Arkansas HVACR NewsMagazine April 2018

S tate, National, Chapter News Feature Story

If you don’t learn your overhead by department, then you’ll be doomed forever to have the competition setting your price! You must know the overhead in each of those businesses. Importance of Gross Margin If you’re going to show a profit, your gross profit dollars must be larger than your overhead dollars. That’s Business 101. When you sell a job, you must have larger gross margin dollars than overhead dollars in that department. The gross margin percentage is the most important percentage in a business. Simply put, the gross margin must be larger than the overhead percentage or you’ll lose money! Therefore, if you know your overhead in each department, then all you have to do is generate enough gross margin to cover the overhead and any profit you want to make! How do you price a job? The three best methods are the divisor method, dual overhead, or labor only recovery method. The divisor method for this exercise, and from my experience, this method works very well in residential jobs 80 to 90% of the time. The dual overhead method is an alternative method that is a more accurate method, and is particularly important when you have a high direct labor cost to material cost. The labor only recovery method is used for the same reason. Whichever method you use, you must know your overhead by department. Departmentalization is the Key Because I didn’t departmentalize, I had no clue what my sales were, or which

department was making or losing money. Each time you make a sale, it should be coded as service, replacement, new construction, etc. You should also know cost per sale. That’s the equipment you buy, and everything that goes into installing the HVAC equipment. The overhead in a typical replacement department is between 30-40%. In a typical service department, the overhead is between 50-60%. If you don’t know your overhead by department, how can you calculate the correct selling price? How Direct Labor Method Works First, assign a percentage of the direct labor that each employee spends in each department. A direct labor employee is an employee that works to repair or replace equipment. For example: the service technician may spend 65% of his time doing service, 17.5% doing start-ups in new construction, and 17.5% installing replacements. You must repeat this exercise (assigning a percentage to departments) with all direct labor employees. Once this is done, each department will have a dollar value of direct labor. Divide total labor dollars in each department by total of all direct labor, for a percentage you can apply to all overhead items. There are a few exceptions, but it’s a simple, yet accurate way to departmentalize. Who Prices Your Jobs? The average net profit for our industry is, by some estimates, as low as 2.5%, or as high as 3.5%. The average salary