Profit Shouldn't Be A Dirty Word
That's what a lot of finicky customers believe. But those customers need a reality check. Contractors are in the business of providing quality service to their customers, but they don't have to go broke doing it.
Of course contractors care about their customers. Without customers, they'd have no business. The same is true for good employees - they'd have no business without them, too. But there is a third thing they need to stay in business - profit.
Contractors need profits to maintain a healthy business and help it grow. They need profits to pay employees a fair wage. They need profits to support their families. It's a simple concept for contractors to grasp - but sometimes it's not readily understood by customers.
Tim Has It Right
I recently read a Q&A article by nationally syndicated newspaper columnist Tim Carter. Carter has a popular "Ask the Builder®" feature at his Web site (www.askthebuilder.com).A homeowner had asked Carter why a contractor was charging him $400 to install a humidifier that he could purchase on the Web for $165. The homeowner wrote, "All of the contractors indicated the job should only take about an hour. Should I get into the HVAC business? It sure seems profitable."
A few contractors could give that homeowner a lesson in profitability. He doesn't take into account that $400 is not pure profit. In fact, it probably reflects very little profit.
Carter explained that small business owners have to pay all sorts of bills each month. He added that these expenses are often allocated to each job as a percentage of the projected total sales for the month.
Carter got more specific when he wrote, "I'll wager that each of the HVAC contractors you contacted has general liability insurance coverage, matching payroll taxes, health insurance coverage, tool expenses, fuel costs for the service truck, payments on the truck, utility expenses for the office, lease payments, office staff salaries, phone bills, professional fees to accountants and attorneys, office equipment and supply costs, etc."
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He added that contractors don't get every bid they produce and often absorb the cost of sending someone to give an estimate.
Carter also noted that it takes time to pick up equipment and parts from a supply house. If a contractor stocks the equipment and parts in his or her own building, they need to charge the customer some money for tying up working capital.
Provide Perspective
It is a good idea to discuss profit rates with your customers - if they ask. According to Carter, the HVAC industry average is less than 3 percent. Ask customersto compare that to their own household income. After paying the mortgage, car, insurance, utilities, food, and other basic necessities, could they survive on a 3 percent cushion?
What part of the 3 percent goes toward a savings account or IRA? What part of that 3 percent goes toward present or future tuition? What part of that 3 percent can be set aside for family emergencies, such as unexpected medical expenses? What part of that 3 percent can be used for recreational or leisure-time activities? There seems to be a lot of things that need to be taken out of that 3 percent slice.
I think Carter gave the best supporting argument for making a profit. "The contractor deserves a profit," he said. "It should not be excessive, but it should be there.
"This profit allows the smart business owner to reinvest in his business and grow it. You want this to happen. You want the contractor to be there in the future if something does go wrong. Those contractors who plow profits back into a company are there when you need them."
John R. Hall is business management editor. He can be reached at 734-464-1970, 248-786-1390 (fax), or johnhall@achrnews.com.
Publication date: 08/01/2005