As a contractor, you know you incur business expenses in operating your contracting business. And when the bill comes due, you must pay it. The materials you use all come with a cost to your business, as does everything else you need to remain in business. You provide salaries for techs and administrative staff, as well as salary-related expenses such as FICA matching funds and insurance related to payroll, unemployment, workers’ compensation and health. Those items, as well as others, come with a dollar amount attached. 

Then there are the costs of tools and tool maintenance: vehicles and vehicular expenses such as fuel (an everchanging volatile number), financing, insurance, repairs and maintenance, and inspections and registrations. All these items come with a set amount of money you are responsible for paying.

You also incur expenses related to the space you take up to run your business — even if you run it from your kitchen table. That space uses expenses incurred because you run a business, including the utilities you use. Lights don’t need to be turned on but are because you run your business from home.

You incur the cost of office supplies and equipment necessary to be in business. You incur business expenses for communication, advertising and professional services such as lawyers, accountants and business consultants like me. 

All those items and services come with a dollar amount attached. Some of those costs have fixed amounts of money, while others have rates that must be paid based on certain criteria.

Those business expenses are tangible (known costs) because each comes with an attached amount of money to be paid. Each is a true business cost. However, those business costs are not your total true business operational cost

Don’t Forget the Intangibles

Adding intangible business circumstances will lead to your total operational business cost. The cost of those circumstances to your business does not come with a fixed or ratable amount of money to which you already agreed to pay.

They pertain to issues such as unapplied labor; customer relations; bad debt, breakage and loss; and any unforeseen issue that may pop up at any time.

As a contractor who pays salaries for 2,080 hours/tech annually and gives your techs 16 paid days for personal time and holidays, you would have only 1,952 service hours to recover your business expenses.

However, it doesn’t end there. During any given year, you probably lose 244 hours/tech to nonrevenue-producing issues such as talking to your business’ administrative staff, checking out and addressing any issues with your service vehicles, tool maintenance, etc. This means you only have 1,708 hours/tech annually to bring money into your business to recover costs and make a profit.

All contracting businesses have callbacks. At only 50 hours/year/tech, your potentially billable number of hours decreases to 1,658.

When you accept that you pay for 2,080 hours/tech but only have 1,658 hours/tech to recover your cost, you will begin on the road to arriving at your true operational business cost.

Using those numbers as an example, for every $100,000 of tech expenses to your company, if you thought you could divide your $100,000 by 2,080 hours to arrive at your true operational business cost per tech hour, you would be doing your business a disservice.

That’s because $100,000 ÷ 2,080 hours = $48.07. However, since you only have 1,658 hours to sell, as per the example numbers, your true cost to your business per sellable tech hour is really $60.31 ($100,000 ÷ 1,658 sellable hours). 

Consequences of Bad Debt

However, the intangible costs you incur running your business do not end there. Bad debt also affects your operational business costs. You would prefer not to have a bad debt line-item cost, but you do not always know whether a consumer will try to stiff you.

For example, you quote a price of $1,000 to perform a service. The consumer agrees to the price, and you perform the service. Then, when you ask to be paid the agreed price, the consumer makes up some story about why they don’t want to pay it. 

If the consumer refuses to pay, you have a problem. You can try to renegotiate the price and deduct a certain amount to not incur additional time and legal fees taking them to court. In which case, taking off $100 or $200 might be the prudent thing to do.

If the consumer refuses to pay anything, you must eat the bill or take them to court. All the additional expenses and the bill itself are a bad debt cost to your business. 

Sometimes, material breaks while you are handling it. Wet hands may drop a water closet when transporting it from your truck to the point of installation. It’s not the manufacturer’s fault, nor is it the consumer’s responsibility. That mishap falls squarely on your shoulders and adds to your true operational business cost.

And Murphy’s Law always hangs over your head like the sword of Damocles. Unforeseen items affecting your true operational business cost are a reality of business operation. Equipment you correctly calculated into your operating budget can break down faster than you estimated. 

An accident can affect your true business cost by decreasing the number of potentially sellable tech hours you thought you had. A tech or a tech’s equipment becoming incapacitated further cuts your available tech selling hours; therefore, making your true hourly tech cost to your business rise. 

In that instance, if you lost 50 hours/year/tech, you would only have 1,608 potentially sellable hours/tech. Your cost per tech hour would rise from $60.31 to $62.19.

You must consider many issues and items in the business arena to arrive at your true operational business cost. It’s your job and your responsibility to yourself, your family, your employees, your clientele, your business and your industry to know your true operational business cost.