RI5: Pricing for a Profit

Transcription

1 RI5: Pricing for a Profit Presented by: Tom Grandy Tom Grandy has over 30 years experience in industry and small business. He has worked as the general manager of a service company, Regional Directory of Company Develop for the DIAL ONE franchise and is the founder and president of Grandy & Associates. The vision of Grandy & Associates is to teach contractors how to run profitable businesses. We accomplish our vision through business training boot camps and seminars, one-on-one consulting and educational materials (i.e., software, brochures, manuals, newsletters, CD s and DVD s). Tom has also developed the industries leading software modeling program called Labor Pricng for a Profit with Cash Flow Projections. We are also the founders of the subscription CD and web-based series called the Profit University Audio Series (for owners and managers). Grandy & Associates also writes articles for numerous trade publications including News, Contracting Business, HVAC Insider and monthly articles in the Sweeping, Reeves Journal, RSES Journal and Contracting Canada. Tom also routinely presents at national and state conventions for QSC, PHCC, Aquatech, Florida Pool and Spa Association, ACCA, MCA, SMACNA plus Comfortech. In addition to trade associations, Grandy & Associates does extensive business-training for contractors through wholesalers, distributors and manufacturers across the country including many national franchises. For contractors serious about profitable growth we also offer our two-day Planning for Profit at numerous locations across the country. Grandy & Associates is also the sales and training arm for the industry-acclaimed performance-based software program called ProfitMaxx. ProfitMaxx accurately measures every area of the technician s productivity and profitability. February 17-19, 2016 Orange County Convention Center Orlando, FL

2 Welcome The Foundation Stone for Profitable Growth Is Proper Labor Pricing! This program will make you money! We have trained over 14,000 contractors, from coast to coast, how to run profitable companies! Tom Grandy, Founder ABC Sample Company It could be any department of any trade (repairs, roof replacement, new construction, etc.). The principles are the same: Service/Repair Department The service department has three (3) vehicles: 2010 Chevy Van Last three more years and will cost $24,000 to replace 2012 Pickup Last four more years and will cost $28,000 to replace 2013 Ford Van Last 6 more years and will cost $30,000 to replace ABC Sample Company The service department has three (3) technicians: Technician #1 Makes $21.50/hour Technician #2 Makes $18.50/hour Technician #3 Makes $17.50/hour Average Non-Billable Time is 45% State Unemployment Rate = 3% Parts/Materials Sales = Cost is $50,000 with average 100% markup 1

3 ABC Sample Company Fixed Overhead Costs: Dispatcher $ 28,500 Advertising ,000 W/C Insurance ,300 Health Insurance ,000 Bad Debt ,500 Credit Card Fees ,000 Loan # ,600 Loan # ,800 Variable Overhead Costs: Small Tools $ 2,000 Gasoline ,000 Uniforms ,400 Total General Overhead Cost of the Company: Total overhead is $230,000 and service picks up 20% or $46,000 (not the way to spread overhead costs!) ABC Sample Company Question: How much does our three-man service department need to charge the customer per hour to cover all of it s real costs of doing business while generating an overall 15% pre-taxed profit? Equipment Replacement Costs 1. All companies have some type of equipment. 2. Someday each and every piece of equipment will wear out and need to be replaced. Question: How will you pay for it? 3. Cost of replacing equipment is a very REAL cost of doing business and a very LARGE cost of doing business just like materials, labor and overhead. 2

4 Calculation Of Annual Equipment Replacement Costs Purchased a nearly new service truck in 2013 for $22,000 and it is estimated to last another three (3) years. Cost of a new truck 3 years from now = $ 27,000 Calculation: Number of years till replacement = 3 years Cost of equipment three years from today = $27,000 Annual Equipment Replacement Cost = $27,000 / 3 years = $ 9,000 / year Unique Situations Concerning Equipment Replacement Costs 1. Leased Equipment: a) Normal lease dollars will be covered as overhead b) Spread the buy-out dollars only 2. Equipment being purchased on a loan now: a) Loan will be picked up in overhead costs b) List equipment on replacement list also, in addition to the loan. Unique Situations Concerning Equipment Replacement Costs 3. Equipment that will need to be replaced immediately (immediately meaning over the next 12 months). a) If the costs were spread over the next 12 months, it would cause an unrealistically high hourly rate. b) Spread it over at least three years. 4. List only equipment of SIGNIFICANT value, normally over $1, Option: Include estimated purchases of NEW ADDITIONAL pieces of equipment, based on your business plan. 3

5 Field Labor (Define Terms) Field Labor: These are the employees who are actually doing the work and whose hours may be charged DIRECTLY to the customer. Non-Billable Time: These are the hours that the company pays FIELD LABOR for but CANNOT charge directly to the customer (shop time, vacation pay, travel time, vehicle maintenance, etc.) Non-Billable Time is Not Necessarily Non-Productive Time Typical Non Billable Time Vacation - Holiday - Sick 80 hours --- Two weeks vacation (3.8%) 72 hours --- Nine (9) paid holidays (3.5%) 40 hours --- Five (5) sick days (1.9%) = 192 hours / 2080 hour year = 9.2 % Non-Billable time 4

6 Model Employee Assume the model employee has a minimum of one hour a day that is non-billable: = 1 hour / day x 47 working weeks = 235 hours per year (11.3%) Model Employee s Non Billable Time Model employee s non-billable time: 3.8% Vacation 3.5% Holidays 1.9% Sick Pay 11.3% ONE hour a day 20.5% Non-Billable Time Think About: Callbacks Warranty Work Company Meetings No-Show Calls Make Work Jobs Around the Office Work 35 Pay, Pay 40 Hours Industry Norms For Non Billable Time Type Employee % Non-Billable Service Tech 40% - 55% Installation crew 20% - 35% 5

7 Calculation Of Field Labor Rate Look at NEXT year realistically: 1. Biggest error most companies make is over estimating the number of billable hours that are charged to the customer. 2. Be Conservative - underestimate Non Billable Time Is Your Single Highest Cost Of Doing Business: Average service tech at $16.00/hr. + matching taxes costs the company: 1 tech $ 18,000/year 2 techs ,000/year 3 techs ,000/year 4 techs ,000/year Must find ways to reduce the cost of non-billable time! What s Your Cost? 6

8 Material Sales (Equipment and Spare Parts) Materials are normally sold in one of three ways: 1. Wholesale 2. Retail 3. Some combination of the two Question Is What part do materials play in your business? Basically pass through, minimal markup (little gross profit) Significant markup and profit Overhead Overhead = Cost of doing business Fixed Overhead Variable Overhead Why is it important to know what your overhead costs are? 1. It is impossible to set an accurate hourly rate 2. If you want to negotiate on a job, how much can you lower your price and still cover costs? 7

9 Breakdown Of A Completed Hourly Rate $ Average base hourly rate Fixed overhead rate/hour Variable overhead rate/hour PROFIT per hour $ Hourly rate charged the customer The above rate was arrived at based on charging out 6,000 billable man-hours to the customer for the year. Breakdown Of A Completed Hourly Rate What happens if LESS than 6,000 man hours are charged out? What happens if MORE than 6,000 man hours are charged out? REAL COST = $ $24.25 = $25.25/hour Examples It s late November and the company has worked 5,500 man-hours to date. You now have an opportunity to bid on a job with 800 man-hours in it, and it can be completed by the end of the year. Can we lower our normal bid price and still make a good profit? What happens if I bid on a job any time during the year and I know it will put me over my planned budget for that point in time? Can I lower my price and still make a profit? 8

10 Company Matching Taxes These are taxes the company pays over and above what the employee pays. It s another cost of doing business! FICA - Social security and Medicare (7.65%) FUTA - Federal unemployment tax (.8%) State Unemployment tax (1%-15%) It s a constant battle covering all the real costs of doing business while still generating a profit Company Matching Taxes Example: FICA Tax % FUTA Tax State Unemployment Tax Total Matching Tax Rate = % For every $100 in gross wages a company pays out, it costs them another $11.45 in matching taxes (another cost of doing business!) Sole Proprietorship? You get to pay 15.3% for Social Security and Medicare! 9

11 What Do We Know About Estimating? Estimate field labor hours (sales) conservatively. Estimate overhead expenses on the high side.? This is where we will pull together all of the costs of doing business! 10

12 What Is Your Company s Goal for Net Profit? Net Profit is Profit after all materials, labor and overhead costs are paid. Normal Range - 5% to 15% Profit is important! Industry Profit Percentages Industry Average: 3% - 5% Well run company New construction: 1% - 2% Replacement: 8% - 12% Service/Repair: 15% - 20% 11

13 Overhead Absorption Overhead Can Only Be Absorbed By Three (3) Things: 1. Gross profit on materials 2. Gross profit on subcontracting 3. Direct labor What will absorb our overhead dollars? 12

14 Markup Vs. Profit Markup and profit are two of the most misunderstood terms in the industry today. Markup: Amount the company chooses to add to the product or service to come up with the selling price: Example - Buy a ball for $1.00 and sell it for $3.00. The markup is three times or 300%. Markup vs. Profit Profit: Profit is expressed as a percent of the total cost to the customer. Profit on the previous example is: = Retail Cost - Cost of Product Retail Cost = $ $ 1.00 $3.00 = 66.6% gross profit Example When a contractor tells a customer he will do a job for cost plus 10% and simply adds 10% to the cost of the job he is not making a 10% profit. Example: A contractor agrees to do a job at cost plus 10%. When the job is over, his cost (labor, materials and overhead) is $1,000 to which he adds 10%. Cost to the customer = $1,000 + $100 = $1,100 Profit = $100 / $1,100 = 9.09% (NOT 10%) 13

15 How To Actually Earn A 10% Profit Divide by the reciprocal of the percent of profit. Reciprocal = ( % profit desired) = ( ) =.90 Now take the same example and calculate what the selling price needs to be to actually have a 10% net profit. Proof of Profit = $1,000 /.9 = $ / $ 1, = $1, = 10% Profit Hourly Rate Is Only Good If Two Things Are True The ACTUAL fixed and variable overhead cost must be close to what was estimated. The ACTUAL number of chargeable labor hours must be close to what was estimated. If either of the above is significantly off, the hourly rate generated is no longer good! 14

16 Determining The Dollar/Hour Value Of Each Overhead Cost The dollar per hour value of each overhead item may now be determined simply by taking the overhead item and dividing it by the estimated chargeable labor hours. Example: Equipment replacement cost in our example is $56,000 for the year and the estimated chargeable labor hours are 5,746. = $56,000 / 5,746 hours = $9.75 / hour Determining The Dollar/Hour Value Of Each Overhead Cost Example: Rent for the year is $12,000 = $12,000 / 5,746 hours = $ 2.09 / hour The What If Process Because we know the estimated chargeable labor hours, we can now begin asking ourselves: What if this were to happen? What if we add an additional person in the office at a cost of $30,000 per year? = $24,000 / 5,746 hours = $ 5.22 per hour must be added to the hourly rate 15

17 What if What if we change locations and our rent or monthly payment goes up $800 per month? = ($800 x 12 month) / 5,746 hours = $1.67 / hour added to current rate What if the owner moves from the field into the office? The owner s $45,000/year income now becomes an overhead cost. = $45,000 / 5,746 hours = $7.83 / hour added to current rate What if We have an opportunity to LOWER our insurance by $5,000 / year. = $5,000 / 5,746 hours = $.87 / hour subtracted from current rate Summary Comments: Number one thing that puts companies out of business is improper labor pricing Profitable labor rates are the foundation stone for profitable growth If you are not sure what to charge, in each department, than take the time to find out! 16