Employee retention is an important consideration for every business. After all, it’s your people who ultimately ensure your success. Taking care of your employees so they want to stick around means doing things like offering competitive pay, meaningful bonuses, good benefits, and job security. These are worthy strategies that do have a positive impact on employee loyalty and retention. Unfortunately, by focusing your attention exclusively on these things, you’re leaving your most important HR tool on the table.
You can’t offer good pay, great benefits, and any sense of job security without job costing.
Job costing is so important that it’s listed as the number one training need by HVAC contractors. It even comes in ahead of sales and marketing, consumer financing, and employee management and leadership.
But what is job costing, exactly how can it boost employee retention, and how do you create an effective job costing strategy for your business?
This guide will explain everything you need to know about job costing and how to apply it to your business, but first, let’s start by defining exactly what it is.
What job costing actually is
Job costing involves tracking all costs associated with a specific job. It includes all direct and indirect costs like labor, materials, overhead, equipment, and time. The ultimate goal of job costing is to determine whether or not you made or lost money on a particular job.
It’s important to gauge the exact cost of each job because margins are often razor-thin. The national average net profit of HVACR contractors comes in at just 6%. Although job costing seems like a simple accounting exercise, it’s actually the foundation that makes everything else in your retention strategy possible. It affects what you pay employees, and ultimately, whether your business survives.
The direct connection to employee compensation
It’s true that sign-on bonuses aren’t usually a good choice when it comes to employee loyalty and retention, but that doesn’t mean all bonuses are bad. According to the Contractor of the Future Study, 47% of HVACR contractors incentivize their technicians through bonuses and spiffs, which ultimately leads to a 5% increase in the size of their average ticket.
That makes bonuses and spiffs a sound option to increase employee retention and your bottom line, but how do you know what to bonus on if you don’t know what’s profitable?
That’s where job costing comes in. By pricing the exact cost of each job, you can determine:
- Which add-on products make money so you can offer a bonus for them.
- Which installations are the most profitable so you can incentivize the right work.
- Which targets are realistic so you know how much labor you can afford per job.
- Better scheduling choices based on whether overtime pay is negatively affecting your bottom line.
- The correct pricing for all services based on the precise cost per truck per day.
Having this data handy ensures you aren’t overpaying your techs and destroying your profit margins or underpaying them and losing them to a higher-paying job elsewhere.
The size and profitability gap
Although the average net profit of HVACR contractors is 6%, there are differences between small and large contractors that are worth paying attention to.
Small contractors with up to four trucks see smaller profit margins at just 5%. Large contractors with 10 or more trucks see an average of 8% net profit. One of the reasons for the difference is that 83% of large contractors use FSM software while only 31% of small contractors use it.
This sets large contractors up for greater success because it means they are more likely to utilize efficient systems for tracking costs. They likely have a process for real-time labor cost tracking, and they use that data to create cost-effective pricing and make staffing decisions.
The good news is you don’t have to be a large contractor to experience higher profit margins. You just have to be willing to create a system that enables you to track costs accurately and often.
How job costing solves HR challenges
Nearly half of HVACR contractors report onboarding and retention as their biggest challenge. Perks like culture and flexible scheduling can help, but at the end of the day, employees want the stability and predictability of a fair wage and good benefits. In order to offer these things, you need to engage in job costing strategies because they enable you to:
- Pay competitively without guessing
- Create a system of performance pay that actually works
- Expose training needs
- Justify investment in people
Pay competitively without guessing
Knowing the average wage for technicians nationwide is a good place to start when offering competitive pay. The national average is $33, but wages do vary depending on location. For example, the average wage in the Deep South is $28, while the average wage in the Northeast is $38.
But this isn’t the end of the story, because you can only pay techs what you can afford. Job costing allows you to see what you can actually afford in your market. If you calculate data carefully, and you are able to create a higher profit margin, you can increase wages, potentially above and beyond the average for your area, which is an effective way to retain great talent.
Create a system of performance pay that actually works
Bonuses and spiffs can be a great way to incentivize technicians, but only if you’re incentivizing the right behaviors. Otherwise, you’ll end up paying techs money to promote certain services or products that don’t actually increase profits.
For example, volume bonuses that pay out for completing a certain number of calls can backfire. An employee might look productive on paper, but the profit per hour may not be high if rushed work results in a callback or the work includes warranty labor.
Job costing can help. It allows you to discover exactly which jobs have the highest profit margins. Then, you can offer bonuses for these jobs. So, instead of offering bonuses for completing service calls, you can offer the bonus for financed work because you have discovered that it comes with higher profit margins.
Expose training needs
74% of contractors understand the importance of continuous learning and offset training costs for employees, but do you know what kind of training your employees need?
Job costing allows you to analyze the cost of each job, but it also enables you to compile data on jobs that are associated with each individual employee. You can see which techs spend the most time on installs or repairs and which ones have high callbacks.
This enables you to determine which employees need training support, rather than labeling everything as a performance problem. This is an important way to reframe the situation, as employee retention increases with access to ongoing training, but employees aren’t shy about leaving a company that regularly flags them for “poor performance.”
Justify investment in people
82% of ACCA members understand the importance of investing in more training, but that isn’t necessarily true of other contractors. Only 71% of non-ACCA members offset the cost of training techs. After all, training costs money, and it costs time too. Techs that are being trained aren’t in the field, which means lost income.
Job costing can help you convince your team to invest in more training. By comparing data before and after a training session, you can prove that it results in faster jobs and fewer callbacks. You can further extrapolate the data to show exactly how much money this saves compared to how much the training costs. By proving the ROI on training investments, you can encourage otherwise hesitant members of your team to invest in more training opportunities for your employees.
The pricing connection
Contractors use different pricing methods, and methods change between installation jobs and service jobs. For example, in the Contractor of the Future Study, 35% of contractors use a multiplier, while 31% use flat-rate pricing, with 15% and 19% using a divisor or net profit per hour or day, respectively. When it comes to service jobs, more than half report using flat-rate pricing.
Using different pricing methods gives you the sense that you’re pricing jobs accurately, but that’s not always the case. You have to know your true costs before you determine how you’re going to price different jobs.
You need to know:
- The actual labor cost, which means adding up wages, taxes, insurance, and benefits.
- The true overhead rate of operating your business.
- Target profit margins so you can keep wages consistent.
Once you have all this information in hand, you can find out the true cost of installations and service calls so you can price them accordingly.
Pro tip: Based on our research, the best pricing practices include using a divisor for installations and a flat rate for service jobs.
The seasonal pricing opportunity
Only 19% of HVACR contractors adjust pricing by season. That means a whopping 81% are missing a potential opportunity to increase revenue. After all, if you have fixed pricing and fixed costs, you will experience higher overhead during the off-season. You’ll pay more for employee downtime, and because competition increases during the off-season, profits shrink even further.
That doesn’t automatically mean you price jobs seasonally. You have to let job costing inform whether or not you can afford to offer discounts during the off-season, or whether it’s better to hold firm on your pricing and focus on efficiency when things are slow.
Here’s a practical how-to framework that can help you create more accurate pricing strategies based on the season:
Step 1: Track the same expenses on every job
The expenses that should be tracked on every single job include:
- Total labor hours, which includes the hours associated with individual employees so you can track the data by each job, each type of job, and each employee.
- Loaded labor cost that includes adding up the wages paid, taxes owed, and benefits paid for throughout the completion of each job.
- The actual cost of materials to complete the job—not estimated costs.
- Equipment costs that include the equipment from the distributor, add-on components, and delivery charges.
- Overhead allocation that includes everything it takes to remain operational, like paying benefits, facilities costs, insurance, marketing, and anything else you spend money on.
- Total revenue before any expenses are deducted.
Step 2: Calculate the profit per job
Next, you should calculate the profit you make per job. The simple formula for calculating the profit per job is:
Revenue – (Labor + Materials + Equipment + Overhead) = Profit
Once calculated, you can look for patterns that will help you make important decisions. You can determine:
- Which job types are the most profitable.
- Which techs are the most efficient.
- Types of jobs where costs are higher than expected.
- Which services have the best margins.
Step 4: Make decisions
Once you have accurate data and you’ve had a chance to see what the numbers reveal, you can begin to make decisions that are informed by facts instead of guessing. You might:
- Adjust pricing on low-margin work to make it more profitable.
- Offer bonuses to techs for high-margin work.
- Train or replace unprofitable employees.
- Market high-margin services.
Step 5: Consider technology
The 56% of contractors who use FSM software have a real advantage over the 44% who don’t. Using software means you don’t have to calculate job costing by hand. Programs also enable you to extrapolate and compare data points, helping you uncover insights that you would otherwise miss if you’re only using a spreadsheet.
If you aren’t using FSM software, or if you’re unhappy with the program you’re using, here are a couple of the most utilized by contractors:
Check out the full list of FSM software that contractors are using on page 34 of the Contractor of the Future Study.
A job costing example
Still not sold on job costing? There’s no doubt that following your gut and making your best guess at what’s profitable and what’s not is less time-consuming. It’s way easier to make a split-second decision without digging into the data or just continue doing things the way you’ve been doing them for years.
But chances are, you’re missing out on some serious money. Here’s an example to illustrate the importance of job costing.
Say a small contractor has 3 trucks and makes $1.2 million in annual revenue. They have a net profit average of just 5%, which equates to $60,000.
So far, so good, but if that contractor is unknowingly pricing just 20% of jobs below cost because the numbers aren’t clear, they’re pricing $240,000 worth of work unprofitably. At a margin of -5%, that means they’re losing $12,000 each year. That’s 20% of their total profit for the year.
On the flip side, a contractor who uncovers these numbers can do a few things. They could:
- Reprice unprofitable jobs to make them more profitable.
- Train techs with a goal of increasing efficiency by just 10%.
- Focus on marketing high-margin work so more customers request it.
Uncovering and acting on real data has the potential to double annual profits. That extra money could be funneled back into your business to fund more competitive wages, bonuses, training programs, and better benefits.
Connect back to retention
As you can see, job costing can result in a serious boost to your bottom line. What you do with that extra revenue can be used to increase retention. It can also help you build a more loyal workforce that is motivated to work hard.
Job costing allows you to:
- Offer a fair wage that is based solidly on what you can afford and what’s competitive for your market.
- Build bonuses that are based on data. This creates transparency, which in turn builds trust among your team members.
- Identify top performers with actual data and not favoritism. Then, you can provide them with career growth opportunities so they can move into higher roles in your business.
- Create a sense of job security for your workers, as profitable businesses are able to avoid layoffs during the slow season.
The training investment
Training is one of the top ways to spend profit, but although 74% of contractors invest in it, not all training topics get the same treatment. Although most contractors make sure workers have the training they need to get the job done, things like job costing, sales and marketing, and consumer financing are still needed. Other contractors report needing training on warranty and service plans, employee management and leadership, and creating and understanding financial statements.
If you do invest in training, you can find some more wiggle room to receive training on topics that you may have put off before by engaging in job costing. It allows you to discover immediate ROI that you can funnel into additional training on top of the training you’re already doing.
If you’re part of the 26% that doesn’t invest in training, job costing can help you find the money to finally pay for the training you and your team need. Paying between $500 and $1,500 for a workshop suddenly becomes doable when you uncover thousands of dollars in hidden losses.
The 5-day action plan
Ready to get started on job costing in your organization? Here’s a 5-day action plan that can help you get the ball rolling.
Job costing is the foundation of your business
Job costing is what sets contractors who are making 8% profit apart from the ones making 5%. Through job costing, they are able to:
- Offer higher compensation compared to others in the area as a way to retain talent.
- Offer performance bonuses that reward the right behaviors, encouraging even more profits.
- Correct pricing that is designed to sustain all business operations, even during the slow season.
- Make data-driven decisions that eliminate guesswork and increase feelings of trust among employees.
- Provide training and continuing education opportunities that target real needs, not just what you think you need.
The contractors of the future understand job costing is the foundation of their business, and you can too. It’s never too late to dig into the data and make the informed decisions that can increase profits and help you retain your best workers.
Additional resources:
- All facts and figures in this guide are from the Contractor of the Future Study.
- You can also dig into the data in the Contractor of the Future Study with this free webinar.
- Use ServiceTitan’s interactive online labor rate calculator that can help you uncover the ideal billable rate for your business.
- FieldEdge also has a pricing calculator that provides you with data that’s outlined on the same page.
- If you discover during a job costing analysis that raises aren’t viable, you can check out these tips on how to keep morale high during lean budget cycles.
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