'The Cost Of Not Knowing. . .' Goes On & On
In my column from May 1996, "The Cost Of Not Knowing Your Costs," I challenged contractors to prove that they could make money and provide decent income and benefits for employees at the PHC service industry's prevailing labor rates of $50-55 an hour. I got no takers, although Paul Swan sent me an interesting letter. It pointed out that many contractors who charge extra for travel time are billing for more labor hours than they actually put in.
"The way that PHC companies can 'get by' on $55-an-hour rates is that they work their employees 10 hours a day," wrote Swan. "Additionally, they charge 'portal-to-portal' so that out of the 10 hours they can 'bill' eight hours. At $55 an hour, figuring their actual billable hours are at 4.5 per day, they are in truth charging almost $110 per 'billable' hour."
Interesting observation. This enables time and material contractors to approach pulling in the revenues they need to earn a decent living for themselves and employees. Yet it supports my point that it is all but impossible to run a modern, sophisticated business at prevailing hourly labor rates. Travel charges and "first half-hour" premiums amount to surcharges that boost the average rate above what the company claims it to be. Under a time and material format, however, consumers end up comparing apples to apples, which is why I remain convinced that flat rate is the only way to go.
Futile SearchIn any case, I am still waiting for one of my critics to show me a profit and loss statement -- anonymously if they prefer -- showing how they can be profitable at $55 an hour while still covering costs and providing decent wages and benefits. (I use $55 an hour as a benchmark for the going rate in most urban areas of the country. It is higher in some cities and lower in others, but $55 seems to be the national average.)
Meantime, I did a search of my files of hundreds of contractor P&L statements to see if I could find one that fit that bill. Not a chance. What I did find, however, was an interesting statement dating back to 1990, shown on the next page, of a colleague from Contractors 2000 who was on the verge of bankruptcy before he saw the light.
This contractor actually charged $65, significantly above the prevailing rates in his market at the time. Let's take a look at his statement.
First thing to notice is that it is a typically barren P&L statement, devoid of much useful information. It shows a total sales that year of $149,308 and cost of sales amount to $95,267, but with no breakdown of labor, materials, permits and anything else that might have gone into direct costs. Expenses are presented in broad terms without enough detail. Nor are there any percentages broken out so the contractor can compare expense ratios from year to year or with industry averages.
Slave WagesUnder officers' salaries we have $43,300, which is what the contractor was paying himself. This is in line with the average compensation for PHC contractors, as determined by the Robert Morris Associates financial benchmark reporting firm and PHC industry surveys.
Note the next line for "Office Salaries." This pertained to the contractor's wife, who earned the royal sum of $4,725 for her role in running the business. This, too, is typical of the slave labor mentality of many small shop owners.
Combined, they earned around $48,000 that year. My guess is that they could have made significantly more money with 40-hour jobs working for somebody else.
Not only that, they also likely would have ended up with some health care and other benefits. Look again at the P&L. Nowhere do we see expenditures for profit sharing and medical coverage, because they did not exist. Once again, this is so sadly typical of the state of our industry. The only thing this contractor had in surplus back in 1990 was long hours of work that goes with being an entrepreneur, whether you earn good money or not. As the "main man" in the field as well as the office, this contractor put in more than 3,000 hours of work that year.
Another thing wrong with this statement is that the contractor operated out of his home, but did not charge any rent for the use of his personal facilities. So many contractors think they have no overhead because they operate from their residences. But they use up living space unavailable for other purposes. The customer ought to compensate them for that.
At least this contractor did have the good sense to charge for utilities. Many people who operate from their homes don't even do that.
Headed For BankruptcyLooking down the statement, we see that this company was in a lot of trouble, suffering a net loss for the year of $41,213. That took a huge bite out of the contractor's retained earnings of $44,409 that existed at the beginning of the year. The contractor, now a good friend, was on a beeline for Chapter 7 bankruptcy.
He has since turned his business and his life around thanks to a new outlook and sensible business practices. After attending one of my "Business of Contracting" seminars he crunched his numbers, turned to flat rate pricing and joined Contractors 2000.
The company is now 26 years young (amazing they were able to stick it out that long) with the founder still at the helm. It is a union operation, employing three field journeymen paid by the hour with medical coverage, a pension plan, paid vacation and other benefits not customarily paid by nonunion PHC firms.
The owner and one other person make up the office staff, and they're getting paid commensurate with their talents and efforts. His company was recognized as one of the top 10 financial performers within Contractors 2000 in 1996, and their current P&L statements are a far cry from what they were in 1990.
Greedy? Rip-offs? No, they have finally come to their senses and begun pricing their services in a way that covers their costs and rewards them fairly for all the risk and hard work they put into the business.
It can be done, and it ought to be done.