• Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
  • ENGINEERS
  • RADIANT & HYDRONICS
  • INSIGHTS
  • MEDIA
  • RESOURCES
  • EMAGAZINE
  • SIGN UP!
cart
facebook instagram twitter linkedin youtube
  • CONTRACTORS
  • BATH & KITCHEN PRO
  • BUSINESS MANAGEMENT
  • HIGH EFFICIENCY HOMES
  • TECHNOLOGY
  • WATER TREATMENT
  • PMC COLUMNS
  • PMC COLUMNS
  • Dave Yates: Contractor’s Corner
  • John Siegenthaler: Hydronics Workshop
  • Kenny Chapman: The Blue Collar Coach
  • Matt Michel: Service Plumbing Pros
  • Scott Secor: Heating Perceptions
  • ENGINEERS
  • CONTINUING EDUCATION
  • DECARBONIZATION | ELECTRIFICATION
  • FIRE PROTECTION
  • GEOTHERMAL | SOLAR THERMAL
  • PIPING | PLUMBING | PVF
  • PME COLUMNS
  • PME COLUMNS
  • Christoph Lohr: Strategic Plumbing Insights
  • David Dexter: Plumbing Talking Points
  • James Dipping: Engineer Viewpoints
  • John Seigenthaler: Renewable Heating Design
  • Lowell Manalo: Plumbing Essentials
  • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
  • RADIANT COMFORT REPORT
  • THE GLITCH & THE FIX
  • INSIGHTS
  • CODES
  • GREEN PLUMBING & MECHANICAL
  • PROJECT PROFILES
  • COLUMNS
  • SPONSOR INSIGHTS
  • COLUMNS
  • Codes Corner
  • Natalie Forster: Editorial Opinion
  • Guest Editorial
  • MEDIA
  • PODCASTS
  • VIDEOS
  • WEBINARS
  • RESOURCES
  • INDUSTRY CALENDAR
  • DIRECTORIES
  • EBOOKS
  • PM BOOKSTORE
  • CE CENTER
  • MARKET RESEARCH
  • CLASSIFIEDS
  • EMAGAZINE
  • EMAGAZINE
  • ARCHIVE ISSUES
  • CONTACT
  • ADVERTISE
  • PME EMAGAZINE ARCHIVES
search
cart
facebook instagram twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
    • BATH & KITCHEN PRO
    • BUSINESS MANAGEMENT
    • HIGH EFFICIENCY HOMES
    • TECHNOLOGY
    • WATER TREATMENT
    • PMC COLUMNS
      • Dave Yates: Contractor’s Corner
      • John Siegenthaler: Hydronics Workshop
      • Kenny Chapman: The Blue Collar Coach
      • Matt Michel: Service Plumbing Pros
      • Scott Secor: Heating Perceptions
  • ENGINEERS
    • CONTINUING EDUCATION
    • DECARBONIZATION | ELECTRIFICATION
    • FIRE PROTECTION
    • GEOTHERMAL | SOLAR THERMAL
    • PIPING | PLUMBING | PVF
    • PME COLUMNS
      • Christoph Lohr: Strategic Plumbing Insights
      • David Dexter: Plumbing Talking Points
      • James Dipping: Engineer Viewpoints
      • John Seigenthaler: Renewable Heating Design
      • Lowell Manalo: Plumbing Essentials
      • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
    • RADIANT COMFORT REPORT
    • THE GLITCH & THE FIX
  • INSIGHTS
    • CODES
    • GREEN PLUMBING & MECHANICAL
    • PROJECT PROFILES
    • COLUMNS
      • Codes Corner
      • Natalie Forster: Editorial Opinion
      • Guest Editorial
    • SPONSOR INSIGHTS
  • MEDIA
    • PODCASTS
    • VIDEOS
    • WEBINARS
  • RESOURCES
    • INDUSTRY CALENDAR
    • DIRECTORIES
    • EBOOKS
    • PM BOOKSTORE
    • CE CENTER
    • MARKET RESEARCH
    • CLASSIFIEDS
  • EMAGAZINE
    • EMAGAZINE
    • ARCHIVE ISSUES
    • CONTACT
    • ADVERTISE
    • PME EMAGAZINE ARCHIVES
  • SIGN UP!
Columns

Material Expenses

By Jack Tester
January 1, 2009
Unfortunately, there could more bad reasons than good for an increase in such expenses.

If you are like many plumbing and heating contractors, you have seen your material expense line in your P&L statement grow in recent years. I hope this is due to expanding sales. However, it could be for more sinister reasons. Let’s take a deep dive into the material expense line and see if any of this sounds familiar.

You’ll find a condensed P&L statement in Table 1. Let’s diagnose what is going on with this company.

If you look at the upper right corner of line 3, you will see that net revenue is up 7.9 percent or $115,000 over the prior year. So far, so good. The old business adage, “If you aren’t growing, you are dying,” is especially true in the service business.

The next stop is direct labor. You can see at the end of line 4 it is up only 6.1 percent. Along with revenue growth, this is more good news. We are gaining leverage on our direct labor expense. In other words, we’re becoming more efficient in the field. Direct labor as a percentage of sales is a healthy 22.4 percent, down slightly from the prior year’s 22.8 percent. So top-line revenues are moving up and labor percentage is moving down. I like it so far.

Let’s look at material. In 2007, material on line 5 represented 11.7 percent of sales. This year it has grown to 14.4 percent. So while revenues are up 7.9 percent, material expenses are up 32.4 percent. Yikes!

Now let’s see what this increase in material expenses has done to profitability.

Reviewing total overheads on line 8, you will see that they have gone up 8.6 percent year over year, just slightly more than revenue growth. This is pretty much in line. For the purposes of this example, I have condensed all these expenses that are typically segregated into many different expense categories such as vehicle expenses, overhead salaries, etc.

The net result, however, is the company made $20,000 less in profit (line 9), despite growing the business and keeping labor and overhead costs in line.

A lot of hard work went into growing the business and managing labor expenses (two very difficult tasks), only to give it all back plus $20,000 all on the material line.

Does this sound familiar? It is happening across our industry in recent years - material costs rising faster than sales and eating into company profits. How can this be?

Here are some possible reasons:

1. Material cost increases are not being fully passed on to the consumer in the form of higher selling prices.

This is the No. 1 reason for increased material percentages on the income statements I review. For several years, prices for common products such as copper pipe, PVC, fixtures, boilers, you name it, have risen dramatically. It seemed that contractors were getting price increases with every material order.

Compounding this problem is the flat rate pricing method used by most service companies. For many contractors, printing a new flat rate book is a time-consuming task. As such, it is done maybe twice a year - usually when all the existing copies are dog-eared and dirty or stolen by former employees. The result is contractors are using last year’s material expenses to build this year’s selling prices. A big problem.

Another mistake I have seen with flat rate contractors is that when they do print new books, they may just take an across the board percentage increase, say 8 percent or so. So they take last year’s book and increase selling prices 8 percent across the board. In most cases, however, key material prices have increased more than 8 percent so again, while they are recovering some of the price increases through selling prices, they are not fully recovering all of them.

If you are a flat rate company, take the time to make sure that all the material cost inputs in your book are current. It would be smart to build in some modest cushion in selling prices to account for price increases that happen before your next price book is printed. If you haven’t reprinted your book in the past six months, do it now.

2. Business mix changes have resulted in changed material expense percentages.

For many contractors, particularly small companies, business mix changes can result in dramatic differences in material percentage. For many contractors, one big commercial water heater job or a large heating installation in a given month can dramatically increase their material percentage. So in your case, if your material percentages are up due to work mix changes, you may be in good shape, if and only if your company’s direct labor percentages have decreased.

This is a very important point. If your direct labor percentage is typically 23 percent and your material percentage is 15 percent, and the next month your material percentage goes to 22 percent because of a big material-intensive job but your labor percentage stays the same - what have you accomplished? Increases in material-intensive jobs should result in significant decreases in direct labor percentages. If this is not happening in your company, you have some inefficiency in the field that needs to be addressed.

Here are a couple of general rules for work mix changes:
  • Increases in drain cleaning and sewer repairs should result in declining material percentages.

  • Increases in service plumbing, remodeling and new construction normally result in increasing material percentages.
3. Large material purchases are expensed on the income statement when bought from the supplier before they are sold to the customer.

The proper way to handle material purchases is to buy material, move the material into inventory (on the company’s balance sheet) and then when the part is taken out of inventory and sold to the consumer, it is expensed on the income statement.

While most public company accountants would faint, the typical company expenses all materials when purchased from the supplier, even if the material is put into inventory to be sold at a later date. This is done due to lack of an inventory system that properly moves materials from the warehouse to the truck to the end- user. Getting this system in place is a huge job and is typically not the first place to start when building a business. So I am not necessarily recommending that it take place.

However, if your material percentages are up or down, it would be wise to consider what has happened to your inventory levels of materials. Have you made significant pre-season inventory purchases or outfitted a new truck and expensed all the new material purchased?

Purchasing (and then expensing) materials for inventory are very real reasons why your material line on your income statement is up in any given month. However, these short-term purchases tend to level off over the course of the year. So if your material expense percentage is up in the fourth quarter, don’t kid yourself. This probably isn’t the reason.

4. Material is being wasted or is “walking out the door.”

It is funny, but when material expenses are up, this is usually the first place contractors blame for a reason. It can’t be because of inattentive management.

It is usually not the reason. Sure, there is no doubt that companies with limited control of inventory in the warehouse or trucks lose material to both inefficiency - such as taking apart a new faucet for a part and then throwing the old faucet away - or theft for a side job for a “friend” who owns a couple of rental duplexes. However, the money lost here typically pales in comparison to not having the proper selling prices.

Don’t take this as a green light to ignore proper inventory controls. They are important and should be developed. But if you have runaway material expenses, don’t expect them to miraculously fix the problem.

When it comes to material expenses, your job as the owner is to completely understand what has caused your material expenses to change. Don’t assume you know, or hope “it will work itself out” over time. Get underneath the number and understand which of the four reasons listed above might be causing your material expenses to rise.

Links

  • Contact Plumbing & Mechanical

Share This Story

Looking for a reprint of this article?
From high-res PDFs to custom plaques, order your copy today!

Jack Tester is the president of Nexstar Network, a business development and training organization serving more than 400 independent plumbing, HVAC and electrical contractors in the United States, Canada and Australia. Jack can be reached at 651/789-8512 or jackt@nexstarnetwork.com.

Recommended Content

JOIN TODAY
to unlock your recommendations.

Already have an account? Sign In

  • Worker using the Milwaukee Tool SWITCH PACK drain cleaner

    Pipeline profits: Drain cleaning, pipe inspection create opportunities

    Drain cleaning and inspection services offer lucrative...
    Plumbing News
    By: Nicole Krawcke
  • Uponor employee, Arturo Moreno

    The reinvestment in American manufacturing and training

    Plumbing & Mechanical Chief Editor Nicole Krawcke and...
    Plumbing News
    By: Nicole Krawcke and Natalie Forster
  • March 2024 Women in Plumbing hero image of woman engineer overlayed by circle of hexagon shapes with numbers from 1 to 10

    Celebrating 10 Influential Women in the Plumbing Industry

    Celebrating Women's History Month and Women in...
    Plumbing News
    By: Nicole Krawcke
Subscribe For Free!
  • eNewsletters
  • Online Registration
  • Subscription Customer Service
  • eMagazine
  • Manage My Preferences

AI can boost efficiency and profitability for plumbing, HVAC contractors

AI can boost efficiency and profitability for plumbing, HVAC contractors

Bell & Gossett Illustrates Path to Net-zero at AHR Expo

Bell & Gossett Illustrates Path to Net-zero at AHR Expo

IPEX celebrates grand opening of new Florida distribution center

IPEX celebrates grand opening of new Florida distribution center

NIBCO Press Solutions

NIBCO Press Solutions

More Videos

Sponsored Content

Sponsored Content is a special paid section where industry companies provide high quality, objective, non-commercial content around topics of interest to the Plumbing & Mechanical audience. All Sponsored Content is supplied by the advertising company and any opinions expressed in this article are those of the author and not necessarily reflect the views of Plumbing & Mechanical or its parent company, BNP Media. Interested in participating in our Sponsored Content section? Contact your local rep!

close
  • J.J. Keller CMV vehicles on road
    Sponsored byJ. J. Keller & Associates, Inc.

    The dash cam game-changer for small business safety

Popular Stories

The interior of a government building.

President Trump signs executive order promoting skilled trades and apprenticeships

Figure 1 is a sketch of the flow problems of the current plumbing system.

Hydronic heating glitch solved: Why adding a circulator won't fix primary loop flow issue

Underfloor heating installation with drain sewer hole in bathroom close up on water floor heating.

Using hydronics to leverage time-of-use electrical rates

PM BEMIS June 25 Free Webinar: Optimizing Plumbing Solutions for Single-Family, Multi-Family & Public Spaces

Events

November 13, 2024

Future Proofing MEP: Navigating the 2026 High Efficiency Water Heating Standards

Join our deep dive into DOE’s new standards so you can future-proof your MEP practice.

EARN: 0.1 ASPE CEU; 1 AIA LU/HSW; 0.1 IACET CEU*; 1 PDH

View All Submit An Event

Poll

Will business be up or down in 2025?

Do you anticipate business in 2025 to be up or down in comparison to 2024?
View Results Poll Archive

Products

The Water Came To A Stop

The Water Came To A Stop

See More Products

Download the FREE Water Conservation, Quality & Safety eBook: Plumbing Trends Increasing Safe Water Availability

×

Keep your content unclogged with our newsletters!

Stay in the know on the latest plumbing & piping industry trends.

JOIN TODAY!
  • RESOURCES
    • Advertise
    • Contact Us
    • Directories
    • Store
    • Want More
    • Supply House Times
  • SIGN UP TODAY
    • Create Account
    • eMagazine
    • eNewsletter
    • Customer Service
    • Manage Preferences
  • SERVICES
    • Marketing Services
    • Reprints
    • Market Research
    • List Rental
    • Survey/Respondent Access
  • STAY CONNECTED
    • LinkedIn
    • Facebook
    • Instagram
    • YouTube
    • X (Twitter)
  • PRIVACY
    • PRIVACY POLICY
    • TERMS & CONDITIONS
    • DO NOT SELL MY PERSONAL INFORMATION
    • PRIVACY REQUEST
    • ACCESSIBILITY

Copyright ©2025. All Rights Reserved BNP Media.

Design, CMS, Hosting & Web Development :: ePublishing

search
cart
facebook instagram twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
    • BATH & KITCHEN PRO
    • BUSINESS MANAGEMENT
    • HIGH EFFICIENCY HOMES
    • TECHNOLOGY
    • WATER TREATMENT
    • PMC COLUMNS
      • Dave Yates: Contractor’s Corner
      • John Siegenthaler: Hydronics Workshop
      • Kenny Chapman: The Blue Collar Coach
      • Matt Michel: Service Plumbing Pros
      • Scott Secor: Heating Perceptions
  • ENGINEERS
    • CONTINUING EDUCATION
    • DECARBONIZATION | ELECTRIFICATION
    • FIRE PROTECTION
    • GEOTHERMAL | SOLAR THERMAL
    • PIPING | PLUMBING | PVF
    • PME COLUMNS
      • Christoph Lohr: Strategic Plumbing Insights
      • David Dexter: Plumbing Talking Points
      • James Dipping: Engineer Viewpoints
      • John Seigenthaler: Renewable Heating Design
      • Lowell Manalo: Plumbing Essentials
      • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
    • RADIANT COMFORT REPORT
    • THE GLITCH & THE FIX
  • INSIGHTS
    • CODES
    • GREEN PLUMBING & MECHANICAL
    • PROJECT PROFILES
    • COLUMNS
      • Codes Corner
      • Natalie Forster: Editorial Opinion
      • Guest Editorial
    • SPONSOR INSIGHTS
  • MEDIA
    • PODCASTS
    • VIDEOS
    • WEBINARS
  • RESOURCES
    • INDUSTRY CALENDAR
    • DIRECTORIES
    • EBOOKS
    • PM BOOKSTORE
    • CE CENTER
    • MARKET RESEARCH
    • CLASSIFIEDS
  • EMAGAZINE
    • EMAGAZINE
    • ARCHIVE ISSUES
    • CONTACT
    • ADVERTISE
    • PME EMAGAZINE ARCHIVES
  • SIGN UP!