I strongly urge you to establish a periodic date that you are very faithful to acknowledge and make it a point to review all of your costs and prices. In this wildly changing world, it is very possible for various costs to escalate at rates we don't really take into consideration unless we sit down and do a thorough analysis.
CHANGES REVEALEDThe review should reveal some very obvious things, including the price of gasoline for our vehicles. Some contractors added a fuel surcharge when prices went over $2.00 per gallon, but have you carefully determined your costs now that gasoline is closer to $3.00 per gallon? To listen to all the economic forecasters, it is not likely that these prices are going to drop significantly in the near future. Therefore I recommend that you make sure that your base service charge or hourly rate is high enough to cover these increases. The days of the temporary fuel surcharge are a thing of the past.
What about your cost of money? For most of us who borrow money at a rate based upon prime, our interest cost has virtually doubled since May of 2004, just two years ago. In addition, half of that increase has been in the past year. Sure, interest rates are lower than they once were, but if you have budgeted your cost of money as you did two years ago, doubling that expense can be a major factor.
Lastly, the most obvious increases are in the area of insurance. All insurance costs have risen, but employee medical costs, especially those that include prescription drug packages, are increasing at significant double-digit rates. If you pay all or most of the medical costs for any of your employees, make sure that you have covered these additional costs in preparing your budgets for this year.
Costs have increased so much that if you are not properly taking them into consideration, you may be looking at dismal financial times. Fortunately, most of us are not into the heart of the air conditioning season quite yet, and if we react quickly we can still cover most of these increases with revised pricing.
PAYING CLOSE ATTENTIONThe three items I mentioned are only overhead items. I hope you are paying close attention as well to the continuing increases in our direct material costs. The equipment manufacturers have reacted to the increases in steel and copper with larger-than-normal annual increases. The copper tubing we buy for refrigeration lines is over 50 percent higher than about a year ago. Nearly all of the steel sheet metal and steel products we buy are continuing to increase significantly as those manufacturers are working to recapture some of the losses they incurred when the drastic increases occurred two years ago.
And of course for nearly all of us, some percentage of annual (or more frequent) labor increases has become a way of life. I've found most contractors are aware of and will take into consideration these periodic labor increases. I am concerned that if a contractor is not careful, all of the other cost increases may turn what looked to be a good year into a bad one.
The important point is not when you do your review, what is important is that you are sure to make a complete periodic review of all of your costs. This review may show that you require a significant price increase. Remember that your competitors will all be experiencing the same cost increases and will need to adjust their prices too.
Butch Welsch, Guest Columnist, Owner of Welsch Heating & Cooling, St. Louis, Welsch1@primary.net
Publication date: 05/22/2006