Calculating Overhead per Man Day

Excess overhead is a burden on both the business and the employees

Excess overhead is a burden on both the business and the employees

The last blog in this series talked about calculating monthly average overhead along with your breakeven point.  You may want to go back and review that blog prior to reading this one.  In this blog, we will talk about measuring company capacity and calculating your overhead per man day burden.

 

Capacity is measured as the number of units available for sale in a given month, and in contracting terms that capacity is measured in man days.  When you’re talking about labor, you are talking about the number of man days available to perform work in a given month.  In this case, men days is calculated only for your field staff, which typically includes service techs, billable apprentices, installers and their helpers.  Let’s say for the sake of this discussion you have 20 such individuals.  In a perfect world, that means you would have 20 billable days per month or 20 man days.  However, we don’t live in a perfect world.  We will never be 100% efficient because we lose time to vacations, holidays and sick days.  We also lose time to things like late arrivals and warranty callbacks.  Unless you have been monitoring this number for your organization, how do you know what to budget for?  A good number to use is 85% efficiency, and if you are not monitoring your actual man days versus total available, you should start.  Again, for the sake of this discussion let’s use 85% or 17 man days.  (20 X .85 = 17)

 

When you look to spread your overhead across your capacity, the result will be here overhead per man day burden.  This is the amount of gross profit dollars each man has to earn each day to cover the firm’s overhead expenses.  This is one of the most critical numbers in your business!  It effectively measures how competitive your firm is along with your ability to make a profit.  Generally speaking, if your firm’s overhead burden per man day is $200 or less, it means you have a good balance of field staff relative to your firm’s overhead expenses.  The higher your firm’s overhead burden, the less competitive you become.  This affects labor-intensive work the most, like labor-intensive installations, maintenance agreements and diagnostic fees.  It is typically very difficult to cut overhead expenses because the vast majority of it is comprised of overhead staff – people.  By understanding and controlling overhead expenses, you’ll be able to determine and allocate each job’s true overhead expense burden based on how long the job takes as measured in man days.

 

Article Courtesy of the HVAC Business Dr.

Picture courtesy of kbenglishsla.wikispaces.com


What do Ben Franklin, William Shakespeare and Peter Drucker Have in Common?

Benjamin Franklin once said, “We are all born ignorant, but one must work hard to remain stupid.”  What does that have to do with the HVAC industry?  The answer lies in how aware you are of what is going on in the industry today, and how you are keeping yourself abreast of related developments.  Specifically, are you involved in your local trade association?  If not, why not?

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For those of you who are followers of this blog, you have seen a number of articles talking about the foibles of the Department of Energy.  (DOE) Last month, they published a new rule regarding enforcement of the residential central and single package air conditioner energy conservation standards that took effect… Get this… On January 1, 2015!  So one and a half years after the standard went into effect, there is finally a rule in place dictating how the industry is supposed to comply with the standards.  But wait, there’s more!  As I’m sure you are aware, 14 SEER has been law in the South and Southwest since December, 2014, yet the DOE only just released this as a final rule in June.  Situations like this point to some disturbing behavior on the part of DOE, and it’s not the first time.

 

This blog has talked before about regional furnace standards, and how several industry organizations banded together to sue DOE in 2011.  As a result, the standards were vacated and remanded in early 2013, yet DOE is still proposing a contentious 92% AFUE national standard!  The DOE was also sued over the final rule for walk-in coolers and freezers in late 2014, which resulted in portions of that rule being vacated and remanded.  More recently, several groups threatened legal action against DOE regarding commercial boiler standards before DOE backtracked.  This is not a time to remain unaware of what is going on in our industry!

 

The August 1 ACHR news published an article by Mike Weil which listed the top 25 reasons for joining and participating in a trade organization.  While some of these reasons involve staying on top of industry standards and events, others relate directly to helping you improve your business.  How so you ask?  Access to forums for peer review and best practices, discounts on products and services, networking and learning opportunities at dinners and social events, and much more.  If you have not checked this article out, you are definitely missing out on opportunities to improve yourself and your business.  Take it from William Shakespeare who said, “Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven.”  I’ll temper Willie’s words however with those of Peter Drucker, “Knowledge has to be improved, challenged, and increased constantly, or it vanishes.”  In today’s environment, we ignore these words at our own peril!

Information about DOE practices taken from Opinion – ACHR news, July 4, 2016


When Did Common Sense Leave the House?

cr-dirjstThere are some people who will read this post that were not alive during the 1970s oil crisis.  The Arab oil embargo resulted in long lines of cars waiting to get $5 worth of gas, the implementation of a national maximum speed limit of 55 mph, a one-year implementation of year-round daylight savings time, wholesale changes in how cars were made and more.  Even NASCAR was affected, they reduced all race distances by 10% and canceled the 1974 24 Hours of Daytona.  President Carter encouraged Americans to set their thermostats no higher than 68°F during the winter.  For the first time since World War II, Americans paid attention to the energy they consumed.

 

In 1975 Congress enacted The Energy Policy and Conservation Act.  This was a direct response to the oil crisis and it created a comprehensive approach to federal energy policy.  The primary goals of this act are to increase energy production and supply, reduce energy demand, provide energy efficiency and give the executive branch additional powers to respond to disruptions in energy supply.  This is the law that governs energy efficiency standards for HVAC products.

 

Recently, the president of AHRI told members of the House subcommittee on energy and power that the 40-year-old law has not been updated, causing consumers to pay a price in both monetary terms as well as in comfort and safety, because of the continuous cycle of rulemaking’s that result in higher and higher efficiency levels.  “When new equipment costs more than consumers can afford, they find alternatives, some of which compromise their comfort and safety while saving less energy or no energy at all,” he said.  “American jobs are being lost – many of them exported – in part because of ever more stringent efficiency regulations.”

 

While the Clinton administration issued 6 major efficiency rules over 8 years, the current administration issued 8 such rules in 2014 alone!  Some of those included mandating 90% efficient furnaces, even in places like Florida and Texas.  Yet others included a proposed rule for commercial packaged boilers that would save just 0.8% more energy than the existing standard, while costing manufacturers up to $24 million to implement.  “There have been 47 new regulations that have been passed in the last 2 years which impact the HVAC industry,” according to Mark Chaffee, VP government relations for Taco Comfort Solutions.  Mark was commenting on the fact that the DOE is preparing to regulate circulator pumps commonly used in residential and light commercial hydronic heating applications for the first time.  And then there was John Kerry, Secretary of State, warning in Vienna that the chemicals inside items like air-conditioners and refrigerators are as dangerous as ISIS.  Yes, the same John Kerry who owns 5 houses – one of which has 23 rooms, and all of which are air-conditioned.

 

Thank goodness for the trade associations in the HVAC industry.  They may be the last oasis of common sense in a climate change world gone mad!

 

Statistics and quotes courtesy of articles in the June 27 AHRI news

Picture courtesy of menrec.com


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.”

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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!

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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!