I was reading an article in another trade magazine not too long ago about Home Depot's "Expo store" in San Diego. This is an experimental facility that includes a 30,000-sq. ft. showroom area devoted to upscale kitchen and baths.
The store also offers full installation services, which they contract out to licensed contractors. A Home Depot executive explained that these contractors are entitled to no mark-up on the merchandise purchased from the store but must "learn how to make a profit on the installation."
Labor Vs. MaterialsThis got me to thinking about Company X. This is the largest PHC service firm in a major metropolitan area. Last year it bought $637,429 worth of materials, charged as Direct Cost of Sales. Suppose all those sales suddenly disappeared. How many more labor hours would this firm have to book to generate the same amount of revenues and earn the same amount of profit?
A little simple arithmetic provides a stunning comparison. The hourly cost of labor for this unionized firm is $27.95, wages and benefits included. Divide that into the $637,429 worth of materials purchased, and the answer is 22,806 hours. This represents the number of man-hours of labor Company X would have to buy for an equivalent dollar amount of materials.
Let us assume the company would carry the same overhead burden on those labor hours as it does on materials, as well as the same desired profit margin. This means that Company X would have to generate 22,806 additional labor hours in a year to compensate for the hypothetical loss of all material sales. Keep in mind that those hours must be productive, billable man-hours.
Using the standard 2,000 hours a year to define a full-time job, that is the equivalent of 11 full-time service techs and 11 service trucks.
Market RealitiesIt so happens that Company X last year generated a grand total of 37,764 productive labor hours. Adding another 22,806 productive hours would represent a 60 percent increase.
Realistically, it would be next to impossible to expand by that amount in a short time. Company X is already the market leader and has been a fixture in the business for almost four decades. There's not much more out there to tap by expanding its already huge amount of advertising and promotion. At this stage of its existence, growth can be expected only in smaller increments.
This hypothetical problem only concerns revenues. Keep in mind the amount of profit dollars that would also disappear with the end of material sales. Company X extracts a considerable amount of profit for paying management bonuses and contributing to a company-wide profit-sharing plan. All down the tubes, along with the capital needed to provide for business expansion and system upgrades.
This is what it would be like if Company X were forced to tie its destiny to Home Depot. I'm very familiar with Company X -- if you get my drift! -- and know that they have no intention of doing anything like that.
Wishful ThinkingHowever, many smaller and less successful contractors are in a different league. Either voluntarily or out of desperation they are cutting deals with Home Depot to be its installers. What a bleak existence that must be.
I'm sure a lot of those contractors are thinking they'll solve the problem by figuring into their labor charges the same amount of profit as if they were supplying the materials. That's wishful thinking, however. Home Depot won't stand for it, and when push comes to shove there will be a mad scramble of lowball pricing just to gain enough work to survive. It will be the same competitive bidding game that's now played in housing and new construction work.
Based on the responses I get on my seminar questionnaires, the average PHC service contractor earns an income of around $35,000 a year. That is pitiful in and of itself. But it will be almost impossible to match even that modest total when a contractor becomes an installer only.
Where is all this leading, my dear industry friends? What are you going to do about it, my fellow contractors? What are you going to do about it, Mr. Wholesaler and Mr. Manufacturer?
- Hourly cost of labor = $27.95
Material purchases = $637,429
637,429 ? 27.95 = 22,806 hours
22,806 ? 2,000 = 11.4