The HVACR Category

Flat Rate Labor Guide

FORWARD & GENERAL INSTRUCTIONS

If you conducted a survey of the HVACR service industry, you would find that there are a lot of strong opinions about flat rate pricing. One of those strong opinions is that flat rate pricing is a “flat-out customer rip-off”, a system employed by service companies to accomplish one objective and one objective only: Charge as much as possible and make as much profit as possible.

It’s easy to understand why there are some who think that way about flat rate pricing. All they have ever considered is a system that has determined a pre-set dollar amount for a given repair of an HVAC system regardless of location (urban or rural), and the size of the community. And it’s hard to disagree with the idea that a system that suggests a service company bill the same dollar amount for a repair whether the customer is in Los Angeles, California or Lost Springs, Wyoming is fair. Obviously, the price that a service company charges in a city with a population in the millions shouldn’t be the same rate for a customer living in a town with a population of less than 100 people.

That’s why the underlying philosophy of a category flat rate pricing system is that each individual service organization sets their own pricing, and it’s based on their CODB (Cost of Doing Business). That’s the first subject we’ll discuss in this program.

The next subject we’ll discuss is another one that involves strong opinions; technicians and selling. To some technicians, “sell” is a four-letter word, but the reality of their job is that part of it goes beyond the technical aspect and focuses on customer service. And providing customer service involves assisting the customer in making an informed buying decision. Which, no matter how you slice it, means that the technician, in their interaction with a customer, is selling.

The last segment of the program provides template pages for you to complete as you build your flat rate pricing system. It’s called a Category Flat Rate System because repairs are determined to be in a given category based on the difficulty of the job. For example:

Category One: This is the simplest repair that takes the least amount of time. One example of this would be replacing an easily accessible component, such as a transformer in a gas furnace or run capacitor for an indoor fan motor.

Category Two: In this category, you will list the jobs that, while they are not the most difficult jobs to do, they are not the simplest either. Some examples to consider here are replacing a condenser fan motor on an air conditioner, or any other repair you would consider beyond the simplest category one type job.

Category Three: Jobs that you may consider in this category would be performing a static pressure test to confirm a dirty indoor coil that is difficult to access and clean.

Category Four: Major repairs that require a significantly longer amount of time than category one, two, or three jobs take would be the jobs that you list in this category.

Category Five: This is the category that would apply to your most complex repair procedures, such as sealed system repairs.

When you develop your labor guide using the template pages, you may have only one page of category one jobs, several category two and three pages, and only one listing page for category four and five jobs. There is no set number of pages. It all depends on the nature of your business, the kinds of jobs you do, and the variety of equipment you work on that may require different categories for the same job due to the different design of a particular piece of equipment.

Changing the heading on a template page is a simple task since they are developed as a Word document. Just modify the document and save it. There are several sample pages at the end of this document that give you a basic idea of how to design and print a particular flat rate job listing page.

Once you have accomplished your job pages, they should be printed and put into a 3-ring binder that serves as a presentation tool that technicians use when explaining the repair that is necessary and what the labor fee for the particular job will be. Placing each page into a clear plastic document protector and designing an insert cover page for the binder is one way to develop a presentation tool that conveys professionalism and quality to the customer.

With your presentation binders ready, the next step to implementing the category flat rate pricing system into your business is to separate your service call billing from your job labor billing.

SEPARATING YOUR SERVICE CALL AND JOB LABOR BILLING

Separating your service call billing from your labor billing is a simple process that not only allows your category flat rate pricing to function effectively, it also simplifies the process of booking calls and answering that ever-present question that a customer asks when calling for service.

Imagine that your phone conversation with a potential customer went like this:

Customer: “How much is a service call?”

(Also asked as, “Can you tell me how much it’s going to cost to fix?” or “If it is the ______, how much will it cost?” or whatever version of price inquiry you hear.)

You: “Our service call and diagnostic fee is $__.00. Once the technician has determined the specific problem with your _________, he (or she) will be able to tell you what your total repair cost will be.”

Note that the above sample script does not use the term “trip charge” or just service call. It states specifically that the service that will be provided for the stated fee is a service call and diagnostic procedure, which conveys to the customer that the process is not simply someone just driving to their house. It includes someone using tools, test equipment, skill, and experience to accomplish a diagnosis.

It also does not mention time, or any idea that a given number of minutes is included in the service call.

Employing a system in which you separate your service call billing from your labor billing allows you to establish a service call and diagnostic fee (based on your CODB) that is, in itself, a profit generating process.

If a technician accomplishes a service call and a complete diagnosis that determines the repair cost, and the customer elects not to go ahead with the repair, your established price for that professional service should cover your cost of doing business and allow for a reasonable profit margin.

If a technician, in the process of accomplishing a diagnosis, discovers that the problem in simply solved, and no repairs are necessary, your established price for that professional service should also cover your cost of doing business and allow for a reasonable profit margin.

It’s also important to understand that when you employ a script as shown above, your customer understands that they entered into a contract agreement with you to pay the established fee for the specific service provided. It doesn’t (and shouldn’t matter) to the customer how long that diagnosis takes. If an

experienced journeyman level technician can accomplish a diagnosis in 10 minutes or less, then the diagnosis is accomplished. If an inexperienced technician takes more than 30 minutes to get the diagnosis correct, then the diagnosis is accomplished. In either case, you are due the amount agreed upon when your customer called for service.

With the service call and diagnosis accomplished, the technician can then use the category pages to explain to the customer what the total repair cost will be. As an example:

Item #1: Service Call and Diagnostic Fee…………………………$__.00Labor To Replace The Failed Part………………………………….$__.00Parts Cost……………………………………………………………...$__.00Tax……………………………………………………………………...$__.00

Total……………………………………………………………………..$__.00

At this point in the presentation, the customer can elect to either go ahead with the repair, agreeing to the total price, or they can decide not to go ahead and pay only the service call and diagnostic fee.

Note: While it’s not necessary, you may decide to design a simple estimate form that allows the technician to list the items above, and have the customer consent by signing the form.

UNDERSTANDING YOUR COST OF DOING BUSINESSAND DETERMINING YOUR CATEGORY PRICING

It’s important to know what you’re CODB (Cost Of Doing Business) so you’ll know how much it costs you for each hour of labor you provide to customers when performing repairs. And knowing what it costs you for each hour of labor you provide is a critical factor in implementing the Category Flat Rate System into your business. You need to plug your hourly rate into the program in order to allow the system to calculate all the flat-rate jobs that are listed. Determining your true cost of doing business isn’t easy. To do it effectively often involves understanding all of your overhead costs and using all available records for at least a full year, involving a series of P&L (Profit & Loss) statements. While we’re not going to cover P&L statements in detail here, we will attempt to give you some insight on understanding your overhead so you can come to an understanding of what your hourly rate should be. One way to calculate your hourly labor rate is to consider five factors:1. Overhead Ratio2. Average Daily Wage 3. Average Daily Total Cost Burden4. Total Daily Productive Hours5. Percentage Profit Goal Average

OVERHEAD RATIO

A first step is to determining your overhead ratio is to decide how long a time period you wish to use for your calculations. You should use at least 3-6 months, but a year’s records will give you better accuracy. For the length of time selected, add together all expenses except technical payroll and any expenses that are incurred for parts only. These expenses are defined as your total overhead expense. These include:1. Office payroll cost, including your own salary if you are self-employed but not a technician. (If you are also a technician, the technical part of your salary needs to be added to the technical payroll.) Be sure to include a salary for your spouse, or any other family members that work in the office. Also under this listing, be sure to include all payroll taxes paid out for technical and office personnel.2. Rent or mortgage payments.3. Utilities including phone, water sewer, gas, electric, and garbage.4. Insurance, including liability, auto, unemployment, health, property, employee, and Workers’ Compensation.5. Automobile expenses such as gas, oil, tires, car washes, maintenance, and repairs, and of course, any vehicle payments. If your vehicle is also used for personal use, check with your accountant to know what portion to deduct.6. Advertising, including all print, radio and TV ads and promotions, vehicle painting, printing, postage, signs, etc.

7. Office equipment and supplies.8. Answering service, radios, cellular phones, etc.9. Educational materials such as magazine or newspaper subscriptions, videos, books, microfiche, and service manuals.10. Memberships to professional organizations.11. Tools, technical equipment and uniform costs.12. Travel and entertainment.

Anything relating to parts should only be used in your calculation of your parts markup because parts are inventory. And the revenue generated from inventory sales should be calculated separately so as not to confuse the revenue issue, which often leads to underpricing labor prices.

AVERAGE DAILY WAGE

To calculate your technical payroll and use that figure to understand your overhead ratio, you need to understand Average Daily Wage. Once your average daily wage and your total technical payroll are understood, your total overhead expense is divided by this figure in order to give you your overhead ratio. Example: If your total overhead expense for the period was $29,100 and technical payroll for the period was $19,400, your overhead ratio is 1.5. This means that for every $1 paid to technicians, an additional $1.50 is paid out for overhead costs. $29,100 ÷ $19,400 = 1.5

In many situations, an independent appliance service company is a one or two-person operation, with the proprietor running the service calls (and the proprietor's partner answering the phone). In these cases, the average daily wage calculation is often overlooked because there are no other technical employees to consider. However, if the proprietor/technician setup is what describes your appliance service operation, designing a system to pay yourself and then using that figure to calculate costs is something you should consider. It’s an effective way to have an overall understanding of your cost of doing business, and, if you grow your company and hire technicians, the system allows you to track individual technician costs effectively.

To calculate average daily wages paid to technicians, whether it’s yourself or someone else, first determine how many hours each technician works on an average day, then divide the number of hours worked by the number of days worked in that time period for each technician.Example: In a three-month period, Technician #1 worked 627 hours in 75 days. The average number of hours he worked each day is 8.36.627 ÷ 75 = 8.36

In the same three-month period, Technician #2 worked 600 hours in 70 days, averaging 8.57 hours each day.600 ÷ 70 = 8.57

Once you have the average number of hours worked daily, you have to calculate the average daily individual wage. Multiply the average number of hours worked daily by the hourly rate of each technician.Example: Technician #1 is paid $22.00 per hour, while Technician #2 is paid $16.00 per hour.$22.00 X 8.36 = $183.92 average daily wages for Technician #1$16.00 X 8.57 = $137.12 average daily wages for Technician #2

If you have employees who are paid overtime for extra hours, you need to calculate the overtime hours separately from the regular hours. Take the number of hours worked in this time period at regular pay and divide it by the number of days worked. Then take the number of hours-worked overtime in the same time period and divide it by the same number of days. Multiply each figure by the appropriate hourly wage.Example: Technician #3 worked 520 regular hours and 100 overtime hours in 65 days.520 hours regular wages ÷ 65 = 8 hours regular pay each day average100 hours overtime wages ÷ 65 = 1.54 hours overtime pay each day average

Multiply the average number of hours each day at each rate. If technician #3 is paid $22.00 for each regular hour and $33.00 for each overtime hour…$22.00 X 8 = $176.00 average daily regular wages$33.00 X 1.54 = $50.82 average daily overtime wages

Add the average daily individual wage (including overtime pay if necessary) for each technician and divide by the number of technicians. This will give you the average daily wage.

$183.92 average daily wages for Technician #1+$137.12 average daily wages for Technician #2+$176.00 average daily regular wages for Technician #3

+$ 50.82 average daily overtime wages for Technician #3 $547.86 average total daily technician’s wages

÷3 technicians $182.62 is your average daily wage

AVERAGE DAILY TOTAL COST BURDEN

With the information gathered so far, you can calculate the average daily cost burden of your business. To accomplish this, first multiply the average daily wage by the overhead ration to calculate an average daily cost burden. Then add the average daily wage to get the average daily total burden.

Example: The average daily wage is $182.62, and the overhead ratio is 1.5 $182.62 Average daily wage X 1.5 Overhead ratio $273.93 Average Daily Cost Burden

+$182.62 Average daily wage $456.55 Average Daily Total Burden

The average daily total burden is your break-even point. If you equal your average daily total burden per technician in labor charges to customers, you will break even on labor. And, with the next concept, Average and Total Daily Productive Hours, understood, you can establish an hourly rate

AVERAGE AND TOTAL DAILY PRODUCTIVE HOURSSome studies have shown that less than 65% of the average technician's 8-hour day is spent actually performing service work. This isn’t to say that technicians are a lazy lot, it’s just that there are a lot of other things they have to handle (paperwork, etc…) in the course of accomplishing repairs. To compute the productive-time ratio for a technician, calculate the actual time working on repairs and compare that time to the total hours paid to that technician over the same period.

Example: In a three-month period, Technician #1 worked 627 hours over 75 days. He spent 135 hours doing paperwork and 492 hours generating service income, for an average of 8.36 hours each day.

627 paid work hours -135 hours doing paperwork

492 hours generating service income

492 hours generating service income ÷627 total hours paid

.78 or 78% Productive-time Ratio

627 total hours paid ÷ 75 days

8.36 daily hours x.78 Productive-time Ratio

6.52 Daily Productive HoursWith this figure understood, the next thing you need to factor in is the fee for your service call and diagnostic services. The most effective way to use a flat-rate pricing system and communicate with a customer at the time they call for service and inquire about price is to let them know that your service call and diagnostic fee is $____, and that once the diagnostic is accomplished, you can advise them on the total cost of the repair. When you use a service call and diagnostic fee, you can deduct any travel time from the total hours you paid to the technician. This will give you a higher productive-time ratio.

Example: Over a three-month time frame, Technician #1 spent 30 hours doing paperwork and 30 hours traveling to service calls and was paid for 600 hours over 70 days in that time period.

600 hours paid - 60 hours doing paperwork

- 150 hours travel time 390 hours generating service income

390 hours generating service income ÷600 total paid hours

.65 or 65% is your real Productive-Time Ratio

Which leads you to calculate:

600 total paid hours ÷70 days

8.57 hours work daily x.65 productive-time ratio

5.57 as the real Daily Productive Hours of Technician #1.

PERCENTAGE OF LABOR PROFIT AND YOUR HOURLY RATE

Now, with all things considered, you can determine the hourly rate you want to plug into your Category Flat Rate Pricing System. Take your average daily total burden and divide it by your average daily productive hours to figure your overhead burden per hour. Then, multiply the overhead burden per hour by your labor profit goal percentage. This calculates your profit goal burden.Add the overhead burden per hour to the profit goal burden to calculate what your hourly rate needs to be in order to earn the profit percentage you’ve set for your business.

Example: You have a daily total burden of $380.85, with 5.57 average daily productive hours, and a profit goal of 10%.

$319.91 daily total burden ÷ 5.57 daily productive hours

$ 57.43 overhead burden per hour (rounded off to nearest dollar)

$ 57.43 overhead burden per hour X 10% profit goal percentage

$ 5.74 profit goal burden

$ 57.43 overhead burden per hour+ $5.74 profit goal burden$ 64.00 per hour labor charge (rounded up to the next dollar)

With this calculation accomplished, divide the per hour labor charge by 6 to get the 10 minute rate that you will to use as a basis to calculate the final number you’ll plug into the Category Flat Rate Pricing System. If the amount is not an even dollar, round it up to the next even dollar amount.

$64.00 ÷ 6 = $10.60, rounded up to nearest dollar…$11.00

Once you’ve determined what your 10-minute rate is, your next step is to determine how much time you’re going to allot to a Category One job. If it’s 30 minutes, then our example would take us to a $33-dollar price for a Category One job. If it’s 40 minutes, your Category One job price would be $44. Next, determine how much time you’re going to allot for an average Category Two job. If it’s 60 minutes, for example, that would set your Category Two rate at $66.00. With your Category One, Two, Three, and if applicable, Category Four rates determined, you can enter specific jobs into the boxes in the template document.

FUNDAMENTAL SALES SKILLS FOR THE TECHNICAL PROFESSIONAL

By Jim Johnson

© 2015 Technical Training Associates An old saying in Texas goes, "If you've got to swallow a bucket of frogs,

you might as well start with the big one."Sometimes, the idea of selling can be a big frog for technicians to swallow.

I know this to be true because in many of the customer service workshops we have presented for technicians, it is one of the more uncomfortable topics for them to discuss.

When we present our workshop on-site for service organizations, I often ask for a show of hands on two questions. The first question I ask is: "Has anybody here ever had a negative experience with a salesperson?"

Invariably, hands shoot up all over the room. Then I ask another question: "Has anybody here ever had a pleasant experience with a salesperson?"

When I ask this question, it takes more time, but eventually, everybody in the room, after they have had time to think it over, raises their hand and admits that they have had a pleasant experience when with dealing with a salesperson.

This brings me to the third question I always like to ask: "So what was the difference?”

When people think about the answer to that question, they usually have some difficulty providing a specific answer. It is apparent something was different about the two kinds of experiences, but it is hard to explain.

PERCEIVED SALES QUALITIES

Comparing two lists from surveys might help. In these surveys, people were asked about the terms they usually use to describe salespeople.

Then, they were asked about the terms they tend to use when describing a professional. This first list contains the top six terms that people commonly use to describe salespeople.

* Pushy--This is at the top of almost everybody's hit parade. Salespeople sometimes can be downright pushy.

* Phony--People often say that one of the things the bothers them most about salespeople is that they change who they are in some way to close a sale. Then they switch back to being themselves or somebody else on a moment's notice to get a signature on the bottom line.

* Sneaky--When people use this term to describe a salesperson, they do not say the salesperson was flat out lying, but maybe just practicing some "creative avoidance.” You realize you have been dealing with a sneaky person when you suddenly find yourself blind-sided by something you did not even think about when you were saying yes.

* Dishonest--Unfortunately, sometimes salespeople are just dishonest. They lie, then say whatever they need to cover it up. They will twist things around when confronted or hang on for dear life to a seemingly insignificant point to defend themselves when a deal goes sour.

* Slick--When salespeople are slick, you just can't catch them in a direct misrepresentation. You know things did not go as planned or promised, but you just can't tie them directly to the problem.

* Desperate--Often, salespeople work on a draw against the commissions they plan to earn during a given time frame, such as a month or a quarter. If they have been drawing a salary against their commission for a long time and they are behind in the game, it can make them appear as desperate.

They know they have some ground to make up and time is marching on. They might even be at risk of losing their job if things do not turn around in a hurry. So they can sometimes come off as desperate.

PROFESSIONALS' QUALITIES

This is the list that was the result of surveys on people's opinions of professionals.

* Competent--The ideas of competence and professionalism seem to go hand in hand.

* Honest--Although dishonestly is fourth on the typical salesperson's list, honesty is second on the list for professionals. This simply says that most people are willing to accept quickly that a professional is honest.

* Knowledgeable-- Professionals are trusted to be competent in their specific area of expertise and knowledgeable of their industry or business as a whole. We often feel that we can get good advice from a professional on how to get information on something that is related to what they do.

* Dependable--When a professional makes a promise, we can count on them delivering on the promise. If something beyond their control goes wrong, we can count on them to make things right. For most of us, that is dependability in a nutshell.

* Caring--When consumers are asked to describe professionals, one of the common responses is that they care about their customers.

* Flexible--One of the things people like about professionals is that they can roll with the punches when necessary. If something comes up and it means that plans, scheduling, or procedures have to be adjusted, then the professional can handle the change.

When you look at the two lists, can you understand why some technicians are resistant to the idea of selling?

When a technician is asked to be more involved in selling, on the outside they may be nodding their head in agreement. However, at the same time, an inner voice is saying to them, "You want me to be a pushy, phony, sneaky, dishonest, slick and desperate person? No thanks--I'll pass."

That kind of thing can go on because of a person's concept of salespeople, and working successfully with a flat rate pricing system often involves selling, whether technicians are comfortable admitting it or not.

The material for this article was excerpted from Jim Johnson’s 3 CD audio learning program “PEAK Performance for the Technical Professional”, available from Technical Training Associates, PO Box 2259, Green Valley, AZ (520) 625-6847, or visit www.techtrainassoc.com. $80.00

IMPLEMENTING THE CATEGORY FLAT RATE PRICING SYSTEM

Often, a service manager or service company owner who goes through the process of calculating their necessary hourly rate is surprised to discover that they haven’t been charging enough for their services. If that’s what just happened for you, then you now have another situation to deal with in regard to yourself and any other technicians in your organization….which is getting over the common myth that using a flat rate guide will make you too expensive, cause customers to complain long and loud about your service rates, and ultimately drive business away.

Our experience is that the exact opposite is true. For hints on implementing The Category Flat Rate Pricing System into your business, consider the following:

…Often, technicians are of the opinion that the service rates charged by a business are already too steep because they just don’t consider some of the fundamental topics we discussed on calculating the cost of doing business.

…It’s easy for a technician to undervalue what they do, especially if they’re good at it. They sometimes see only the actual time it takes them to make a repair, not the amount of time they had to invest in gaining the experience and skill to be able to make that repair quickly and efficiently. Ask a technician if they think they only pay for a lawyer’s actual time spent while they’re sitting across a desk from them discussing their case and they’ll get the idea. Spending time and money for law school is no different than spending time and money becoming a Journeyman Level technician in the appliance service industry. And, as in any profession, there is time and money invested in keeping up to date on new developments in order to be able to stay current in the industry.

Here’s what you should not do to implement flat-rate pricing into your business if you employ technicians other than yourself:

Buy the guide, get one printed up for each technician, and call a morning meeting to hand them out while you announce “This is what we’ll be using from now on.”

Here’s a 7-Step Plan that outlines what you should do:

1. Schedule a meeting to discuss your plan to implement flat-rate pricing and allow plenty of time for discussion and addressing concerns that are sure to come up. Advise every one of the date you’ve chosen to implement the program, which should be at least 30 days from the date of this initial meeting. And, remember, in any situation in which there is a change in a work environment, employees often go directly to the fear that the end result of the change might be that they’ll be looking for work.

2. Schedule a follow-up meeting to further discuss concerns and answer questions about how it will work. Printing up one sample page from the guide and distributing copies to everyone (both technical and administrative personnel) who will be working with it is a good idea. Hand out a list of why the reasons flat-rate is a good idea for everyone…customers, the service company, and the employees. Making more money isn’t the only motivator (although it’s certainly a good one) for people when they’re dealing with change. A flat-rate pricing system is good for the customer because they don’t have to pay for inexperience. It’s better for the service company and its employees because it allows a business owner to calculate costs, get a fair price for professional services, and make an honest profit in the process, while at the same time set money aside for things like capital improvements and increased employee benefits.

3. Schedule a second follow-up meeting that is at least 2 weeks away from the implementation date. Hand out more example pages and announce the date that you’ll be distributing complete copies of the guide to everyone who will be working with it.

4. Schedule a third follow-up meeting that is at least 1 week away from the implementation date, and that is a few days after you’ve distributed the complete copies. This will allow necessary time for everyone to become familiar with the guide and consider what questions they want to ask and what concerns they want to discuss. Remember, asking questions and raising concerns takes courage, so give everyone who will be working with the guide time to gather that courage.

5. Do whatever it takes to schedule a meeting at the end of the first day the guide is in use. Talk little and listen a lot at this meeting. Be open to accepting suggestions and ideas for using the guide effectively while at the same time standing your ground on the price issue. Remember, it’s your responsibility to calculate the necessary hourly rate to plug into the guide so it will work for your business, and it’s not just a figure you pulled out of the air.

6. Schedule a meeting after the guide has been in use for a full week. Again, talk little and listen a lot. Don’t be discouraged if there is still resistance to the change. And keep in mind that there may be situations in which somebody will never accept the change you’ve implemented.

7. At your regularly scheduled staff meetings, always have the guide as an agenda item so you can discuss any questions or comments about it. Be ready to be happy at these meetings when it comes to discussing the guide. By this time, you’ll be hearing mostly positive things about it and expect to hear admissions from those who had their doubts about how it would work, but are now convinced that they wouldn’t want to work with any other system than a flat-rate.

The following pages show your category page templates with some examples.

CATEGORY ONE JOB PRICINGGas Furnace

Flat Rate Job Price $

Page One

Replace Control Transformer

CATEGORY TWO JOB PRICINGGas Furnace

Flat Rate Job Price $

Page One

Replace Gas Valve

CATEGORY THREE JOB PRICINGGas Furnace

Flat Rate Job Price $

Page One

Replace Indoor Air Handler

CATEGORY ONE JOB PRICINGA/C System Repair

Flat Rate Job Price $

Page One

Replace Contactor

CATEGORY TWO JOB PRICINGA/C System Repair

Flat Rate Job Price $Page One

Replace Condenser Fan Motor

CATEGORY THREE JOB PRICINGA/C System Repair

Flat Rate Job Price $Page One

Perform Static Pressure Test and Clean Indoor Coil

CATEGORY FOUR JOB PRICINGA/C System Repair

Flat Rate Job Price $Page One

CATEGORY FIVE JOB PRICINGA/C System Repair

Flat Rate Job Price $Page One