The Going Rate Gone Too Far
I spent several hours on the phone with Antoine “Tony” Nassimos. Tony followed the proceedings concerning Joe Fichner, who has been accused by the Board of Examiners of Master Plumbers of the State of New Jersey of unconscionable pricing practices. Tony has accumulated over 17,000 pages of legal transcripts related to these proceedings. I did not read all the transcripts but I read enough to form a few opinions about lessons in them for the small shop operator.
The New Jersey Board of Examiners of Master Plumbers was created in 1968 as a testing and licensing board, similar to those of many other states. The idea was to ensure that only qualified contractors got licenses in the state. Over time, the Board took it upon themselves to oversee all activities of the licensees. One New Jersey statute bound the board to be a “watchdog” for “unconscionable” pricing, i.e.:
(a) A licensee of the Board of Examiners of Master Plumbers shall not charge an excessive price for services. A price is excessive when, after a review of the facts, a licensee of ordinary prudence would be left with a definite and firm conviction that the price is so high as to be manifestly unconscionable or overreaching under the circumstances.
(b) Factors which may be considered in determining whether a price is excessive include, but are not limited to, the following:
1. The time and effort required.
2. The novelty and difficulty of the job.
3. The skill required to perform the job properly.
4. Any special conditions placed upon the performance of the job by the person or entity for which the work is being performed.
5. The experience, reputation and ability of the licensee to perform the services.
6. The price customarily charged in the locality for similar services.
Putting It Into Practice: Number 6 is the heart of the problem. How would you determine those charges? Shouldn’t your charges be based on your own costs of doing business?
The New Jersey PHCC boasted of its efforts to have point number 6 added to the list. Why would an association that purports to help its members be more profitable and productive hold them to charging what their competitors are charging?
In 1992, Joe Fichner, a plumbing and heating contractor in Monmouth County was accused by the New Jersey Board of unconscionable pricing. Tony Nassimos, another local contractor, attended the hearings. According to Tony, he was interested in how the Board was going to determine a pricing violation. Fichner was charged with seven counts of unconscionable pricing. In each case the final price was agreed upon before the work started. In one instance, the work wasn’t started for more than a week after the signature was obtained. In subsequent proceedings, Richard DiToma, a plumbing and heating contractor who has written about and conducted seminars on business finances, was asked his opinion of Fichner’s prices. DiToma suggested a range of prices based on certain costs of doing business, that would support Fichner’s prices.
But the board selected Robert Muller, then third vice president of the New Jersey PHCC as its expert on pricing. Under oath, Mr. Muller testified that he regularly did surveys of local contractors, asking how much they charged for their services. Here’s an excerpt from his testimony explaining how he determined “customary charges”:
Robert Muller: “You must understand, most plumbers are very social animals, they like to talk and we exchange ideas at these association functions. One of those particular things that are discussed is for example, ‘Hey Bob, what are you getting at your shop? Joe’s getting this, so-and-so is getting this, how do you figure you can get that?’
“These types of conversations. That is how I base my knowledge. In addition to that, I am very friendly. I know a large portion — I don’t know everybody, but I know a large portion of plumbers within our local area, meaning the Matawan area. Most of them are (NJAPHCC) association members anyway, and at various times they’ll have a complaint about a bill and they’ll converse with me in such a way to say, ‘What do you think? You know, am I out of line?’ And we talk and ‘This is what we get per hour, this is what you get per hour.’
“And we compare notes, and by golly, we ask a third plumber and this is how I compile my information of the general prevailing wage. Because when the conversation is basically all done, we pretty much fall into a category.”
Throughout his testimony, Robert Muller demonstrated his ignorance of business and accounting fundamentals. Yet the Board, based on Muller’s “expert” testimony, convicted Joe Fichner, fined him and suspended his license. He was also ordered to pay court expenses, including Muller’s $50 per hour fee to testify as an “expert” on pricing.
Litigation Starts: At this point, Tony got involved. Wasn’t it against the law to discuss selling prices at association meetings? Didn’t this constitute price fixing? There seemed to be a Catch 22: contractors couldn’t charge more than the “going” rate, but posting the “going” rate was clearly illegal.
Tony called a meeting of local contractors and informed them that he planned to file antitrust charges against the NJ Board of Examiners of Master Plumbers, NJ Association of Plumbing Heating Cooling Contractors, Bayshore Association of Plumbing Heating-Cooling Contractors, Robert Muller, individually and in his capacity as officer of the NJPHCC and Board members Thomas Biondi Sr. and Alan Feid. Nine other contractors agreed to file suit with him. There are about 10,000 contractors in New Jersey. Clearly, 9,990 were not interested in challenging the board.
“Nassimos v. NJ Board of Examiners of Master Plumbers” charged that the state was violating antitrust laws as laid out in the Sherman Act. The State Court decision maintained that the state was exempt from the Sherman Act. The U.S. Supreme Court upheld the lower court’s ruling.
I can understand that the U.S. Supreme Court is loathe to interfere with the states on pricing issues. Do we really want the federal government involved? But I also understand the frustration of Tony and his compatriots. Which direction do you go? The district attorney general is the appropriate person to alert about price fixing attempts. But the district attorney general was the prosecuting attorney for the Board, Muller, Feid and Biondi. I am reminded of the fox watching the hen house.
If At First You Don’t Succeed ... Today, almost five years later, this situation is still at full boil. Joe Fichner appealed the Board’s decision and it was overthrown by the Appellate Court of New Jersey. The Appellate Court found the Board to be illegally composed of members who did not meet the state’s requirements for their posts. Fichner’s license was reinstated. The Board was reformed, and brought the same charges against Joe Fichner in 1996. That new decision, based on the same testimonies, is pending.
The Board continues to hound contractors whose prices fall outside the “customary charges” as defined by Muller. One contractor showed me a letter he received for a bid he gave a customer. The Board held that the price was unconscionable, even though the contractor never performed the work or charged the customer for anything! The Board gave him a “reply by” date, beyond which they would take further action.
On a turned-down bid!
Tony has not given up on his crusade. He is working with civil rights attorneys and they are planning to file another suit.
Lessons: There is much more to this story. PM is not an appropriate forum to print 17,000 pages of court transcripts. Still, I think we can learn from this fiasco. Small shop folks, listen up —
- Never relinquish responsibility for establishing your own selling prices.
- Use financial data to create prices that will allow you to run a professional, profitable business.
- Obtain a signature approving the price and the work to be done before starting any job.
- If you find yourself in court defending your prices, have the financial statements to back them up.
- Never allow your trade associations to officially or unofficially determine the “going rate.”
- Do not participate in any surveys of contractor prices in your area.
Yes, there should be resources available to customers who have been abused by contractors. And I might be more understanding of the Board’s actions if price gouging was rampant in our industry.
But, more often, it’s the contractor who gets ripped off because he doesn’t know enough about business to establish a realistic selling price. He looks to his industry leaders for guidance, and he adopts the “going rate.”
I’ve been there, done that myself. And I know that road leads to ruin.