UNDERSTANDING YOUR COST OF DOING BUSINESS
It’s important to know what your CODB (Cost Of Doing Business) so you’ll know how much it costs you for each hour of labor you provide to customers when performing repairs. And knowing what it costs you for each hour of labor you provide is a critical factor in implementing the a flat rate pricing system into your business. You need to plug your hourly rate into the program in order to allow the system to calculate all the flat-rate jobs that are listed. Determining your true cost of doing business isn’t easy. To do it effectively often involves understanding all of your overhead costs and using all available records for at least a full year, involving a series of P&L (Profit & Loss) statements. While we’re not going to cover P&L statements in detail here, we will attempt to give you some insight on understanding your overhead so you can come to an understanding of what your hourly rate should be.
One way to calculate your hourly labor rate is to consider five factors:
1. Overhead Ratio
2. Average Daily Wage
3. Average Daily Total Cost Burden
4. Total Daily Productive Hours
5. Percentage Profit Goal Average
OVERHEAD RATIO
A first step is to determining your overhead ratio is to decide how long a time period you wish to use for your calculations. You should use at least 3-6 months, but a year’s records will give you better accuracy. For the length of time selected, add together all expenses except technical payroll and any expenses that are incurred for parts only. These expenses are defined as your total overhead expense.
These include:
1......... Office payroll cost, including your own salary if you are self-employed but not a technician. (If you are also a technician, the technical part of your salary needs to be added to the technical payroll.) Be sure to include a salary for your spouse, or any other family members that work in the office. Also under this listing, be sure to include all payroll taxes paid out for techical and office personnel.
2......... Rent or mortgage payments.
3......... Utilities including phone, water sewer, gas, electric, and garbage.
4.........Insurance, including liability, auto, unemployment, health, property, employee, and Workers’ Compensation.
5.........Automobile expenses such as gas, oil, tires, car washes, maintenance, and repairs, and of course, any vehicle payments. If your vehicle is also used for personal use, check with your accountant to know what portion to deduct.
6......... Advertising, including all print, radio and TV ads and promotions, vehicle painting, printing, postage, signs, etc.
7......... Office equipment and supplies.
8......... Answering service, radios, cellular phones, etc.
9......... Educational materials such as magazine or newspaper subscriptions, videos, books, microfiche, and service manuals.
10....... Memberships to professional organizations.
11....... Tools, technical equipment and uniform costs.
12........Travel and entertainment.
Anything relating to parts should only be used in your calculation of your parts markup because parts are inventory. And the revenue generated from inventory sales should be calculated separately so as not to confuse the revenue issue, which often leads to under-pricing labor prices.
AVERAGE DAILY WAGE
To calculate your technical payroll and use that figure to understand your overhead ratio, you need to understand Average Daily Wage. Once your average daily wage and your total technical payroll are understood, your total overhead expense is divided by this figure in order to give you your overhead ratio.
Example: If your total overhead expense for the period was $29,100 and technical payroll for the period was $19,400, your overhead ratio is 1.5. This means that for every $1 paid to technicians, an additional $1.50 is paid out for overhead costs.
$29,100 ÷ $19,400 = 1.5
In many situations, a service company is a one or two-person operation, with the proprietor running the service calls (and the proprietor's partner answering the phone). In these cases, the average daily wage calculation is often overlooked because there are no other technical employees to consider. However, if the proprietor/technician setup is what describes your service operation, designing a system to pay yourself and then using that figure to calcite costs is something your should consider. It’s an effective way to have an overall understanding of your cost of doing business, and, if you grow your company and hire technicians, the system allows you to track individual technician costs effectively.
To calculate average daily wages paid to technicians, whether it’s yourself or someone else, first determine how many hours each technician works on an average day, then divide the number of hours worked by the number of days worked in that time period for each technician.
Example: In a three-month period, Technician #1 worked 627 hours in 75 days. The average number of hours he worked each day is 8.36.
627 ÷ 75 = 8.36
In the same three-month period, Technician #2 worked 600 hours in 70 days, averaging 8.57 hours each day.
600 ÷ 70 = 8.57
Once you have the average number of hours worked daily, you have to calculate the average daily individual wage. Multiply the average number of hours worked daily by the hourly rate of each technician.
Example: Technician #1 is paid $22.00 per hour, while Technician #2 is paid $16.00 per hour.
$22.00 X 8.36 = $183.92 average daily wages for Technician #1
$16.00 X 8.57 = $137.12 average daily wages for Technician #2
If you have employees who are paid overtime for extra hours, you need to calculate the overtime hours separately from the regular hours. Take the number of hours worked in this time period at regular pay and divide it by the number of days worked. Then take the number of hours-worked overtime in the same time period and divide it by the same number of days. Multiply each figure by the appropriate hourly wage.
Example: Technician #3 worked 520 regular hours and 100 overtime hours in 65 days.
520 hours regular wages ÷ 65 = 8 hours regular pay each day average
100 hours overtime wages ÷ 65 = 1.54 hours overtime pay each day average
Multiply the average number of hours each day at each rate. If technician #3 is paid $22.00 for each regular hour and $33.00 for each overtime hour…
$22.00 X 8 = $176.00 average daily regular wages
$33.00 X 1.54 = $50.82 average daily overtime wages
Add the average daily individual wage (including overtime pay if necessary) for each technician and divide by the number of technicians. This will give you the average daily wage.
$183.92 average daily wages for Technician #1
+$137.12 average daily wages for Technician #2
+$176.00 average daily regular wages for Technician #3
+$ 50.82 average daily overtime wages for Technician #3
$547.86 average total daily technicians wages
÷3 technicians
$182.62 is your average daily wage
AVERAGE DAILY TOTAL COST BURDEN
With the information gathered so far, you can calculate the average daily cost burden of your business. To accomplish this, first multiply the average daily wage by the overhead ration to calculate an average daily cost burden. Then add the average daily wage to get the average daily total burden.
Example: The average daily wage is $182.62, and the overhead ratio is 1.5
$182.62 Average daily wage
X 1.5 Overhead ratio
$273.93 Average Daily Cost Burden
+$182.62 Average daily wage
$456.55 Average Daily Total Burden
The average daily total burden is your break-even point. If you equal your average daily total burden per technician in labor charges to customers, you will break even on labor. And, with the next concept, Average and Total Daily Productive Hours, understood, you can establish an hourly rate
AVERAGE AND TOTAL DAILY PRODUCTIVE HOURS
Some studies have shown that less than 65% of the average technician's 8-hour day is spent actually performing service work. This isn’t to say that technicians are a lazy lot, it’s just that there are a lot of other things they have to handle (paperwork, etc…) in the course of accomplishing repairs. To compute the productive-time ratio for a technician, calculate the actual time working on repairs and compare that time to the total hours paid to that technician over the same period.
Example: In a three-month period, Technician #1 worked 627 hours over 75 days. He spent 135 hours doing paperwork and 492 hours generating service income, for an average of 8.36 hours each day.
627 paid work hours
-135 hours doing paperwork
492 hours generating service income
492 hours generating service income
÷627 total hours paid
.78 or 78% Productive-time Ratio
627 total hours paid
÷ 75 days
8.36 daily hours
x.78 Productive-time Ratio
6.52 Daily Productive Hours
With this figure understood, the next thing you need to factor in is the fee for your service call and diagnostic services. The most effective way to use a flat-rate pricing system and communicate with a customer at the time they call for service and inquire about price is to let them know that your service call and diagnostic fee is $____, and that once the diagnostic is accomplished, you can advise them on the total cost of the repair. When you use a service call and diagnostic fee, you can deduct any travel time from the total hours you paid to the technician. This will give you a higher productive-time ratio.
Example: Over a three-month time frame, Technician #1 spent 30 hours doing paperwork and 30 hours traveling to service calls and was paid for 600 hours over 70 days in that time period.
600 hours paid
- 60 hours doing paperwork
- 150 hours travel time
390 hours generating service income
390 hours generating service income
÷600 total paid hours
.65 or 65% is your real Productive-Time Ratio
Which leads you to calculate:
600 total paid hours
÷70 days
8.57 hours work daily
x.65 productive-time ratio
5.57 as the real Daily Productive Hours of Technician #1.
Now, with all things considered, you can determine the hourly rate you want to plug into The Appliance Service Solution flat rate guide.
Take your average daily total burden and divide it by your average daily productive hours to figure your overhead burden per hour.
Then, multiply the overhead burden per hour by your labor profit goal percentage. This calculates your profit goal burden.
Add the overhead burden per hour to the profit goal burden to calculate what your hourly rate needs to be in order to earn the profit percentage you’ve set for your business.
Example: You have a daily total burden of $380.85, with 5.57 average daily productive hours, and a profit goal of 10%.
$319.91 daily total burden
÷ 5.57 daily productive hours
$ 57.43 overhead burden per hour (rounded off to nearest dollar)
$ 57.43 overhead burden per hour
X 10% profit goal percentage
$ 5.74 profit goal burden
$ 57.43 overhead burden per hour
+ $5.74 profit goal burden
$ 64.00 per hour labor charge (rounded up to the next dollar)
With this calculation accomplished, divide the per hour labor charge by 6 to get the 10 minute rate that you will to use to determine your overall labor rate, then use that number to apply to different categories of jobs, which will determine the labor rate for that specific job. If the amount is not an even dollar, round it up to the next even dollar amount.
$64.00 ÷ 6 = $10.60, rounded up to nearest dollar…$11.00
Often, a service manager or service company owner who goes through the process of calculating their necessary hourly rate is surprised to discover that they haven’t been charging enough for their services. If that’s what just happened for you, then you now have another situation to deal with in regard to yourself and any other technicians in your organization….which is getting over the common myth that using a flat rate guide will make you too expensive, cause customers to complain long and loud about your service rates, and ultimately drive business away.
Our experience is that the exact opposite is true. For hints on implementing flat rate pricing into your business, consider the following:
…Often, technicians are of the opinion that the service rates charged by a business are already too steep because they just don’t consider some of the fundamental topics we discussed on calculating the cost of doing business.
…It’s easy for a technician to undervalue what they do, especially if they’re good at it. They sometimes see only the actual time it takes them to make a repair, not the amount of time they had to invest in gaining the experience and skill to be able to make that repair quickly and efficiently. Ask a technician if they think they only pay for a lawyer’s actual time spent while they’re sitting across a desk from them discussing their case and they’ll get the idea. Spending time and money for law school is no different that spending time and money becoming a Journeyman Level technician in the major appliance service industry. And, as in any profession, there is time and money invested in keeping up to date on new developments in order to be able to stay current in the industry.
Here’s what you should not do to implement flat-rate pricing into your business if you employ technicians other than yourself:
Buy the guide, get one printed up for each technician, and call a morning meeting to hand them out while you announce “This is what we’ll be using from now on.”
Here’s a 7-Step Plan that outlines what you should do:
1. Schedule a meeting to discuss your plan to implement flat-rate pricing and allow plenty of time for discussion and addressing concerns that are sure to come up. Advise everyone of the date you’ve chosen to implement the program, which should be at least 30 days from the date of this initial meeting. And, remember, in any situation in which there is a change in a work environment, employees often go directly to the fear that the end result of the change might be that they’ll be looking for work.
2. Schedule a follow-up meeting to further discuss concerns and answer questions about how it will work. Printing up one sample page from the guide and distributing copies to everyone (both technical and administrative personnel) who will be working with it is a good idea. Hand out a list of why the reasons flat-rate is a good idea for everyone…customers, the service company, and the employees. Making more money isn’t the only motivator (although it’s certainly a good one) for people when they’re dealing with change. A flat-rate pricing system is good for the customer because they don’t have to pay for inexperience. It’s better for the service company and its employees because it allows a business owner to calculate costs, get a fair price for professional services, and make an honest profit in the process, while at the same time set money aside for things like capital improvements and increased employee benefits.
3. Schedule a second follow-up meeting that is at least 2 weeks away from the implementation date. Hand out more example pages and announce the date that you’ll be distributing complete copies of the guide to everyone who will be working with it.
4. Schedule a third follow-up meeting that is at least 1 week away from the implementation date, and that is a few days after you’ve distributed the complete copies. This will allow necessary time for everyone to become familiar with the guide and consider what questions they want to ask and what concerns they want to discuss. Remember, asking questions and raising concerns takes courage, so give everyone who will be working with the guide time to gather that courage.
5. Do whatever it takes to schedule a meeting at the end of the first day the guide is in use. Talk little and listen a lot at this meeting. Be open to accepting suggestions and ideas for using the guide effectively while at the same time standing your ground on the price issue. Remember, it’s your responsibility to calculate the necessary hourly rate to plug into the guide so it will work for your business, and it’s not just a figure you pulled out of the air.
6. Schedule a meeting after the guide has been in use for a full week. Again, talk little and listen a lot. Don’t be discouraged if there is still resistance to the change. And keep in mind that there may be situations in which somebody will never accept the change you’ve implemented.
7. At your regularly scheduled staff meetings, always have the guide as an agenda item so you can discuss any questions or comments about it. Be ready to be happy at these meetings when it comes to discussing the guide. By this time, you’ll be hearing mostly positive things about it and expect to hear admissions from those who had their doubts about how it would work, but are now convinced that they wouldn’t want to work with any other system than a flat-rate.
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