How Much to Charge for Parts and Labor
How much profit does a contractor want to
make after all costs and taxes are paid 10, 20, 30%? Over the past 100 years the
stock market has returned an average annual return of a little over 10%.
With that in mind at least a 10% after tax profit is a good goal.
Contractors who use time and
material pricing have a very difficult if
not impossible time earning at least 10% profit. The reason is that when
determining how much per hour a contractor needs to charge in order to earn a
10% net profit (as in our example) the hourly rate will typically be much
higher than his competitor’s hourly rate.
A consumer will typically call a few
contractors and ask how much do you charge to come out and fix my furnace? If
your competitor says $75 an hour and you say $125 an hour who
do you think the consumer will have come out for the repair? The $75 an
hour company in most cases.
In order to achieve the 10% net
profits wanted, the $125 an hour contractor will need to use flat rate pricing and keep the $125 an
hour fee private. Note, there is nothing dishonest about this. very retail
store and restaurant does business this way.
It is critical for a contractor to
charge an hourly rate that is adequate to meet their profit goals. The best way
to determine that is to use the Accu-Pricing™ “Know What to Charge For Labor” calculator and the Accu-Pricing™
“Know What to Charge For Parts” calculator. Thesecalculators will tell you how much
you need to charge to meet your goals.
It is better to cover all your overhead
costs in
your labor rates otherwise if you do a repair job that only requires labor and
no parts you will lose money on that repair if you are using parts profit for
paying overhead expenses.
Some
contractors like to mark up parts a certain amount like parts that cost between
$0 and $20, 2 times the cost. Parts that cost between $20 and $75, 1.75 times
the cost. Parts that cost $75 and up 1.5 times the cost, etc.
There is a better
way to do this in the author’s opinion.
Some
contractors like to use the “How Much to Charge For Parts”calculator that
comes with Accu-Pricing™. This will give them a set markup for all parts like
1.53 times. Even though we include this calculator with Accu-Pricing™ the
author believes there is a better way to do this.
It
is good to know what the minimum markup needs to be on parts to meet your
profit goals. If you take that number and add in the labor number you may
arrive in most cases a total repair price much lower than you can fairly
collect. Why not earn as much as possible from your business without ripping
people off.
For example, you might want to markup a capacitor 10 times its $5
cost while you may want to only markup a thermostat 1.25 times its
cost.
Look
at the total price a customer pays for a repair and think about what the
perceived value of what that repair is. For example, a motor or computer board
has a perceived value in a customer’s eyes a lot higher than
a thermostat does.
Don’t
worry about making a decent profit! Microsoft after they pay all their expenses
earns over 85% profit. Charge enough money so you can provide a good lifestyle
for your employees. This includes good health insurance, vacation days,
sick days nice trucks, training, good pension, etc.
The
way to achieve this is to markup your parts as much as the market will bear.
Your labor hours you will want to keep accurate meaning if the average repair
time is 2 hours for a task then figure in 2 hours. Don’t increase it to 2 ½
hours to make more profits.
