ACHRNEWS

Get a Handle on Your Overhead

August 17, 2009

Did you know that the Small Business Administration (SBA) estimates that restaurants have the highest failure rate of all businesses? Did you know that HVAC contractors run a very close second? Restaurants might fail because of lack of sales; after all there are simply so many of them. But did you know that HVAC contractors typically fail in the year of their greatest sales revenue? That is right. They typically fail when they experience their greatest sales revenue. Now while I know this to be a statement of fact, I believe the reason is because contractors do not typically capture all of their costs in their selling price.



THE GUESS METHOD

Think about the last job estimate that you figured for a replacement system. If you are like the typical contractor, you simply thought back to the last job like this one and tried to remember how it went. Maybe it took a little longer than you thought it should so you add a couple of dollars more and give the homeowner a price.

After all, the homeowner is not going to wait around while you get your equipment costs, estimate your labor, add in overhead, a profit, and possibly commission. They want to know the bottom line, and they want to know it right now.

Let us look at this approach a little closer. Did you actually check the last similar job to see how well you did? Do you actually have a way of checking completed jobs to see if you recouped your overhead or made a profit? Most contractors do not have a system in place to accomplish this, but when I demonstrate how easy it really is to my clients, they are amazed. One program I offer shows what they should make before the job is even started and then compares that with what is actually made upon completion of the job. Now, that is running your business instead of your business running you.



THE PROPER METHOD

To properly price an estimate for a homeowner, you need the following:

• Equipment and material costs;

• Labor estimate;

• Overhead;

• Desired profit;

• Commission.

All of these items are required to obtain a selling price. You should have no trouble with equipment or material costs, after all, you could call your supplier and get the costs. Labor is something else. You are always estimating your labor costs on how long you think it will take to complete the installation, or how many hours at your employees’ labor rate. But did you check your overhead and include it, and did you actually include your desired profit and commission? Yes, I know that this would not be practical to accomplish while right in front of the homeowner, but it is the proper way.



THE PRACTICAL METHOD

The practical method recognizes the weakness of the guess method and the impractical aspect of the proper method, while maximizing profitability and reducing errors or omissions. The practical method uses a price sheet or book that has already included equipment and material costs, labor estimates, overhead, profit and commission.

All of the preceding items are fixed costs with the exception of the labor estimate. Let us face facts about the labor estimate; most installations are not that different, to install an air conditioner basically requires the same labor if it is a three-ton, five-ton, 13 SEER, or a 16 SEER.

Yes, there might be some additional labor for a programmable thermostat or whatever. However, it is a simple matter of including it on your price sheet. The point is: You will not forget it when you give the homeowner the price.

I realize that there are some differences, like a longer line set, or a new pad, but that can also be listed as additional items on your price sheet (click on the PDF link below for an example; if you want help in creating your price sheets, call me). There is an additional bonus when using a printed price sheet - creditability.



GETTING A HANDLE ON YOUR OVERHEAD

If you accept the practical method, you are well on your way to not participating in the high failure rate of many HVAC contractors. However, as I stated earlier, the main reason for failure is not including all your costs. Equipment and material are relatively fixed costs, labor estimates are variable, but now you know how to incorporate them in your price sheet. Profit and commission are also relatively fixed costs. However, overhead can be considered a fixed cost or adjusted annually. The real issue with overhead is that most contractors do not know where to find it or how to calculate it.

Overhead can be found on your income statement and then calculated as a percentage to be included in your price sheets.

Now, do not expect to see a line item labeled “Overhead.” If you look at the next to last section of your income statement, you will see a list of costs such as rent, utilities, postage, and on and on - this is your overhead cost. Simply divide the total figure by your gross revenue (or income) and this is the percentage of overhead that must be included in all of your pricing. Let us look at a simple example:

• Gross revenue: $1 million

• Overhead cost: $430,000

• Divide $430,000 by $1 million = 43 percent Overhead

This means that 43 percent of any selling price must be included just as you would any other cost. The failure to examine and include this cost, when pricing, is what I believe to be the greatest contributing factor to the failure of HVAC contractors. So do not become a statistic, become a more professional and profitable contractor, use the practical method of selling.

Publication date: 08/17/2009

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