There are generally 3 types of pricing models in the HVAC industry.
Number one is the markup model. This model is where you take the cost and mark up by a percentage to come up with a selling price. For example, if I had a $1000 cost and I wanted to markup a part 40% I would take 1000 and multiply times 1.4 to come up with a selling price of $1400. The margin on this $1400 sale is only $400 or 28.6% gross margin.
This method of pricing is quite archaic since it generally works with smaller priced parts that need a much larger percentage of markup. For example, marking up a $10 capacitor 600% will give you a $60 selling price on that part. Therefore, this model works with the merchandising and pricing of smaller parts but not necessarily the pricing of larger services or equipment.
The second model that is used in our industry is the gross margin percentage model. This model takes the cost of goods sold and applies a margin by a divisor method. For example, if I had a cost of goods sold of $5000 and I wanted to apply a 50% margin, the formula would be… $5000 divided by 1 minus 50% or .5, and the selling price would be $10,000. This gross profit would be $5000.
The third model is the gross profit dollars per crew per day or per hour. This model is generally instituted by less than 20% of the HVAC industry. Although it is a growing model for contractors to implement. This model allows for predictive modeling of a price structure that is used in other industries such as hotels and airlines or any industry that implements a yield management philosophy. You can read about yield management here. https://en.wikipedia.org/wiki/Yield_management
This philosophy is based on the idea that you have a certain amount of time, people, and resources to perform the services that you have available to your company. Quite frankly, once you figure out the amount that you should budget for a sales price, the number never changes and can always be the same. Let’s look at how we figure this out.
To be able to figure this out we will need to know some parameters. What is your overhead per month, what is your desired net profit per month, how many total people do you have to perform the work, and how many days do you have for them to get this work performed in.
Generally, when we are trying to figure out a gross profit cost per crew, we are doing this based on how many crews we have and how often they can work in a month. Here is the formula….
Overhead plus net profit equals gross profit. You also want to include in this number any money that you have in a payable to your distributor. Also, any future capital expenditures that you want to make for things such as trucks.
We will take this information and divide that by the total number of work days in a month. Now generally there are 20 workdays in a month, Monday through Friday, four weeks a month. However, we don’t want to plan on being busy every day we need to plan for some breakage. So, I like to have a plan to only be busy around 65% of the time. That will take a 20 day month down to 13 days. It also will reduce the amount of time you have to do the work which will increase the price of your gross profit for person day. Don’t be afraid of this as the second parameter you want to use as a critical factor when pricing your jobs is what the market will bear. And what the market will bear is generally a lot higher than what your gross profit per person or per crew day is.
When I take my total gross profit that included my payables to my distributor, with my future capital expenditures and I divide that by the total number of days that I have to do the work, and then I divide that number by the total number of crews I have to do the work I will come up with a gross profit per crew day. My plan would be to attempt to get each gross profit event to happen in the time that high planned for it. If I have a one day job, and one gross profit event, then that day needs to not exceed the time allowed or I will lose money. The good news is, since I planned for 35% of the time to have some breakage then I will be OK as long as it doesn’t happen very often.
I have a calculator that you are welcome to use that explains this very calculation. Gross profit per crew day is not for the light-hearted. I recommend getting with your accountant or a gross profit coach to determine what your number should be. Feel free to reach out to me if you need help with this area. This calculator is in the admin under the library area and can be download it to your desktop. I’ll be happy to help users of our program to understand what their numbers should be.
Gross Profit Calculator