Breakeven In Four Easy Steps

HowToCalculateYourBreakevenOnLabor(ShortForm)

CalculationforDepartment:_______________________________ WhyThisWorksheet
MostHVAC,plumbing,electrical,andrelatedcompanieslosemoneyonservicework.Theyhavenoideahow expensiveitistodelivera$50,000hardwarestoreonwheelsdrivenbythemostemployablepersoninAmerica. Thisworksheetwascreatedtoprovideasimplewayformanagerstocalculatetheapproximatecosttoprovidea servicevehicleandaservicetechnicianonanhourlybasis.Youcanviewadditionalresources,watchhowtovideos, obtainadditionalcopiesofthisform,andseeexamplesatwww.aptora.com/breakeven

Step1:StandardHourlyCosts:

A. TechnicianPayPerStandardHour

Regulartime,nooverhead,useyourhighestpaidtechsstraightwage

$ % $

B. DirectExpensesBasedonCompensation

FICA,Medicare,unemployment,workcomp,health&life,benefits(assume30%)

C.

C=A+B%

DirectLaborCostPerStandardHour

Step2:LostDays:

D. TotalHoursAvailable(noovertime) 52weeksx40hoursperweek

2080Hrs. Hrs. Hrs. Hrs. Hrs. % Hrs. $

E.

NumberofPaidVacationsHours
Werecommendatleast40hoursandupto120hours

F.

NumberofPaidHolidays Werecommendatleast56hours NumberofPaidSick/PersonalDays

Werecommendatleast40hours

G.

H.

ProductiveHoursAvailable
H=D(E+F+G)

I.

Hourspaidbutnotbilledtoclientassume50%forservice&20%forinstall

NonBillableHours(unproductivetime) BillableHours

J.

J=(100I)x(H100)

K.

AdjustedDirectLaborCostPerBillableHour K=(DJ)xC

20062008AptoraCorporation.AllRightsReserved.Page:1

Breakeven In Four Easy Steps

HowToCalculateYourBreakevenOnLabor(ShortForm)

Step3:VehicleCosts:
Acommercialvehiclecostsalottooperate.AccordingtorecentresearchperformedbytheAAA,itcostsabout69.2 centspermiletooperateanoncommercialminivan.Theinternetisfullofinformationonthistopicsoweencour ageyoutodoyourownresearch.

L.

MilesDrivenPerYear
Ifunsure,assume40,000forserviceand25,000forinstallers

Miles Cents $ $

M. CostPerMile Assume75centspermileforserviceand60centspermileforinstallation

N. TotalVehicleCostsPerYear
N=(LxM)

O. VehicleCostPerBillableHour
O=(NJ)

Step4:CostofTechnicianandTruck(nooverhead):

P.

AdjustedDirectLaborCostPerBillableHour SeelineK
SeelineO

$ $ $

Q. VehicleCostPerBillableHour R. YourTrueDirectCostofLabor(seenotesbelow) R(P+Q) Surprised?

Areyousurprised?Areyouchargingfarlessforlaborthanitcostsyoutoprovideit?Formanyofyou,itwould honestlybecheaperifyoupaidyourcustomerstocalloneofyourcompetitors.

Notes

1. ThisworksheetcalculatesyourDirectCostofLabor,notyourLaborBreakevenSalesPoint.Inotherwords,you stillmustpayyourcompanysoverhead(likerent,officesalaries,ownerscompensationthelistgoeson). 2. Nothinghasbeenincludedforoverheadandnothinghasbeenaddedforprofit.

QuestionsForYouToThinkAbout

1. 2. 3. 4. 5.

Howdothecalculationschangeifweuseatwopersoncrew(twopeoplepervehicle)? Whydoestheservicedepartmentcostsomuchmoreperhourtooperate? Howmuchmorerevenuewouldbegeneratedifyouincreasedyourlaborrateby$20.00perhour? Howmanylaborhoursmustyourcompanyselltobreakeven? Whatifyouofferaseniorcitizenorserviceagreementdiscount?Howmuchareyoulosingthen?

20062008AptoraCorporation.AllRightsReserved.Page:2

Breakeven In Four Easy Steps

HowToCalculateYourBreakevenOnLabor(ShortForm)

CalculationforDepartment:Service(maintenanceandrepairs) WhyThisWorksheet
MostHVAC,plumbing,electrical,andrelatedcompanieslosemoneyonservicework.Theyhavenoideahow expensiveitistodelivera$50,000hardwarestoreonwheelsdrivenbythemostemployablepersoninAmerica. Thisworksheetwascreatedtoprovideasimplewayformanagerstocalculatetheapproximatecosttoprovidea servicevehicleandaservicetechnicianonanhourlybasis.Youcanviewadditionalresources,watchhowtovideos, obtainadditionalcopiesofthisform,andseeexamplesatwww.aptora.com/breakeven

Step1:StandardHourlyCosts:

A. TechnicianPayPerStandardHour

Regulartime,nooverhead,useyourhighestpaidtechsstraightwage

$25.00 30% $32.50

B. DirectExpensesBasedonCompensation

FICA,Medicare,unemployment,workcomp,health&life,benefits(assume30%)

C.

C=A+B%($25.00x1.3=$32.50)

DirectLaborCostPerStandardHour

Step2:LostDays:

D. TotalHoursAvailable(noovertime) 52weeksx40hoursperweek

2080Hrs. 40Hrs. 56Hrs. 40Hrs. 1944Hrs. 50% 972Hrs. $69.52

E.

NumberofPaidVacationsHours
Werecommendatleast40hoursandupto120hours

F.

NumberofPaidHolidays Werecommendatleast56hours NumberofPaidSick/PersonalDays

Werecommendatleast40hours

G.

H.

ProductiveHoursAvailable
H=D(E+F+G)

I.

Hourspaidbutnotbilledtoclientassume50%forservice&20%forinstall

NonBillableHours(unproductivetime) BillableHours

J.

J=(100I)x(H100)

K.

K=(DJ)xC(2080dividedby972=2.139times$32.50=69.517)

AdjustedDirectLaborCostPerBillableHour

20062008AptoraCorporation.AllRightsReserved.Page:1

Breakeven In Four Easy Steps

HowToCalculateYourBreakevenOnLabor(ShortForm)

Step3:VehicleCosts:
Acommercialvehiclecostsalottooperate.AccordingtorecentresearchperformedbytheAAA,itcostsabout69.2 centspermiletooperateanoncommercialminivan.Theinternetisfullofinformationonthistopicsoweencour ageyoutodoyourownresearch.

L.

MilesDrivenPerYear
Ifunsure,assume40,000forserviceand25,000forinstallers

40,000Miles 75Cents $30,000.00 $30.86

M. CostPerMile Assume75centspermileforserviceand60centspermileforinstallation

N. TotalVehicleCostsPerYear
N=(LxM)

O. VehicleCostPerBillableHour
O=(NJ)($30,000dividedby972=$30.86)

Step4:CostofTechnicianandTruck(nooverhead):

P.

AdjustedDirectLaborCostPerBillableHour SeelineK
SeelineO

$69.52 $30.86 $100.38

Q. VehicleCostPerBillableHour R. YourTrueDirectCostofLabor(seenotesbelow) R(P+Q)($69.52+$30.86=$100.38) Surprised?

Areyousurprised?Areyouchargingfarlessforlaborthanitcostsyoutoprovideit?Formanyofyou,itwould honestlybecheaperifyoupaidyourcustomerstocalloneofyourcompetitors.

Notes

1. ThisworksheetcalculatesyourDirectCostofLabor,notyourLaborBreakevenSalesPoint.Inotherwords,you stillmustpayyourcompanysoverhead(likerent,officesalaries,ownerscompensationthelistgoeson). 2. Nothinghasbeenincludedforoverheadandnothinghasbeenaddedforprofit.

QuestionsForYouToThinkAbout

1. 2. 3. 4. 5.

Howdothecalculationschangeifweuseatwopersoncrew(twopeoplepervehicle)? Whydoestheservicedepartmentcostsomuchmoreperhourtooperate? Howmuchmorerevenuewouldbegeneratedifyouincreasedyourlaborrateby$20.00perhour? Howmanylaborhoursmustyourcompanyselltobreakeven? Whatifyouofferaseniorcitizenorserviceagreementdiscount?Howmuchareyoulosingthen?

20062008AptoraCorporation.AllRightsReserved.Page:2

BreakevenWorksheetInstructions
WhatThisBreakevenWorksheetDoesandDoesNotDo
Thisworksheetwillhelpcontractors,suchasHVAC,refrigeration,heating,airconditioning,plumbing,electrical, applianceandotherrelatedbusinesses,calculatethecorrectretailpriceforlabor.Thisworksheetdoesnot attempttocalculatetheproperretailpriceforequipment,parts,ormaterials.Thisparticularworksheetdoesnot factoringeneraladministrativeoverhead.Thereasonisthatadministrativeoverheadwouldneedtobebroken outbydepartment(likeserviceorreplacement)andthatisnotpossibleformanycontractors.Ourintentionwas todeterminethetruecosttoprovideaqualifiedtechnicianalongwithaproperlyequippedvehicle.

WhyThisWorksheet
Accountingexpertshavedevisedmanymethodsofcalculatingthebreakevenpriceandbreakevensalespointfor productsandservices.Mostoftheseapproachesarevalidandworthyofstudy.However,theycangetvery complicatedandoftenrequiredetailedfinancialdatathatisdifficulttoobtainformostcontractors.Thislabor pricebreakevenworksheetwasdesignedtotakeaverysimpleyetreliableapproachtocalculatingtheproper sellingpriceforlabor.Eventhoughmanycomplicatedtechniqueswerebypassed,thisbreakevenworksheetoffers therightbalanceofsimplicityandaccuracy.

StepByStepInstructions
ThefollowingaredetailedinstructionsforcompletingtheBreakeveninFourEasyStepsworksheet.Wehavealso providedasampleworksheetforyoutouseasaguideline. Eachparagraphbelowcorrespondstotheparagraphsfoundintheworksheet.Eventhoughtheworksheetiseasy tofillout,youmayfindsomeofthetipsandadvicehereveryhelpful.

Step1
A. Theamountofmoneyyoupayyourtechnicianforregularstandardtimewithoutanybenefitsoroverhead. Youmightcallthisstraighttime. B. Thisreferstotheexpensesthataredirectlyassociatedwitheachdollaroflabor.Theseitemsarelimitedto federalandstatepayrolltaxes,federalandstateunemployment,healthandlifeinsurance,workers compensation,uniforms,etc.Donotincludevehicleexpensesbecausetheywillbehandledlater.Donot includegeneraloverheaditemssuchasrent,officewages,etc.Ifyoudonthaveaccurateandreliable information,averygoodruleofthumbis30%. C. Thisfigureiswhatyoupayyourtechnician(lineA)plusthecostofdirectexpensesfoundinlineB.The formulaseemsabitcomplicatedatfirst.Seeourexampleforhelp.Basically,ifyouuseour30%ruleofthumb, justmultiplylineAby1.3.Thatwilladd30%tolineA.

Step2
D. Thisisthenumberofhoursthatyounormallyhaveavailabletoselleachyearpertechnician.Thereareonly somanyhoursoflaborthatacompanycansell.Yourcompanyisavailablealldaylongevenifnoonecalls. Unbillablehourshavetobepaidforbysomeoneandthatcostisaddedtoyourhourlyrate.Overtimeisnot consideredbecauseitsusuallyunpredictable.Ourdefaultvalueis2080.Thisisthenumberofhoursavailable

E.

F.

G.

H.

I.

J. K.

toselleachyear.Wecameupwithnumberbyconsideringthatthereareeighthoursinastandardworkday and52weeksineachyear.Generallyyouwouldnotconsideraddingextrahoursforovertimeunlessovertime waspredictable;likepartofanongoingcontract.Note:Whenatechnicianperformsworkduringoffhours, theyareveryprofitable.Thatsbecausetheyarecreatingadditionalbillablehoursaboveandbeyondwhat wasconsideredwhenyoucalculatedyourlaborpricing. Thisisthenumberofhoursyouofferscoworkersfortheirvacation.Generallyyoushouldoffer40hours(one week)ofvacationforonetotwoyearsofservice,80hoursforthreeyears,and120hoursofvacationfor coworkerswhohavebeenwithyouforfiveyearsormore. Enterthenumberofpaidholidayhoursyouofferyourcoworkers.Generallywerecommendthatyoupay NewYears,LaborDay,MemorialDay,July4,Thanksgiving,ChristmasEve,andChristmas.Eighthoursispaid foreachholiday. Itsimportanttoofferemployeespaidtimeoffforsickdaysandotherpersonaltime.Employeesshouldbe encouragedtostayhomewhentheyaregenuinelyill.Theyshouldnotfeelasiftheyhavetofakeillnessto taketimeoffforfamilyeventsortorunpersonalerrandslikegettingtheirvehicleregistered.Werecommend thatyouoffer40hoursofpersonaltimeperyear.Wedonotrecommendthatyouallowthesehoursto accumulateandrolloverfromyeartoyear(usethemortheyarelost). ProductiveHoursAvailableisthenethoursavailableforyoutosell.Youaresimplysubtractingvacation, holiday,sicktime,andpersonaltimeofffromthe2080hoursthatareavailableeachyear.Weunderstand thatyoumayhaveopportunitiesforovertimebutOTshouldnotbeconsideredinourcalculations. NonBillableHoursreferstothehoursineachbusinessdaythatyoucantbillsomeone.Forexample,aservice technicianarrivestoworkat8amandleavesworkat,letssay,5pm.Thatsninehoursbuthewouldbelucky ifheactuallychargedsomeoneforfiveoutoftheeighthourshewasatwork.Thedifferencebetween availablehoursandbillablehours(hourschargedtosomeone)iscalledNonBillableHours.Thisisthemain reasonserviceworkhassuchhighoverhead.Note:Somecompaniesonlypaytechniciansfortimetheyhave actuallybilled.Thesecompaniesarebasically100%billablewiththeexceptionoftrainingwhichshould alwaysbepaidtime.Ifyoupayyourtechniciansforbillabletimeonly,thanyoushouldonlyconsidertraining time.Hereisonemoreimportantthingtothinkabout,ifyoupayonlybillabletime,thanyoushouldbepaying yourtechniciansalotmoremoneyperhour.Eitherway,techniciansmustmake$75,000ormoreifyouare goingtogetandkeepgreattechnicians.Thefinalnumberwillusuallybenearlythesameeitherway. BillableHoursisequaltoProductiveHoursAvailable(lineH)lessNonBillableHours(lineI).Thesearethe hoursthatyouwillactuallysell.Foraservicedepartment,thatmightbejust50%ofwhatwasavailabletosell. AdjustedDirectLaborCostPerBillableHourisactuallywhatatechniciancostsyouperhour.Thereasonthis numberishigherisbecauseeventhoughatechnicianisavailableeighthoursperday,theyrarelyeverbillout eighthoursinaday.Whilesomedaysarebetterthanothers,manyservicetechniciansareluckytobillout 1000hoursperyear.Installationtechniciansmightcreate1700hoursofbillablelaborperyear.

Step3
L. Weneedtoknowhowmanymilesyoudriveeachyear.Ifyouarenotcertainpleaseuseourruleofthumb. Ourruleofthumbforaservicevehicleis40,000milesperyear.Aninstallationvehiclemighttravel25,000 milesperyear.Ifyouworkinaruralarea,youmaytravelevenmoremiles(whichhelpsdebunkthemyththat ruralcompanieshavelessoverhead). M. Wemustnowconsidertheconsiderablecostofoperatingacommercialvehicle.Formanyofusthisisafull sizedvanorboxtruck.Eitherwayitsnotunusuallytoinvest$50,000insuchavehicleonceyouhave boughtitandequippeditwithshelving,ladderracks,ladders,tools,andinventory.Servicevehiclesarethe mostexpensivetooperatebecausetheytypicallytravelmoremilesthatinstallationvehiclesdoeachyear.

Servicevehicleusuallyhavemoreinventoryandtools.Locatingyouractualvehiclerelatedexpensesmaybe hardtodosoconsiderusingourruleofthumbwhichis75centspermile.Thisisagoodnumberwhen gasolinepricesareat$3.10pergallonandthebasecostofthevehicleisapproximately$30,000.00.This numberisalsovalidevenifyouleasethevehicleorifyouarenolongermakingpaymentsonit. N. Hereyousimplymultiplythenumberofmilesyoudriveeveryyearbythemoneyittakestotravelonemile andyoushouldhaveaprettygoodideaofwhatitcoststooperateavehiclepermile.Thisfinalnumber includesgasoline,insurance,maintenance,wearandtear(depreciation),licenseandregistration,etc.For mostofyou,thisnumberwillbeinthe$30,000.00range. O. Thisnumberiswhatitcostsyoutooperateyourvehicleperbillablehour.Tofigurethisout,dividelineNby lineJ.Formostofyou,thecostwillbeabout$31.00perhour.

Step4
P. ThisissamenumberaslineK.Youarejustcopyingitover. Q. ThisissamenumberaslineO.Youarejustcopyingitover. R. AddlinePandlineQtogether.ThatisAdjustedDirectLaborCostPerBillableHourplusVehicleCostPer BillableHour.Thisnumberiswhatitcostsyoutoprovideaqualifiedtechnicianandaproperlyequipped vehicleperbillablehour.

ImportantNotes
NoOverheadandNoProfit
Formanyofyouthisnumberisfarhigherthanwhatyouarechargingperhour.Well,itgetsworse.Wehavent evenpaidforoverhead.Inotherwords,thisratedoesntcoverofficewages,rent,generalinsurance,telephone, cellphones,advertising,utilitiesoranythingelse. Wehavenotaddinganymoneyforprofitwhich,ofcourse,isthesolereasonfortheexistenceofyourbusiness.If youarenotmakingareasonableprofitthanyouregoingtoleadamiserablebusinesslifeandyouwillfail.

WhatToDoIfYouAreChargingLessThanYourBreakeven
Youcanturnthingsaroundthroughacombinationofincreasedlaborpricingandhigherpricesonmostparts.We highlyrecommendflatratepricing.Flatratepricingallowsyoutoquoteapricefortherepairbeforetheworksis started.Clientshaveanopportunitytoaskquestionsandheartheiroptionsbeforeworkdothework.Presenting aguaranteedpriceallowsmostbusinessestoeasilycharge20%to30%morewhilereducingpricerelated complaints.Thisisnodifferentthanwhatyouaredoingwhenyouwriteasalesproposalandaskforapproval. Onceyougetapprovalanddothework,nobodycomplainsabouttheprice.Right?

WhereToGoFromHere
Aswementioned,thisisasimplifiedworksheet.Asyoubecomemorecomfortablewiththissubject,youmay wishtocreateadetailedlistofoverheadandcalculatethecorrectlaborratetopayforallofthatoverhead.You mayalsowishtobreakoutoverheadbydepartment;suchasserviceorinstallation.Youmaythenrecalculatefor eachdepartment. Advancedmanagersshouldalsoconsidertheimpactofdiagnosticortravelfeesontheirlaborrates.Sincethese feesareusuallysoldbelowcost,theywillcauseyourlaborratestoincrease.Anotherareafortheadvanced managertoconsideristheimpactofsellingparts,materials,equipment,andothernonlaboritems.Iftheseitems

producegrossprofit(somecompaniesdonotmarkupitems),thisactionmightallowyoutoloweryourlabor rates.

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