Make a Profit: A Must for Contractors

July 9, 2007
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[Editor’s Note: This is the last of three articles by Ken Summers about the three most important items an HVAC contractor should know.]

The most important thing any contractor should know is that it is OK to make a profit. Period. Contractors must remember that profit is not a bad word.

In any business they are in, everyone needs to make a profit. This is simply the way the world works. One does not get up in the morning, look in the mirror, and say, “Today is the day I want to lose money in my business.”

Of course, this is all easier said than done.

Sure, contractors have to do all of the right things in order to keep a business afloat. Contractors need to know their costs, as well as understand the difference between markup and margin. They should know the difference between flat-rate pricing and billing time and materials. (I strongly believe in flat rate.) And, of course, contractors should budget.

There are a couple of things contractors can do to increase profits. One, contractors can get more out of the jobs they go out to see. Home performance testing can also really help today’s contractor, as this shows a contractor how not to lose money on jobs.

Let me explain.

GET MORE JOBS YOU QUOTE

When you quote a job and do not get it, this is a huge area in which a contractor can lose money. A few years ago, the Environmental Protection Agency (EPA) did a survey and found that the average contractor across the country had an average closing ratio of 37 percent. This means if you go out and see 10 people, you will sell 3.7 jobs.

Let’s take an average job size of $5,000 and a contractor with $750,000 in retrofit sales. This works out to 150 installed jobs.

In order for a contractor to sell 150 jobs with a 37 percent closing ratio, his company would have had a 63 percent nonclosing ratio. At the same time, his company would have gone out on 405 sales calls. Doing the math, this means the company did not get 255 jobs, which works out to $1.275 million in sales they did not get.

Ouch! Have you ever thought of it that way?

What’s just as bad, if not worse, the contractor did not get the job and spent money trying to get it.

This includes the cost of advertising, phones, people to answer the phone, vehicles to go on the sales call, gas to run the vehicle, and on and on. There will not be money coming in from ongoing maintenance. There will not be future accessory sales or referrals. (Worse yet, the contractor could get a negative referral from a friend, family member, co-worker, or a neighbor, saying that the contractor came and had a high price.)

Bottom line: Contractors have to get more out of every sales call. Imagine: Only 10 percent would add $75,000 in additional sales and the number only keeps going up.

HOME PERFORMANCE TESTING

As a contractor, have you ever revisited a job you sold and find out that the profit you thought you were going to make did not happen? An even worse scenario is to find out it actually cost you more money to finish the job than what you sold it for.

I believe we have all been there. I know I have.

You begin to ask questions. Maybe the equipment cost was more than what was assumed in the actual estimate? But you find out that the equipment costs were good. Then maybe you used more materials than estimated? Surprisingly, you find out that you used less material than estimated. Maybe the installers needed the hours, so they took longer than the hours you allotted in the job? Once again, this was not what happened.

So where is the problem if everything was as you expected?

After the job was sold, in-stalled, and billed, the customer called back and said, “What you promised me is not actually what I am getting.” For example, their new high-efficiency system isn’t saving much on utility bills. Or they still have dust on the furniture after installing a high-end air cleaner. Or the house is still too dry after buying a humidifier. So out goes a service technician to try and figure out the problem. In the end, this is where you start losing money on the job.

The solution? It’s best to do home performance testing from the start in order to meet the needs of the homeowner.

This is what makes a good contractor a great contractor. Every-one talks about good equipment, doing the job right, clean trucks, guaranteed work, and drug-free environments. But what really separates you from your competition? My answer: Home performance testing, using diagnostic instruments like infrared cameras, infiltrometer blower doors, flow hoods, and smoke puffers.

When used on the sales call, you find out upfront what needs to be done to install the job properly the first time. For example, correcting pre-existing infiltration or duct leakage problems. Now the problems can be resolved as an added sale rather than be your problem after the job is installed and does not work properly. At the very least, if the client declines the recommended added repairs, the problems you uncovered remains theirs, and doesn’t become yours.

Also, home performance testing is truth selling. Homeowners know up front what it takes to keep them comfortable, have a good IAQ environment, save money on utility bills, and get long-term life out of the equipment they are purchasing. In a recent study, homeowners stated they wanted to deal with the best contractor in town.

Bottom line: Become the best. Get all needed repairs to the job up front. In the end, you will sell more of the jobs you see, increase average job size, reduce costly callbacks and complaints, and add profits to your business.

Publication Date: 07/09/2007

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