Many contractors find managing the financial aspects of each project challenging and fail to allocate correct pricing for their projects. Understanding job costing for HVAC and plumbing contractors is fundamental to staying competitive and maintaining a healthy profit margin.
The fundamentals of job costing are similar in the HVAC and plumbing industries. Two specific price models exist, hourly rate and flat rate, and a third one combines the two to create a hybrid that offers more flexibility when pricing for services.
We explore the fundamentals of job costing and break down the various ways HVAC and plumbing contractors can approach pricing projects to help ensure precise pricing, generate profit, and ensure financial sustainability.
The Importance of Job Costing
There is always excitement and a sense of achievement when signing up for a new HVAC installation or plumbing service contract. That excitement can quickly fade when you realize your labor and material costs have far exceeded your quoted price and you see your profit margin shrinking.
Understanding the fundamentals of each job’s cost, including direct and indirect expenses, and the different ways you can approach pricing your goods and services will give you a clear picture of the job’s cost, and ultimately what will flow to your bottomline.
Different Pricing Methods For HVAC and Plumbing Contractors
There are various ways contractors can price their services by tracking expenses, which can help set profitable rates and also keep them competitive in the market, resulting in a possibility of improving client base.
We often see contractors forgetting about the indirect costs that are culprits of a shrinking profit margin.
Direct costs include:
- Material
- Labor
- Equipment
Indirect costs include:
- Overhead
- Equipment transportation
- Administrative expenses
We look at how contractors can determine the price of services or goods they sell to their clients.
Fixed Pricing
Also known as flat-rate costs, this model uses labor, material, and overhead costs to set a price regardless of how many hours it takes to finish the job. The silver lining is that the quicker the job is completed, the more profit is made.
This model is commonly used for:
- System installations and replacements
- Common repairs
- Routine maintenance and inspections
Using a fixed price for service requires knowledge of the average time and material needed for each routine job to help determine a flat rate. However, each job is unique, and properly assessing the issue upfront will help avoid unforeseen costs that may arise.
Hourly Rate
This charging method is based on time and material, known as cost-plus pricing. The clients are charged per hour of work and material used, plus a markup on labor and material to compensate for overhead.
Charging an hourly rate gives contractors more flexibility to adjust prices based on real-time costs and offers more transparency with clients about their charges. However, this method leads to clients watching the clock and technicians rushing jobs.
This model of charging is suitable for more complex projects like:
- Custom installations
- Complex or unusual repairs
- Emergency call outs
- new construction.
Hybrid Pricing
The third method is hybrid pricing, which combines charging a flat rate for certain services with the flexibility of hourly rates for unpredictable jobs where contractors are uncertain of the labor time and material needed due to the job’s complexity.
Fundamentals of Job Costing For Contractors
Business owners and contractors in the HVAC and plumbing industry need to prioritize the profitability of every project. However, it’s easy to undercharge or overlook hidden expenses without a clear understanding of how much each job costs to complete.
Having a clear picture of what each job costs from start to finish will help eliminate the guesswork of putting a price on services and offer more efficient services.
Once a pricing model is decided on that best fits the business, the next step is to implement a detailed job costing system to break down the total costs.
We look at the three main categories and how each component works.
Labour Tracking
HVAC and plumbing are both labor-intensive industries that require direct labor, such as technicians and installers, and indirect labor, such as administrative staff, project managers, and supervisors, who help to support and coordinate the jobs.
To track labor costs, you need to know the number of billable hours of labor and the number of technicians needed for the job. Accurate tracking helps determine the true cost of a project and prevents underpricing, which shrinks profit margins.
Material Costs
Tracking the costs of the physical components and supplies needed to complete a project can range from large items like HVAC units, boilers, and piping to more minor, easily omitted items like fasteners, fittings, and insulation.
Forgetting to add any material or indirect costs of material needed to do the job must be absorbed by the contractor, leading to underquoting. Although you might have a good profit ratio, all these forgotten items will reduce your company’s profitability.
It also impacts future jobs, as estimates will be made using the same mistakes over and over. Tracking each item used ensures a detailed and thorough account of what you need and what it costs to do a specific job, whether it is installing a smart thermostat or repairing and replacing water pipes.
Here are some examples of direct material costs to consider:
- HVAC heating and cooling units
- Ducts
- Thermostats
- Epoxy putty
- Washers
Examples of indirect material costs:
- Shipping and handling
- Material waste
- Cleaning up and discarding debris from the site
- Inventory management
- Taxes
Overhead Costs
Overhead costs are often overlooked when costing a job or service. These are the indirect expenses of running a business and are not tied to one specific project; a portion of this expense should be allocated across different jobs quoted for.
Depending on the time a project takes, the overhead costs should be divided according to the allocated time. For example, if a project takes up 15% of the contractor’s monthly work hours, then 15% of the overheads should be added to the job to cover expenses.
It’s important to note all the overhead of the business and understand the running costs; here are some examples of overhead costs:
- Office rent
- Insurances
- Support staff salaries
- Cell phone bills
- Uniforms
- Marketing expenses
- Vehicle costs
- Licensing fees
- Training costs
Overheads can represent a substantial portion of business costs, and omitting them from the job costing may radically reduce contractors’ profit margins.
Conclusion
In today’s competitive market, we understand that job costing is important for HVAC and plumbing contractors to price jobs correctly and avoid unexpected costs. Accurately tracking labor, material, and overhead costs helps you remain competitive and profitable.