If you remember Bob from our last blog post, you remember that he was struggling to understand why his business's financial documents demonstrated the company wasn't profitable, even though they were.
He's discovered for 3 of his most recent jobs that, compared to their estimates, the company paid more for labor and materials.
Time
There are several components to this piece. Let's take a deeper look into all these components, starting with technician payroll.
1. Technician Payroll
There are several things we commonly see included in a job quote: the wage technicians are paid, the number of hours to complete the job, and then business owners will mark up the job to make a profit. However, there are several important components that we don't see included on job quotes, the first being payroll taxes. In one of our previous posts, "The Hidden Cost of Labor", we shared that payroll taxes generally cost 10–15% of employee wages.
A second component that is often missed is workers comp. In the blog post previously mentioned, we also shared that, according to Wexford Insurance, workers comp amounts to about $0.75–$2.00 per $100 of payroll for smaller HVAC businesses, while larger HVAC businesses pay $2.50–$5.00 per $100 of payroll.
Travel time and unbillable hours are a couple other components we don't always see on job quotes. We'll talk more about these in the next section.
2. Job Efficiency
Another component is time efficiency on the job. There are two types of jobs in the HVAC industry: time and material jobs and quoted/projected jobs. The former bills for time and materials. To bill these jobs correctly, it's important to understand the cost of labor. The latter has a set number or possible range of hours in which the job is expected to be completed. This means, however, that there's not a lot of wiggle room for technicians to work beyond the set range of hours. When a job does go beyond the estimate, however, we often see the hours lost in things that are considered normal, which could include technicians driving to hardware stores in the middle of jobs because they were missing a part or ran out of a material.
Before moving forward, it's important to define the difference between billed time and unbilled time. Billed time (also called billable time) is the portion of a technician's paid workday that actually gets invoiced to a customer. This is time that's spent on-site performing repairs, installs, or maintenance that shows up as a charge on a customer's bill.
Unbilled time is everything else the company pays for that never turns into revenue. This includes:
- Drive time between jobs
- Parts runs and waiting on materials
- Training, meetings, and administrative tasks
- Callbacks and rework
- Downtime between calls when the phones are slow
3. Planning and Scheduling
When it comes to planning and scheduling jobs and estimates, it's important to consider a couple of factors, one being the location. Technicians spend a lot more time driving when they have a job five minutes from the office, and then have to drive an hour away from the office to do another job. If a company has a job on one side of their service area and another job on the opposite side of their service area, they will often schedule each job on a day when one or more technicians will be in the area to reduce drive time between jobs. They will also do the same for estimates to reduce drive time for estimators.
It's also important for technicians to only start a job if they're able to finish it the same day. The time it takes for technicians to set up, start, and pack up their materials adds up and may cause them to exceed the set number of hours that the company budgeted for the job.
Material
1. Tracked vs. Untracked Materials
There are two different types of materials: tracked/billed and untracked/unbilled materials. Tracked materials are the materials that are included in a job quote or the final invoice if it's a time and materials job. Untracked materials are materials that came off a truck (fasteners, leftover fittings from other jobs, etc.) that are not included in the estimate or final invoice. If the cost of tracked materials are not included in the job quote, then customers will not be billed for the additional materials and the company will eat the cost.
Commonly businesses find that techs routinely pull small items like fuses or wire nuts from the truck for a diagnostic call and don't log the usage so it can be billed. Individually, these don't seem to add up to a lot, but can add thousands of dollars per year in hidden costs that are eating into the profit margin of the company. Often these expenses will get captured in COGS accounts like inventory shrinkage or job materials. Similarly, field studies show consumables like screws, sealants, and tape account for 25–35% of recurring material costs, and losing just $10 in consumables per service call adds up.
Many would argue that it is impossible to track to that level and we would agree, but raising the per hour rate by $0.50 or a dollar will recover much of the "loss" from these routine actions. It is also important for a business to track the generic job material usage to improve crew efficiency in using materials. Additionally, a business should account for physical shrinkage (theft/loss) as a separate line item and build it into the overhead costs of the labor. Our HVAC Overhead Job Costing Calculator makes it easier to allocate those hidden costs across billable hours.
2. Usage Efficiency
There are several scenarios in which usage inefficiency can occur, one being when a technician orders a part the company already has in stock, but was unaware due to poor inventory tracking. If inventory is not tracked properly, parts will be ordered that don't need to be, and the company will discover they have less inventory of some parts than the tracking data show.
Another scenario is when technicians waste materials on jobs. When materials are wasted, the company has to buy more. If this happened just once, it doesn't affect the company too much. If it happens across multiple jobs, however, it increases the total amount the company has to pay for materials that year.
A third scenario is when technicians are sent to job sites without all the materials they need. In our blog post "Inefficiencies That Are Killing Your Job Profitability", we discussed how running out of materials on the job site means technicians have to make a trip to a hardware store, which costs the company time.
3. Planning and Scheduling
Here's an example of how poor planning and scheduling can play out when it comes to job materials: a technician arrives at a job site only to find that a required part is missing. This technician has to take one of two actions: drive back to the warehouse to get the part, or scramble to find a supplier. Either option delays the schedule.
Bringing It All Together
Let's go back to Bob. After looking at the time and material logs, he decides to implement ways to make jobs more efficient, including planning and scheduling jobs in the same service area on the same day to reduce travel time between jobs. He also adds a truck stock inventory so he knows what's being used and what else needs to be included in his materials costs.
Running each job through a repeatable process — like our HVAC Job Costing Calculator, Gross Margin Calculator, and Break-Even Calculator — closes the gap between the margin you expect and the margin you keep. If you're also weighing new equipment or a truck purchase against your current cash flow, the Debt Service Capacity Calculator can help you see how much your business can safely take on.
Call to Action
On your next quoted job, track drive time, prep time, supply runs, and any unexpected material usage separately. Compare those numbers against what was originally estimated. The gaps often reveal where profit quietly disappears. If you'd like help reviewing your numbers, schedule a complimentary consultation with Joseph.
Disclaimer: The information in this post is intended for general guidance purposes. For advice specific to your business finances or taxes, consult a licensed accountant or financial advisor.
