Why Are We Arguing about The $15 Per Hour Minimum Wage?

There has been a lot of talk in this year of a lot of talking about the $15 per hour minimum wage.  Leading the way are the usual suspects, New York State, California, and Washington state.  Other jurisdictions have legislative proposals for a phase-in to $15 per hour, including the federal government, Oregon, Missouri, and the city of Minneapolis among others.  Employer groups in industries such as banks, tech companies, and healthcare adopted this as policy in 2015 as well.  The reaction has been all across the map, as it is every time this subject comes up.  It ranges from “the government has no business affecting wages in the marketplace” to “the increase should be immediate and across-the-board.”

cr-minwa

The ACH&R news recently published an article about the subject as it applies to the HVAC industry.  As expected, you got a similar range of views as those described above.  In the article, (Debating the Impact of a Minimum Wage Increase by Nicole Krawcke, June 20, 2016) one contractor said “I don’t see how this can be a good thing.  The minimum wage legislation will put pressure on the HVAC industry, as it is a tough business for an entry-level worker.”  Another contractor said the $15 minimum wage legislation will not have a significant impact on his business because many of his employees wages are already at or above the proposed rate hike.  “When hiring more qualified people, they’re already commanding a higher wage, so many of our team members are well beyond this rate or right in line with it.”

 

The contractor making the latter point also outlined an issue that no one is talking about.  “One of the negatives is we now have less of a company wage letter to climb in a new norm of complacency can set in.  The new minimum wage raise is a salary or wage reduction to everyone else in the wage pool and will eventually become a negative to business.  To maintain or retain the top performers, they will also expect that relative increase.”

 

So here’s the thing.  For the past 40 years those of us who have been in the industry that long have heard about the worker shortage in the industry, and how it’s only going to get worse over time.  A recent article in a trade pub said the HVACR industry will need 100,000+ new technicians and installers in the next 7 years just to keep up with demand.  A study by the HVACR Workforce Development Foundation indicated the number of mechanic and installer jobs will increase by 21% through 2022, which is nearly twice the growth of employment in the economy overall.  The bottom line is that we need to attract new blood into our industry, and we need to make it attractive vis-à-vis other career opportunities.  Are we competing with bank teller employees, fast food workers, retail clerks or receptionists for our installers and service technicians?  No!  So why in the world are we arguing about a $15 per hour minimum wage in our industry?

 

One contractor put it best.  “Very few, if any, HVAC workers should be working anywhere close to that minimum wage.  We are going to have to convince the dwindling supply of capable workers that HVAC is where they belong, not in one of the other industries desperate for help.  If you want someone who actually knows something about HVAC and is also competent, $15 an hour is not going to cut it.”  Nuff said!


The Vision of Freedom

The Vision of Freedom

Betsy Ross flag, picture courtesy of UShistory.org.

Last week, we celebrated the 240th anniversary of the birth of our country.  In a letter to his wife Abigail on July 3, 1776 John Adams said this about the vote for independence, which occurred the day before in Congress.  “I am apt to believe that it (vote for independence) will be celebrated by succeeding generations as the great anniversary Festival.  It ought to be commemorated as the day of deliverance by solemn acts of devotion to God Almighty.  It ought to be solemnized with pomp and parade, with shews (shows), games, sports, guns, bells, bonfires and illuminations (fireworks) from one end of this continent to the other from this time forward forever more.”

 

I spent some time on July 4th thinking about how one could so accurately predict how this event would be celebrated in future generations.  After all, at the time of the adoption of this declaration, the state of our union was extremely fragile, and by later signing the declaration, these men had effectively signed their own death warrant.  Adams however was not on a euphoric high over the vote on July 2.  He further noted in his letter to Abigail, “you will think me transported with Enthusiasm but I am not – I am well aware of the toil and blood and treasure that it will cost us to maintain this declaration, and support and defend the states.  Yet through all the gloom I can see the rays of ravishing light and glory.  I can see that the end is more than worth all the means.  And that posterity will triumph in that day’s transaction even although we should rue (bitterly regret) it, which I trust in God we shall not.”

 

John Adams didn’t celebrate the Fourth of July because he believed it should be celebrated on July 2, the date which Congress voted on the motion for independence made by Richard Henry Lee.  (One of whose descendants included Robert E Lee, the Confederate General) In a twist of fate, John Adams died on July 4, 1826 – the same day as did Thomas Jefferson.

 

John Adams life and letter gives us all something to think about as we celebrate our nation’s independence!


Using Monthly Average Overhead to Calculate Burden per Man Hour

In the last blog we looked at calculating monthly average overhead along with the breakeven point for your business.  In this blog, we will look at calculating the capacity of your business along with calculating your overhead per man day – possibly the most critical number in your business!

cr-iobpm

We can define capacity for your business as the number of units available for sale in a given month, and for a contracting business that capacity is measured in man days.  Now we know that field labor will never be 100% efficient due to lost time for vacations, holidays, sick days and warranty or callbacks.  Given that, you should strive for efficiency levels of at least 85%.  The following calculation defines your firm’s total capacity with this metric in mind.

  • 20 workdays per month X .85 = 17 days per month per man capacity
  • # Field Staff X 17 days = Total Capacity

Your field staff consists of service technicians, billable apprentices, installers and installation helpers.  The number of man days sold becomes another trackable goal for your organization.

Once you have determined this, you can then calculate your overhead burden based on capacity.  The result is the number of gross profit dollars each man has to earn each day to cover the firm’s overhead expenses.  If your firm’s overhead burden is $200 or less, (<$25/hour) it means you have a good balance of field staff as compared to your overhead expenses.  The higher your firm’s overhead burden, the less competitive your firm becomes.  This affects labor intensive work the most, such as ductwork, piping projects or maintenance agreements.

To improve the firm’s overhead burden, you can do one of two things.  First, you can increase capacity.  As you have more man days, you spread the overhead expenses out reducing the overhead burden per man.  Second, you can decrease overhead expenses but this is extremely hard to do.  Remember, most of your firm’s overhead lies in overhead staff, so you have to examine whether you can increase sales or even maintain sales with a smaller overhead.  By understanding your overhead expenses, you will be able to determine each job’s true overhead expense burden, based on how long the job takes.  (Number of man days)

Courtesy of the HVAC business Dr. & Image Caption courtesy of stronglifts.com

Calculating Monthly Average Overhead And Breakeven Point

Calculating Monthly Average Overhead And Breakeven Point

Chart courtesy of Lanzarote Business Club

In this blog we will look at how to calculate your monthly average overhead and breakeven point as measured in gross profit dollars.  There are 2 steps required to calculate your monthly average overhead.  Why is that?  That is because there are 4 overhead expenses that should not be averaged.  These include office/officer/overhead staff payroll, payroll taxes on overhead staff, 401(k)/IRA for overhead staff and health/medical insurance.  Step A therefore is to calculate monthly overhead expenses for these 4 items.

The first element in Step A is to identify all your overhead or nonbillable staff and list their weekly compensation.  Multiply this number by 4.33, as there are 13 weeks  in a quarter.  The resultant number is your monthly overhead payroll expense.

The second element in Step A is to calculate payroll taxes on overhead staff.  There are 3 types of payroll taxes including FICA, FUTA, and SUI.  FICA taxes (Social Security and Medicare) are currently 7.65%.  FUTA taxes (federal unemployment tax) are currently 6%.  SUI taxes (state unemployment insurance) are different for each state so you will need to research this for your area.  Once you have determined that rate, multiply your total overhead staff compensation by the total percentage of payroll taxes to calculate your monthly overhead payroll tax expense.

The third element in Step A is to multiply your total overhead staff compensation by your matching 401(k) or IRA contribution, if applicable.  The final element in Step A is to determine your health/medical expense.  This can be done by researching last months health insurance bill.  Add together the numbers obtained in each of the 4 elements of Step A.  This number will be added to the number determined in Step B below.

Step B involves looking at the overhead chart of accounts, referencing the chart we showed in the last blog.  First, highlight the 4 areas we showed in Step A above.  Then, add the yearly totals of all overhead expenses with the exception of those highlighted and divide by 12.  Add this result to the number determined in Step A to obtain your total average monthly overhead.

This average monthly overhead expense represents the firm’s monthly breakeven point as measured in gross profit dollars.  It is important to periodically review these expenses to see if things have changed in order to have the correct average monthly overhead.  In the next blog, we will show how to use average monthly overhead to calculate your overhead per man day burden.

Courtesy of HVAC Business Dr.


Understanding Overhead in Your Business

Recent blogs have provided a wealth of information for home services contractors with regard to properly pricing service labor and understanding the income statement.  If you missed these, I highly encourage you to revisit them, as follows.

 

February: Correctly Pricing Service Labor & Calculating Demand Service Rate.

 

March: Understanding the Income Statement; Departmentalizing Your Income Statement & Analyzing Your Income Statement.

 

In the next few blogs we will start to take a look at the importance of understanding your overhead expenses, understanding and calculating your breakeven point and making more informed financial decisions as a result.

 

Let’s start off with a definition of overhead.  Overhead costs are those that relate to the ongoing expense of operating a business and which cannot be directly attributable or traced to any specific job.  Examples of these expenses include facility rent, office personnel and utilities.  Often times you will hear a contractor say that his overhead is 30% of his business.  When looking at a yearly aggregate for example that may be true.  When looking at it from a month to month basis however that may very well not be true.  For example, if your sales are $2,000,000 a year, 30% overhead would equate to $600,000.  Your sales however are not equal every month so one month you may have $200,000 in sales, and in another only $85,000.  If your overhead runs about $50,000 a month, that would mean it was 25% in the month you sold $2,000,000 and 59% in the month you sold $85,000.  The point here is that your monthly overhead is a dollar amount, never a percentage.  After all, your fixed monthly expenses cannot be paid with by a percentage.

 

In order to accurately determine your firm’s average monthly overhead, you must first make sure your overhead is properly classified.  You can use the chart below to do this.  First, using this chart, highlight all direct costs or cost of goods sold that you currently have classified as overhead expenses.  Next, reclassify and move the general ledger accounts that should be listed in your cost of goods sold section but are listed as overhead in your P&L.  Incoming blogs, we will go through how to compute your average monthly overhead and breakeven point.

 

The following chart should serve as a guide for properly classifying your overhead expenses.

 

Employee Expenses

Officer Salaries

Office Salaries

Sales Salaries

Payroll Taxes

Uniforms

Employee Benefits/401(k)

Insurance Expenses

General Liability Insurance

Life Insurance

Health Insurance

Dental Insurance

Property Expenses

Property Taxes

Rent

Cleaning/Sanitation

Refuse Removal

Utilities

Communication Expenses

Cell Phones

Answering Service

Office Expenses

Postage

Software Updates & Support

Office Equipment Repair

Office Supplies

Marketing Expenses

Trade Shows

Travel/Meals

Advertising

Printing

Web Expenses/Yellow Pages

Professional Expenses

Professional Fees

Dues & Expenses

Payroll Services

Retirement Plan Fees

Financial Services

Bank Service Fees

Collection Service Fees

Credit Card Fees

Interest Expense

Other Expenses

Truck Leases

Bad Debt/Returned Checks

Depreciation

Amortization

Leasehold Improvements

Courtesy of HVAC Business Dr.


Plug-And-Play And the Tech Shortage

Plug-And-Play And the Tech Shortage

Picture courtesy of ACHR news

For years we have been hearing about the skilled labor shortage in the HVAC industry and construction industry at large.  Have you ever stopped to think about what that might mean for your business?  The May 23 issue of ACH & R news talked about the ramifications of this in an article entitled, Is HVAC Becoming a Plug-And-Play Profession?  The article started off by telling the story of one of the writers neighbors whose water heater had recently died.  They simply went to Home Depot, bought a new one and replaced it themselves.  Another neighbor purchased a ductless mini split off Craigslist and had a friend help him install it for a new room which he had finished off above his garage.  Both apparently cited how easy it was to install their equipment and how little skill was needed.

 

One contractor in the article said this was the perfect storm of skilled labor shortages, huge demand for our products and manufacturers who have always been looking to make their products easier to install and service.  This is not just a recent phenomenon.  Refrigeration piping used to consist of all braised joints requiring skilled technicians to install it.  Technology and a workforce shortage caused manufacturers to introduce quick connect fittings so other mechanical trades could install this equipment.  This trend is not exclusive to the residential side of the business either.

 

According to Kirk Thorne, Executive Vice President of sales, marketing and aftermarket at Daikin Applied, “Unfortunately there is no sign that the tide is turning on the skilled labor market in any quadrant of the industry.  To that end, Daikin’s product portfolio is designed around their customers needs for ease of installation.  We are responding with product solutions that reduce the tasks and requirements for installation and commissioning as well as limiting the requirement for on-site commissioning .  For example, Daikin’s modular central plants are pre-engineered and preassembled, arriving at the site on a trailer, ready for simple installation ” he said.  The article mentions similar comments by executives at Nortel Global, Victaulic and Ruskin.

 

What does this mean for your business?  It means that simply being an installer and servicer of mechanical equipment may not be a sufficient skill set for the future.  It means you need to take a strategic look at your business and plan for its future, not just letting its future happen.  Perhaps you need to expand your skill set to become a full mechanical systems provider for your customers.  One such well-known company in the industry for example handles everything from furnaces to boilers to air-conditioners, heat pumps, air cleaning and filtration devices, humidifier/dehumidifiers, gas fireplaces and inserts, water heaters and standby generators.  They also offer service plans, duct cleaning, electrical service, plumbing services and handyman services.  Other companies have become the energy experts for their customers by offering home energy audits covering everything from efficiency evaluations to air and duct sealing, attic ventilation, renewable energy products and indoor air quality solutions.  How do you begin this transformation of your business?  First, identify the areas that you have a passion for and that represent profitable areas for expansion.  Second, look at your trade area and make a list of all the competitive businesses, the services they offer and   the strengths and weaknesses of each.  From those two things, you can begin to fashion a business plan for your company.

 

According to Monty Betts, product manager for Viega, “While most do not believe that HVAC systems will become plug-and-play devices anytime soon, contractors will have to respond accordingly.  I still do not fully appreciate or understand the depth and breath of changes being considered by manufacturers, but as shown here they are becoming very innovative at designing systems and components to address the lack of skilled labor in the HVAC industry.”


You’ll Kick Yourself If You Miss out on This!

cr-cbstNormally, you look to this column for sage advice on matters relating to home service businesses.  This week however were going to take a bit of an end run on such topics.

 

Callahan Roach Business Solutions is an ardent supporter of the Joseph Groh Foundation, as you may have noticed from our website.  Who are they and what do they do you ask?  They are a 501©(3) Texas public charity which provides (among other things) financial assistance to those who are living with a life altering disability AND who have some kind of connection to the construction trades industry.  That makes them the only organization that we are aware of dedicated exclusively to providing financial assistance to those individuals in need who have made their living in the HVAC, electrical, plumbing, roofing etc. business.

 

The foundation was started by one such individual – Joseph Groh.  After spending 35 years in the HVAC industry, Joe had a freak bicycle accident on Father’s Day 2008 – and that accident left Joe a quadriplegic.  In other words, Joe is completely paralyzed below the shoulders.  In 2009 however he started up the foundation to help others in need, and Callahan Roach Business Solutions was an immediate supporter.  Since that time, the foundation has helped dozens of individuals in states all over the country purchase such items as handicapped accessible vans, rehabilitation equipment, complete home and bath remodels and more.  For more information on this unique organization please visit Josephgrohfoundation.org.

 

All of this brings us to a unique opportunity for you – when you will kick yourself for if you miss out on it.  The foundation has 2 tickets to the Dallas Cowboys-Houston Texans football game on Thursday, September 1 at 8 PM, but these aren’t just any tickets.  These tickets are in club level section C108!  If you were going to get any closer to the action you would have to suit up!

 

These seats normally cost $350 each or $700 for the pair, but the foundation will award them to the first caller who contacts them with a bid of $250 or more – for the pair!  If interested, please call Joe Groh at 214-998-9749.  Shoulder pads not included!


The Internet of Things

By now you have undoubtedly heard the term, The Internet of Things, often expressed as IoT. You may have wondered to yourself what exactly that is and more importantly, what does it mean to those of us in the HVAC industry?

The Internet of Things can be described as a network of physical objects – devices, appliances, vehicles, buildings etc. that are all embedded with electronics, software sensors and network connectivity that enables these objects to collect, exchange, analyze and act on this data. Stop and think for just a minute about the breathtaking implications of that definition. A ubiquitous network of data-gathering sensors communicating through the cloud in constant, real time and instantaneous connection. But what does it really mean?

Picture courtesy of iotworm.com

Picture courtesy of iotworm.com

Steve Case, cofounder of AOL in 1985, can be seen making the rounds of talk shows discussing his new book entitled The Third Wave. With the title, Case pays homage to futurist Alvin Toffler, who published a book by the same name in 1980 and was written as a sequel to Future Shock, which was published 10 years earlier. According to Case, we are entering a new paradigm called the 3rd wave of the Internet. The first wave saw AOL and other companies lay the foundation for consumers to connect to the Internet. The 2nd wave saw companies like Google and Facebook create search and social networking capabilities while a variety of apps leveraged the smart phone revolution. The 3rd wave describes a period in which entrepreneurs will vastly transform major sectors like health, education, transportation, energy, construction and food in ways that fundamentally change the way we live our daily lives. These changes, Case explains, will require a different skill set for employees and will require companies to rethink their relationships with customers, competitors – even the government. How will these changes manifest themselves?

Take our nation’s aging infrastructure. How do we possibly prioritize spending given such massive needs? We could for example, embed sensors into “smart cement” to monitor stresses, cracks and warpages. Sensors in smart cement – the same ones used to detect stress – can also detect ice on the bridge and communicate that information to a wireless Internet in your car. Once your car knows there is a hazard ahead, it will instruct the driver to slow down, and if the driver doesn’t, then the car will slow down for him. In the case of HVAC, sensors in the building, ductwork, thermostat etc. will work in harmony to deliver a ratio of comfort to efficiency not possible today. There is not a single job in the industry that won’t be transformed by such technology, and there are predictions that this future is as close as 10 years away – well within the career span of many people working today.

The entrepreneurs in the HVAC industry are those companies and employees who stay on top of current developments, while preparing for how to monetize on those advances. The opportunities are endless, and much more vast than most of us realize!

Sources: Simon and Schuster; Wired.com


Analyzing Your Income Statement

In the last blog we talked about the benefits of departmentalizing your income statement and the commensurate requirement to set up a purchase order system as well as using weekly coded timesheets for labor.  These last 2 items allow you to properly assign both material and labor costs to the appropriate job and department inside of the income statement.  Let’s say you have now done this – congratulations!  You have taken a most important step on the journey toward developing financial information – not for the accountants or the IRS – but for your use in making management decisions about your company!  Now that you have this information, what is it telling you?

 

To answer this question we must look at some of the ratios.  For example, if we divide our HVAC installation material and equipment cost by our installation sales, we will see what percentage of our installation sales being consumed by material.  For new construction that percentage should run about 35 to 40% and for retrofit about 40 to 45%.  If the percentage is too low, that might be telling us that we are selling too much low end equipment and potentially not enough accessories.  Conversely, if our material costs exceed the upper end of these percentages we could be underestimating our equipment and material costs on each job or might indicate we have a waste or shrinkage problem.

 

What about labor?  If our labor costs exceed 15% of our installation sales, that could indicate that we are underestimating the amount of time it will take to complete a job, or it may indicate that we don’t have a good handle on our true cost of labor, including fringe benefits.  It could also mean that our field staff lacks sufficient supervision to complete work in a timely manner.  Before we leave this topic however we need to address one other key statistic.  Do you know what your warranty labor costs are as a percentage of sales?  This percentage should run 1 to 1.5%. Some additional percentage guidelines are listed below.  Hopefully this begins to give you a feel for how properly reported accounting information can be used to make management decisions that are critical for your company.

  • Cost of service materials to service sales ~ 15 to 20%
  • Cost of service labor to service sales using flat rate pricing ~ <25%
  • Cost of service labor to service sales using T & M pricing ~ <35%
  • Cost of service agreement labor to service agreement sales ~ 35 to 45%

 

Chart Courtesy of Warranty Week.com

Chart Courtesy of Warranty Week.com

Courtesy Of the HVAC Business Dr.


Departmentalizing Your Income Statement

If you have only been getting consolidated income statements like those described in the previous blog, it can be difficult to answer questions such as, should I increase my demand service rates or, am I making enough money doing residential new construction work?  It can be difficult to answer these questions if you can’t isolate the profits associated with doing each different type of business.  In addition, some segments of your business require a greater investment in things like inventory, while others such as your service business, may not be accounting for paid man-hours that are not billable.  These decisions become much more clear when you have a departmentalized income statement.

 

The first step in this process is to identify what the different areas of your business are such as residential new construction, residential replacement, service department etc.  When you are doing this, give some thought to the future.  For example, you may not be doing any commercial replacement business now, but you have been thinking about it.  If that is the case, then set up this profit center now so that it better fits into the flow of your accounting as you move into the future.  Once you have done this, the next step is to set up a purchase order system that will allow you to separate your parts, material and equipment purchases by profit center.  This may mean that you need to place separate orders when ordering equipment destined for installation from service parts when you order from the same vendor.

 

Similarly, you need to separate individual employees labor into the appropriate activity by using weekly coded timesheets.  By setting up new general ledger accounts, you can track the various labor accounts.  As you make these changes in your business, don’t be afraid to do some research and use the professional assistance at your disposal for advice.  For example, your accountant/CPA should be more than someone who just does your taxes.  They should be able to serve as a financial consultant to your company to advise you in such matters.  If they are unwilling or don’t have the expertise, you should find a new accountant or CPA.  In addition, if you use QuickBooks you can find an accountant who is an expert with this system to advise you.  If you use some other form of industry software, contact that vendor to help you devise the best possible system for your business.  After all, you encourage DIY homeowner/service technicians to refrain from diagnosing and attempting to fix their air-conditioning problems by calling experts such as yourself.  Why should your business be any different?

 

The next blog in this series will look at using information gained from departmentalized income statements to make better management decisions.

 

Service Tech: David Hours Worked Total Compensation
Res.  Replacement service 25 $500
Residential installation 6 $120
Svce Agreements 4 $80
Callbacks 2 $40
Res.  Installation warranty 3 $60
Total 40 $800

Sample Timesheet For Service Technician Broken Out By Type Of Work Performed

 

Courtesy HVAC business Dr.