By Tom Grandy, Founder Grandy & Associates
Grandy & Associates has been teaching trades contractors how to set profitable hourly rates since its inception in 1987. We are not alone. Other companies have been teaching profitable labor pricing as well. The irony is that after all that teaching the leading cause of business failure is STILL improper labor pricing. Have some companies learned and moved on to profitable growth? Of course they have. However, as an industry, we are no closer to overcoming this problem than we were 35+ years ago.
Many companies really have invested time, energy and money in setting proper and profitable hours rates…initially. But many fail to adjust those rates as things change within the company.
Every change in your company cost of doing business will necessitate a change in your hourly rate in order to maintain profitability!
Grandy & Associates has multiple resources to help contractors set profitable hourly rates. However, the objective of this article is not to teach the process of setting profitable hourly rates. The objective of this article is to help the reader understand the need to adjust rates as time goes on.
To be able to illustrate the point we are going to need a simple Sample Company. Let’s assume our Sample Company is 100% residential service and has three service technicians. Each service tech bills out roughly half their time or 1,000 billable hours a year. Let’s look at a few “What if’s”.
- Techs are doing a great job and deserve a raise. The company desires to provide a $2.00/hour raise for each tech.
How will that affect what the customer is charged?
The additional basic cost to the company is $12,480/year ($2.00/hour x 2,080 paid hours a year per tech times 3 techs = $12,480). When the $12,480 is divided by the 3,000 billed hours a year that means the company will need to increase its hourly rate to the customer by $4.16/hour ($12,480/3,000 billed hours = $4.16/hour) just to maintain current profitability.
- One of the service techs van just died. The company needs to purchase another one right away.
How will the new vehicle purchase affect the hourly rate?
Total cost with racks and wrapping the vehicle produced a loan payment of $550/month principal and interest. That just added $6,600 in annual cost. When the $6,600 is divided by the 3,000 billable hours the hourly rate will need to go up $2.20/hour. That does not include the extra cost of insurance.
- Good news! Health insurance for the three techs, owner and bookkeeper/CSR only went up $35/month each.
How much will the “additional” cost of insurance affect the company’s hourly rate?
Five employees at an additional cost of $35/month will result in an increase in the cost of doing business of $2,100 ($35/month x 12 months x 5 employees = $2,100). Dividing the $2,100 by the 3,000 billed hours will cause the hourly rate to be increased by $.70/hour.
None of the three additional costs are huge by themselves but literally every additional dollar spent on the cost of doing business will DECREASE the company’s net profit by the same amount. If the three items above were simply adsorbed, the company’s net profit will decrease by $ 21,180 ($12,480 + $6,600 + $2,100 = $21,180). For a simple three tech service company that is a lot of lost profit!
Now, think about ignoring minor increase year-after-year. You don’t need to be a brain scientist to see the long-term effects on the company’s profitability.
In honor of Grandy & Associates 35 years in business the founder, Tom Grandy, has written a book entitled Profitable Labor Pricing for the Trades Industry. It covers why companies fail, differences in cash flow and accounting, how growth can put a company out of business plus detailed worksheets on how to set profitable hourly rates. The $19.45 investment includes shipping. Order Today!