I’m in a call with a Contractor who has taken me up on my offer of a free 30 minute phone consultation from my website. I ask as part of the questionnaire for their primary challenge. What I get as an answer to that question can be many different things.
One response I get a lot is, “What should I charge per hour?”
I make it clear to them that of the many things I do I’m not a financial guru. There are other consultants who specialize in this financial work like Ellen Rohr of Bare Bones Biz who I recommend to take them through the process either by purchasing her self-study tools and doing the work or hiring her to work one-to-one with them.
But since we’re on the phone, I do ask is if they’re currently doing budgeting on a regular basis at their business. More times than not, the answer is no. They’re current per hour rate is based on what they feel their market can bear. That’s based on asking their competitors what they charge [which is illegal], calling around anonymously and asking what they charge by the hour or trying to figure who they’re losing bids to based on pricing and trying to work backwards to figure out what they figured for their hourly rate.
Whether you are pricing based on time and material or better yet flat rate, budgeting is the only way to arrive at what the right hourly price should be.
Ellen’s great book, “How Much Should I Charge?” points out how fool hearty it is to base your hourly rate on what the competitors are charging because they can be on the fast track to going broke. Ellen who is a disciple of Frank Blau, the industry leader, has been trained well.
And what they both teach the industry is that you need to charge for all of what it costs to be in business and build in the profit you wish to make. The big mistake we, as contractors, make is only accounting for the hourly salary we pay our Techs and the cost of materials and equipment and ignoring all the other overhead costs there are to have a business that is built to last.
I share with clients that charging the right price is ultimately in the customer’s best interest. Yes, our customers, like us when we’re a consumer, all like a good price. But, if we don’t charge enough, we won’t be in business and we can’t take care of the customer the way they deserve to be taken care of.
Think about it. If you don’t charge enough and you go out of business, what good is the warranty you provide on what you serviced and installed?
If you don’t charge enough, how can you willingly run a callback when it arises?
If you don’t charge enough, how can you attract and keep good staff?
If you don’t charge enough, how can you invest in the latest technology and ongoing training?
Hey, would you be comfortable adjusting a gas-fired piece of equipment and then not do a carbon monoxide test? I hope not comfortable at all.
How would you feel about clearing a sewer line and not putting a camera in the line to verify that the blockage is fully removed and that there’s not obstruction, collapse, roots, sand or other bigger issue that still need to be dealt with? I hope you wouldn’t be.
The great Frank Blau once told me, “The customer pays for everything because it’s in their best interest to do so.”
So, in my quick 30 minute free consultation call, I explain to those who want to better understand why they need to do budgeting and charge a properly arrived at flat-rate hourly pricing… I have the 3 Column Fast Budget and Pricing Method which is NOT a replacement for a full blown budgeting process and other financial work BUT it’s a quick way to better understand what it takes to be in business:
- Column One is looking at all of your yearend expenses from your accountant. Then, looking at each of those expenses and determining as best you can what their new cost might be in the year ahead.
- Column Two is looking at what you plan to do differently in the year ahead that will advance your business as it operates today toward the goals you’ve set for the coming year and beyond.
Ex: You want or need to do more marketing to get more calls from the
right customers to avoid a steep drop-off in work. You
want to have paid weekly meetings to improve communications. You
want to invest in ongoing training classes beyond just weekly
meetings. You want to improve the technology at your company like
phones, tablets, computers and more.
Note: You now need to total up Columns One and Column Two and this
becomes your new breakeven.
- Column Three is the profit you desire.
Now, you must decide what profit you want to make. We’re not in business to lose money. We’re not in business to just breakeven. We’re in business to make money because it benefits the customers, the company and all who work at the company including ownership.
Ex: The cost of vehicle insurance is going up. The cost of medical
coverage is going up. Rent and utilities are going up at your shop.
Note: So, Column One is all of what it took to be in business the last year
plus your best guess at what additional cost there will be for these items in the coming year.
Okay, let’s put some numbers to this.
Column One: $900,000
Column Two: $100,000
Total of above: $1,000,000
Add your Profit: $200,000
Total Budgeted Gross Sales = $1,200,000
If you have 6 Technicians at your company, divide $1,200,000 by 6. Now you know that each Tech will need to bring in $200,000 in sales this year. If they work 50 weeks a year at 40 hours a week with no overtime they have 2,000 hours worked in a year. Traditionally Techs are 50% efficient which means you paid them for 8 hours and they billed out and did 4 hours. So, each Tech will give you 1,000 billed hours a year.
You now have a total of 6,000 billable hours to sell to generate $1,200,000 of profitable sales. Divide $1,200,000 by 6,000 and you arrive at an hourly selling price of $200 per hour.
Eye opener… isn’t it?
My goal as it is in all my 30 minute calls is to share some business basics. What you do about it is always your decision. My hope here is you do your financial homework and commit to doing real budgeting at your company on a regular basis and find out what the right selling price at your company should be.