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Starting a Contractor Business

Contractor 20/20 Offers Great Advice if Your Just Starting Your Contractor Business

Note: this was originally a post I made to the ServiceRoundTable.com.

There is more than one way to accomplish a goal.
Here is the way Contractor 20/20 sees it, after consulting for over 250 contractors of all sizes in 26 states over the past 7 years and working with business owners of all types over the last 27 years.

I think the first step in the process is for a third party to call your last 20 customers and see who they would use if they had a plumbing problem. If less than 15 names … you then need to learn how to deliver customer satisfaction. If you start heavy promotion before you can deliver customer satisfaction, you’re buying trouble.

Next you need to set your hourly rate. Here are two computing methods:
1) Let’s assume you can bill 20 hours a week. Let’s say that including taxes and benefits, a plumber in your area earns $25 hour ($25 is a fake number, just to show the math). If you take $25×2=$50 (the real cost when the men are working) then $50×4=$200, then add 5% for call backs that would get you to $210. The problem with this first method is that is assumes efficient management that you may not be able to achieve given your skill level.
2) Another popular method is to add up all your costs of doing business, except materials. Then divide by the number of expected sales hours, than multiply by 125% for a 25% markup. The problem with this second method is that is makes no provision for the fact that your bad business practices may be driving up your costs. A higher than necessary cost that will drop your closing rates and lower your customer retention.
I like the first method because it maximizes closing rates, customer retention and forces you to learn to limit unnecessary expenses and deal with the realities of market forces.
a side note…

Now I can already hear the voices of critics who love the mark up method … “blind leading the blind” was my favorite one last time we were on this topic. OK, I have 2 things to say before you slam me.
1) I will grant you that price is less of an issue in larger markets than small ones.
2) However I have spent the last 7 years cleaning up the mess your method leaves behind in small markets where formally respected companies are now thought to be thieves.
Back on topic now…

If you do decide to price in a way that sets your direct labor on service (not installs) below 25% of gross labor, then it better be that you work extraordinary clean and on time. You better have terrific sales skills and customer relations. You better hire security screened, drug tested techs and you better effectively market those facts to people who put a high value on those facts to people who put a high value on those qualities, and it better be that there are enough of those folks in your market to float your boat.
It can be done … I have large highly profitable clients in Denver and Salt Lake City who proves it can be done.

The next step is to decide how you are going to mark up materials. Just for profit purposes, it should be at least 25%. I have seen numbers that suggest that the paperwork and stocking costs of materials in general are last 30%. Some contractors mark up items under $10, 200% – $11-50, $100 – $51-100, 50% – $100 and more, 30%. It seems everyone has a different opinion on this one.

The next area is Overhead Control and Sales Goals. In general for plumbers, 40% overhead of gross sales is a good target. (Overhead is all your costs of doing business except for direct labor including taxes and benefits for direct labor, subcontractors, permits, and materials) the question is how do you get there.

One way is to budget that you will only spend 40% of your sales on overhead, no matter what.
Another way to force sales growth … to do it you add up your overhead, divide by point .4 and use the result to determine your “total sales goal” then take your “total sales goal” minutes your actual sales to determine your “sales shortage”. Then take “sales shortage” x your “new customer cost” (the percentage of promotion cost needed to generate additional sales thru advertising … normally 16% to 26% of the sale for a new customer). That result becomes your “additional advertising budget”, take the “additional advertising budget” divide by the total sales goal that result is the price increase necessary to fund the additional advertising.

Other things to watch:
1) CSR (the person answering the phone) appointment rate should be at least 70% … if not increase her training or decrease your trip charge.
2) Tech closing rates … if under 70% get some sales training of check if your prices are too high or that you’re targeting the wrong customers.
3) Customer retention … do third party surveys … if your customer retention is under 75% figure out why and fit it or price to live with it.
4) Average tickets … if less than one 175% of your hourly rate, get some sales training and check that you are not marketing to too many newer homes or too young or too old retired homeowners.

Contractor 20/20 knows what it takes to start a business and then keep it going. If you have questions or need to turn your business into a profitable center of ongoing business, call us today.