Several ingredients are necessary for a contracting business to be successful. Obviously, knowledge of your chosen trade regarding services being offered to the public is paramount. After all, if you, as a contractor, don’t know how to properly and professionally perform tasks in an efficient and timely manner, consumers cannot get value for the dollars they spend with your business.

The delivery of performance excellence to consumers is the next requirement for success. Even if you are adroit in your abilities to perform the services you offer to the public, it is not a guarantee as to your performance quality. 

Mediocrity does not deliver value to consumers — and it harms your business reputation. In turn, it doesn’t lead to recommendations from those consumers who only received mediocre performance to their friends, relatives and neighbors. 

The absence of recommendations hinders the ability to succeed.

Excellence in business performance is another, and extremely important, success requirement.

Once you are skillful at your trade and the delivery of excellence to consumers, it is necessary for you to do the same with regards to administering the costs you incur to perform the tasks you offer to the public. 

Tangible vs. Intangible Costs

Every decision you make and action you employ in addressing your true legitimate operational business costs requires scrutiny to arrive at the correct selling prices. These allow you to recover the costs you incur in completing tasks while giving you the chance to earn a profit.

If you are not fully cognizant of your true operational business costs, your selling prices, with the exception of dumb luck, will be flawed.

That scrutiny requires you to identify and calculate your true cost of operation in totality and as it proportionately pertains to any service. True cost of operation means all legitimate tangible and intangible costs you incur.

By tangible operational business costs, I mean those costs you see for an item as well as knowing the said cost you will incur to purchase that item. Tools and materials are tangibles costs; both have stated prices for the cost you must pay before you purchase them. 

However, maintenance, repairs or replacement associated with tools is an intangible cost in as much as you don’t know when they will be needed; it depends on the amount of their usage. 

Similarly, materials have intangible cost factors. Materials can be top quality as well as lesser quality. Materials, regardless of quality, can be defective, causing callbacks that can affect your reputation in the eyes of consumers. 

Callbacks definitely affect the number of hours that can be sold to recover costs and earn a profit. You or your techs can’t be on jobs bringing money into your businesses when spending time redoing what you have already been paid to do. 

Determining your Profit Margin

Once you correctly calculate your legitimate true operational business costs, inclusive of all tangible and intangible expenses, a profit margin allowing you to earn a reward above those said costs must be chosen.

It is imperative to understand that just because a profit margin is applied to true cost, profit is not guaranteed. 

What? How is that possible? To address those questions, I’ll try to explain.

Only a maximum of 1,708 potentially revenue-producing hours are available per tech in a 40-hour week/5 days per week/52-week year, with six paid holidays and two paid weeks for vacation/personal time. 

40 hours x 52 weeks = 2,080 hours of paid salary expense 

Subtract 128 hours for paid holidays and vacation/personal time and only 1,952 hours are left to sell to the public. 

Then, there are the hours lost to nonrevenue-producing responsibilities such as checking truck vital signs, communicating with administrative personnel and turning in paperwork (regardless of whether it is digital or actual paperwork), restocking truck inventory, etc.

Since the example work year includes six holidays and two weeks for vacation/personal time, only 244 potentially revenue-producing workdays are available per tech annually. 

Allow me to explain: 52 weeks x 5 work days per week = 260 work days. This is without considering the aforementioned time off for paid holidays and vacation/personal time, which comes to 16 days. 

260 days - 16 days = 244 potentially revenue-producing days/tech annually 

After being in the contracting building trades as an apprentice, journeyman, contractor and business consultant for 54 years, I have concluded that minimally, on average, one hour/workday/tech is lost to nonrevenue-producing duties. 

That means there are 244 more hours to subtract from the aforementioned 1,952 available potentially revenue-producing hours per tech annually, leaving a maximum of 1,708 hours/tech/year. If you offer, or in reality realize, more or less than the example number of hours, you must alter the number of potentially revenue-productive hours you need to sell.

Now, let’s get back to the choice of profit margin. Why does that info affect your choice of profit margin, your selling prices and the ability to succeed?

If you are establishing your true cost calculation on selling all your available revenue-producing tech hours all the time and you choose a 10 percent profit margin, you should wind up getting 10 percent of profit dollars above your true costs to perform the task at hand. 

Similarly, 20 percent should get you a 20 percent profit above your true cost, and so on and so forth. However, no contractor sells all available revenue-producing tech hours all the time.

 Chart 1, excerpted from my book “Solutions Management Theories & Methods for The Contracting Business,” shows different costs and profit margins needed, dependent upon projected revenue hours sold, to recover your true legitimate operational business costs and break even.

Keep in mind that in addition to knowing your stuff — delivering excellence — and properly calculating your numbers, you need confidence in yourself and what you are doing to successfully sell your services with a flair. To succeed, you do it right.