by Tom McCart

How Do You Measure Up?

Whenever I visit a new contractor customer, I get asked this question: “Tom, how do I compare with the other contractors you work with?” The answer is almost always, “About the same.”

Why do I say that? Because most HVAC contractors are running jobs, not businesses. Most don’t attend conventions, national ACCA meetings, HVAC Comfortech, or other major trade shows.

The reason: they’re too busy, they can’t afford the time or the money, they’re not into socializing. Because of this reasoning, they miss the opportunity to rub shoulders with their peers. They don’t learn how to better manage their businesses. In other words, they stay just the same as every other contractor out there.

This may sound negative, but the intent is to explain what the average contractor looks like so you can compare your company and get a feeling as to how your firm measures up. My comments here are based on the thousands of contractors I’ve seen while training or consulting.

I’ll be breaking down the average company by the following key criteria:

  • Personnel
  • Management
  • Service and productivity
  • Pricing.

Use these four criteria, you should be able to get an idea as to whether you are running a business or just have a job.

Personnel. There are about 49,000+ HVAC dealerships in the U.S. The average dealer has less than five employees (but all are looking for technicians). Sales per employee tend to be less than $90,000. In addition, most contractors have few formal training programs in place for new hire employees. An investment here would pay big dividends.

The majority of companies have a bookkeeper who doubles as a dispatcher or receptionist. Many have computerized their firm’s bookkeeping functions, but don’t use the financial tools that software offers. The most popular software packaged used seems to be QuickBooks.

Furthermore, service history is poorly maintained and rarely used for marketing. The owner is usually in the field selling, putting out fires, handling service manager duties, or trying to get an estimate or equipment order finished.

Training is done mostly through local suppliers, brand manufacturers, or is done in-house. Most training is technical — office personnel are seldom included.

Management. Issues that concern most owners of average companies are receivables more than 60 days old. The typical owner has poor business management skills and the organization is loosely wrapped around the owner’s drive, lack of vision for the future, improper labor staffing and low price competition.

Company owners work more than 60 hours a week. They seldom have health and life insurance, and almost none have a business plan or succession plan in place. Many use the proffered dealer trip from their suppliers as a vacation. Marketing seems to be a foreign subject, and formal marketing plans are still very scarce.

Of those businesses with a marketing budget, most of those dollars are spent on poor or non-producing Yellow Page ads. Many businesses don’t have enough phone lines to handle seasonal call traffic.

Net profit has hovered around 2.3% for the last five years. Yet contractors deserve 12% to 20% net profit. Gross profits average around 36% and overheads are dangerously above 33%.

Equipment stocking programs, parts inventories, and floor plans are becoming smaller. Inventories aren’t being managed for maximum sales and service. There are too many trips being made to supply houses by technicians.

Operating capital is being used to subsidize customers, both residential and commercial, for slow or no pay. Aging reports or receivables with money over 60 days old is more the norm than the exception. The reason for these financial problems appears to be poor budgets or no budgets in use.

Most profit and loss (P&L) statements have been set up by tax accountants for tax purposes, not for a financial score card with which to make business decisions. “Cost of Sales” is seldom itemized. Contractors should be anxious for a new P&L to come out to see how they performed, not just throw it in a desk drawer, thankful to have survived another month.

Service & Productivity. The average labor hour is around $60. Most labor rates don’t meet or exceed the company’s break-even point. The average service invoice is under $90 per call.

Furthermore, service truck production isn’t being measured by the week, month, or year. Technicians rarely know where and how they fit in the big picture of the business. For them to hit production goals is like playing darts blindfolded.

Speaking of service truck production, companies doing less than $1 million in gross sales should be producing more than $160,000 per full-time service truck.

From a capability standpoint, I’ve found that many technicians don’t have the tools they need to provide exceptional service. Tools such as carbon monoxide testers, magnahelic gauges, infrared heat exchanger cameras, mold test kits, flow hoods, and blower doors all help technicians diagnose and correct problems on the first pass and can increase average invoice dollars.

A well-equipped professional technician can be a tremendous source for lead generation.

Of course, training plays into this as well. Not only technical training, but training on soft skills as well. This is vital for technicians who interface with the everyday customer. It includes things like penmanship, proper paperwork habits, communications skills, and so on.

Keep this in mind: If service invoices aren’t being completed properly, the company can’t garner valuable marketing information and service history.

The average contractors pay 90% of their technicians by the hour with diminished accountability to the job. Management is seen placing more importance on new business than existing customers.

Dispatching every call causes callbacks and low invoice dollars. This all fosters low moral, lack of innovation, poor workmanship, low self¯esteem, and higher turnover.

Companies that offer service or maintenance agreements usually have less than 100 agreements per years in business. Agreements aren’t an everyday program and don’t get measured, so the conversion rate to agreement customers is very low. Yet statistically, almost 70% of total business can be attributed to an existing customer.

Pricing. The majority of HVAC contracting businesses aren’t able to quote or price replacement jobs on the first call. It appears that in most companies, the owners are the primary sales people (as if they didn’t have enough to do).

Many contractors are still using 1.4 as a multiplier for figuring selling price. Even when proper pricing procedures are used, there are a multitude of errors when calculating the selling price. The most common is that the labor burden isn’t calculated into cost of sales.

Neither are warranty reserve money, financing points for delay or deferred financing, spiffs, and commissions. Heck, commissions are often erroneously taken out of gross profit and not figured into cost of sales.

Material pull sheets aren’t being used on installations and are often just randomly pulled by the installer. Materials returned from jobs are seldom credited from job costing.

Labor pricing often doesn’t reflect true overhead costs including call-back rate, profit desired, or federal tax bracket.

And finally, the last U.S. Census showed that 37.1% contractors reported no net income.

Because I’ve worked with some of these contractors, many one-on-one, I can unequivocally say change is occurring. The drive and determination of these independent contractors will lead this industry into the future. With a little basic business training, I’ve seen contractors become excited again and willing to make internal changes. They are hungry to learn and take the next step.

So there you have it — a portrait of the average HVAC contractor. Now when you ask me or someone else how you compare, you’ll have a better idea. And the question will be: Is your company just average?