Figure your job costs for profitability

ONE OF THE MOST common questions that I'm asked when I present the Radiant Panel Association's Radiant Basics class is: "How much should I charge for X?" Unfortunately, this question has no clear answer other than the universal answer to any hydronic heating question. That answer is: "It depends ..." Knowing your direct and indirect costs of doing business is the most important part of the equation,

ONE OF THE MOST common questions that I'm asked when I present the Radiant Panel Association's Radiant Basics class is: "How much should I charge for X?" Unfortunately, this question has no clear answer other than the universal answer to any hydronic heating question. That answer is: "It depends ..."

Knowing your direct and indirect costs of doing business is the most important part of the equation, and only you can plug those numbers into the equation based on your experience. Those numbers vary by company.

The smaller the company, the larger the cost per hour for overhead. Small companies with 10 or fewer employees probably will end up with a retail cost per billable hour approaching or exceeding-$100. Some larger companies may have a retail cost of less than $100 per billable hour.

But this is only part of the equation. Once you've determined the sales price of your labor, you still need to estimate how much labor will be required to complete the given task, and this is where it gets tricky.

"How much labor does it take to ...?"

Again, the only correct answer is: "It depends," and the only way to know for sure is to track your individual employee labor costs for a given task. Some prepackaged software programs can help you to establish approximate labor costs for a given task, however, you still need to track your employees' labor to fine-tune these numbers.

The Plumbing-Heating-Cooling Contractors - National Association has a relatively low-cost estimation program that has many tasks associated with the installation of a given hydronic heating system. You have to read between the lines and make surethat you're comfortable with the numbers being generated for a given task.

Make sure the
job is profitable.

One very efficient way to track your labor, and estimate your costs of installation, is to use one of the spreadsheet programs that comes with most new PCs. If you are not familiar with spreadsheet programs, I'd strongly suggest that you either do a study-at-home course or attend classes in developing and using spreadsheet programs at your local community college. The total power potential of these spreadsheet programs is mind-boggling.

The spreadsheet we developed in our own company has the functional ability to estimate material costs, labor requirements, subcontract costs, gross profit margins and targeted net profit margins. It also can generate purchase orders and allows our office manager to input actual field labor costs to allow us to compare estimated vs. actual labor costs. It is important that this evaluation be performed on a regular basis in order to track and control your labor costs, otherwise you may be giving away labor costs, which is not a good business practice.

Once you've determined your hourly costs per employee and have begun estimating the installed costs of a given system, it becomes obvious that the only way to lower costs is to reduce your labor in the field. The prices of material generally don't vary much from supplier to supplier, so those costs are generally fixed.

In order to retain an edge against your competition, you can install the job for less by reducing your profit margins (not suggested) or by having your employees learn how to do a given task faster than you anticipated and share in the monetary savings. The latter approach gives them the incentive to perform their tasks in a faster, more efficient manner and will result in more money being put into their own pockets, which gives them additional incentive to increase their efficiency. It's a win/win proposition.

A performance-based pay program is one more tool that you can use to increase the efficiency of your field employees. This program is tougher to institute because it requires you to comply with certain federal and state labor law requirements. You must ensure that you are paying your employees more than minimum wage, and that you are paying them their minimum guaranteed hourly wage.

This means more paperwork than typical methods, but it can result in the employees making more money per hour and also having to work less in a given week. This program assigns a direct cost of labor to a specific task, installing staple-down tubing for example, and assigns a dollar value to that task. Installation crew members are then told that they will be paid "X" dollars for that task.

You do not tell employees how many hours are estimated to complete the given task, other than telling them the date when their next task will start. The employees will find new ways to decrease their installation time and this will allow them to make more money per hour.

This is a double-edged sword. Those employees who are real go-getters will finish that task and ask for the next task so that they may increase their weekly personal income. Some employeesmay just take off from work earlier, thereby increasing their "Fun Time" quota. Your mileage may vary.

Not all employees will be interested in your PBP program. That could be an indication of employees who are taking advantage of their current work situation. These people usually will not come in at or below estimated labor budgets for a project task.

It is generally recommended that you take one installation crew, secretly talk to them and get them to begin experimenting with the PBP program. Once you have established a good track record with them, you can then allow them to make the pitch to the other employees as to the merits of the program. It will flow much easier if a fellow employee is the advocate as opposed to someone from management. Another important point is don't depend on the free advice offered up by your suppliers. Rumors are often started by someone who heard that so and so was getting big bucks per square foot for installing a radiant floor heating system. Unfortunately, this number gets used over and over by some poor, unsuspecting business person. The " number" may or may not be right. Most often, it is not right, and the contractor can't understand why he's so busy, yet there's no money left over in the end.

Track your costs, including installation costs, and make sure the job is profitable and worth your effort to continue doing business. Eventually, you will be able to verbally estimate a project's installed cost based on its size and complexity, and do so confidently. Until then, don't guess. It won't do you or your reputation any good.

TAGS: Hydronics