Your True Cost

Are the prices you charge costing you money? 

“What do you charge for a water heater replacement?” is a question I have heard many times by contractors at supply house counters, trade meetings and casual conversations. The contractors inquiring usually ask because they are not sure if the prices they charge are causing them to lose money, make a profit, or break even since they don’t know their own true cost to perform the service.  

Not knowing your own true cost makes properly pricing your services so you can recover your cost to perform any task and have an opportunity to earn your desired profit above your true cost difficult at best. 

By asking other contractors, you could get a false sense of security that their price is correct and must be the going rate. Unfortunately for you, those prices are more than likely based on fiction rather than fact, and, not based on your true cost. Since the majority of contractors do not know their own true cost, the propensity of the going rate really being the going broke rate is great indeed.

Financially prudent contractors encountering competition selling their services below their true cost might also ask the price question since their financial forethought makes them aware that the competition obviously doesn’t know their true cost. Then, a dialogue about true costs of operating a contracting business can be initiated. 

Since my intent in writing my articles for you in PHC News is to help you, the contractor, learn how to enjoy the opportunity to deliver excellence to your clientele while earning the reward you deserve for the delivery, I thought it would be a good idea to add a section to my articles that show you the cost you incur for certain typical repair and replacement services.

Knowing your true cost before quoting prices is imperative and just common sense. If you don’t know where the bar is, you can’t know if you are above or below the bar.

In this article, I will look at the cost contractors incur to replace a natural gas water heater (40 gallon) in a residential home with the heater located in the basement.   

Issues to consider

Before quoting a price, there is certain information which is critical to the job itself and the price of the task. Attaining that information requires inspection of the existing heater location and installation. After all, just because the consumer asked for a certain water heater does not mean that heater is the proper model for the application. Combustion clearance, needs of the house as to gallon capacity and temperature recovery, Btu ratings, flue size, etc., must be considered. That type of inspection will consume some amount of time, and time is money. If you don’t charge the consumer (who’s consuming your time and money) for that time spent, you are paying for it. 

Since water heaters are usually not replaced until the existing heater leaks, it is often difficult to schedule water heater replacements for future work since in the consumer’s mind it is an “I need it and I need it now” job. Therefore, scheduling deliveries to coincide with your schedule usually doesn’t occur.

Once the model has been correctly chosen, the tech must pick up the new heater. On average that will probably take an hour by the time the tech drives to the supply house, or your shop; waits for and gets the heater on the truck; and drives back to the jobsite. If you are thinking, “I’ll have the heater delivered,” realize that just because you called for a heater doesn’t mean time isn’t wasted. 

Even if your tech was draining and removing the existing heater while waiting for the delivery, the deliverer may not show up in time to coincide with your tech’s readiness to install the new heater. And, as we know, time is money. Therefore, the example replacement in this article will include tech material pick up time of one hour. 

To the pickup time, we must add the time the tech spends inspecting the aforementioned circumstances; speaking with the consumer; quoting the price; writing up the paperwork; setting up the work area; draining and removing the existing heater from its current location; installing the new heater; testing the flue draft, and, for carbon monoxide spillage; cleaning up the work area; adjusting the heater to reach a safe water temperature; testing the water temperature; having the consumer confirm in writing on your invoice the temperature was left at a safe limit; and getting paid from the client. On average, that takes about three hours. If you had two techs who spent just 1½ hours, that’s still three tech hours (1½ hours x two techs = three hours). 

Sometimes the aforementioned issues could be done faster, but, other times it could take you longer. When you quote prices before the work is done so that the consumer can be aware of the cost to them before the job is started, you should use average time factors, which in this example add up to four hours inclusive of one-hour material pickup time. But, don’t forget to add your average initial travel time to the four hours to do the job. 

The next issue is material cost. Obviously, you have the cost of the heater. But, you also have the cost of the additional material needed to install the heater such as tubing, fittings, venting, solder, acetylene, sealant, etc. Regarding material costs, taxing regulations for this task which vary from state to state may add to your material cost and therefore must also be considered in the costs you incur.

For the example water heater replacement, I have chosen a material cost allowance to the contractor of $550.

The cost contractor incurs for the task

Figure 1 shows you the minimum cost (in red) contractors incur to perform the indicated task based on: 1) Hourly Labor/Overhead Tech cost range to contractors in $25 increments from $100 to $250 per tech hour for four hours plus initial travel time; 2) Selling all your available tech hours (1,708 per tech) all the time; 3) Average initial travel time to the client in two increments – 15-minute and 30-minute; and, 4) Material cost allowance of $550. 

NOTE: If you base your cost on selling all available tech hours, but sell less, your cost is higher. Example: Based on selling all your tech hours all the time and an hourly tech cost to you of $100, line 1 shows your cost for the task to be between $975 and $1,000 dependent on travel time. That is the cost to you the contractor, you have made no profit. However, if you sell only 70 percent of 1,708 available tech hours, the $100 per tech hour increment really costs you $142.86. Therefore, if you only sell 70 percent of your available time, your cost is closer to the range shown on line 5, which is $1,187.50 to $1,225.

Looking at the chart, where do you stand? 

If you are wondering how some plumbers install water heaters for big box home improvement centers for $100 to $300, stop wondering. The writing is on the wall, or, in this case in Figure 1. 

Even if the big box retailer supplied all the material, contractors who install heaters in that $100 to $300 price range lose money. If we subtract the material allowance from the lowest cost to contractor of $975 ($975 - $550 = $425), their cost to install the heater is minimally $425. If you subtract the hour for material pickup, assuming the big box store delivered the heater, the minimum cost at the $100 per tech hour level is $325. 
And, if they only sell 70 percent of their available time, that minimum cost rises to $607.16 ($142.86 x 4.25 hours). By subtracting the material pickup time the minimum cost to the contractor is $464.30.

I guess the fictional movie character Forrest Gump, who said “Stupid is as stupid does,” was referring to people who act like those contractors. But, the stupidity doesn’t end there. Clueless contractors who sell their services below cost take jobs out of the market place, which makes their opportunities to succeed fewer rather than greater.

If you have an opinion on this article; want an opportunity to attain your contractor profit advantage; would like information on the ways I can help you; or, would like to order a copy of my Readily Available Pricing Information Digest pricing guide which is customized to your true cost of labor and overhead, and, puts prices at your fingertips for rapid and profitable price quoting, give me a call. 

Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the Contractor Profit Advantage or to contact Richard: call 845-639-5050; email; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. N.Y .10994.

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