Are you a homeowner or building manager?
Find a Contractor »

The Tech Shortage Is Really A Pricing Problem!

Posted on:

Have you talked to other contractors lately, or perhaps attended a local or national trade association meeting or conference? If you have, and who hasn’t, the conversation soon comes around to techs. Most contractors are saying the same thing, “We have more than enough work, but we can’t find qualified techs.” Guess what? It’s not just a problem in the plumbing, HVAC, and electrical industry, it’s a problem within the entire trades industry!

Let’s switch our thought pattern a bit. Assume that you pay your techs a base wage of $25-30/hour. You pay all of their medical, dental, and vision insurance, plus a 401K plan, and a year-end bonus. Then throw in another week’s vacation, and let them earn education and tool credits based on billed hours. Do you think you would have any problem finding a qualified tech? If you are honest, you would say, “No, we would have no problem finding techs if we offered those kinds of benefits.” As a matter of fact, if the entire industry offered those kinds of benefits, something else wonderful would begin to happen. High school graduates would be looking at our industry as a very viable career path. At $25/hour, that equates to $52,000 a year with GREAT benefits. Who needs college?!

What kind of benefits does the average contractor offer his or her tech? Usually the hourly rate is $12.00-$18.00/hour, and the company pays a portion of the medical benefits. Vacations? Usually one week, and if they have been there a long time, perhaps two weeks with a few holidays thrown in. Do you notice a difference?

I can hear you now, “Great idea, Tom, but what contractor can afford to pay $25/hour with all those benefits?” Have you had a telephone, copier, or computer tech work on your equipment lately? If you have, did you look at the bill? The hourly rate was somewhere between $100 and $150/hour, and you paid it! When AT&T, IBM, and Microsoft set rates for their techs, they don’t just pick the rate out of the air. They charge those rates because they have run the numbers, and found out that they have to charge that much to cover their costs and generate a profit. Guess what? So do you!

At one of my recent full day labor pricing seminars, I did an exercise with the contractors, just for fun. I asked each contractor to list all of the benefits they would like to offer their techs, just so we could see how much it would increase their hourly rate. The results were amazing. To keep things simple, let’s do this exercise, but keep it limited to the service techs. The principles would be the same for all departments.

So let’s get started. First, begin by increasing the hourly rate we pay the tech by $8.00 an hour. That should get most of you into the $20.00 to $25.00 per hour range. To help us put some numbers together, let’s further assume that our hourly rate is now $25.00 per hour including the company matching taxes. Now, let’s give the techs an additional week’s vacation at a cost of $1,000 a year ($25/hour x 40 hours). How about holidays? Let’s give them four (4) more holidays at a cost of $800/year (4 days x 8 hours/day x $25/hour). Now for the fun part, insurances. Let’s pay all the medical insurance for a family of four at a cost of $400 per month, or $4,800 per year. Dental and vision insurance will run another $200 per month, or $2,400 for the year. How about a 401K plan for retirement? Let’s assume the company contributes $1,500 a year to the plan. Then it’s Christmas time! How about a year-end cash bonus of $750? Is this fun or what? I can just see the techs coming from across town, from another city, or perhaps even from across the country! They are lining up at your door, waiting for the company to have an opening so they can be hired. No shortage of techs here!

What else do techs like? Well, everyone loves tools, right? How about building in $1.00 per billable hour for an “earned” tool allowance? Let’s also build in $0.50 an hour for education. Those two will add in $1.50 per billable hour to our rate.

So much for the benefits, now the question is, ‘How are the extra costs going to affect the hourly rate we charge the customer?’ The first question is how many hours we have available to charge the customer. The normal non-billable time for service techs is 40%-55%. To keep it simple, let’s assume we have 50% non-billable time. That means of the 2,080 hours the company pays for during the year, it can actually bill out 1,040 hours, or half the time. Now let’s total the additional costs for the above benefits.

Raise in base hourly rate ($8/hr x 2,080 hr/year) ————– $ 16,640
Additional week of vacation —————————————– 1,000
Four more holidays —————————————————– 800
Medical insurance —————————————————— 4,800
Dental and vision ——————————————————- 2,400
401K plan —————————————————————– 1,500
Year-end bonus ——————————————————— 750
Total ———————— $ 27,890

If we take the additional $27,890 and divide it by the 1,040 hours we can bill the customer, it means the company will have to increase its hourly rate to the customer by $26.82/hour. We are not quite through, since we need to add the $1.50 per billable hour for tool allowance and education which now makes our rate $28.32. The range for the average service tech on a time and material basis is $60-$80/hour. If we assume the current rate is $70.00/hour, and then add our $28.32/hour for the extra benefits, the company will need to charge $98.32/hour. You’re thinking, “But Tom, my customers will not pay $98.32 per hour for service work!” You may be right. So what is your alternative? Switch to flat rate pricing. The average internal hourly rate on flat rate pricing is $125-$175/hour. If we switch to flat rate pricing, is our $98.32/hour rate a problem? NO!

Let’s face it, if we are going to solve the tech shortage in our industry, we have to offer the pay and benefits that will attract the best talent in the industry. Our country is based on the law of supply and demand. If the computer, telephone, and copier industry are going to offer the best pay and benefits, guess who is going to get the best techs that are available? If the young people of the future are going to consider a long-term career in our industry, the pay and benefits are going to have to be there to attract them. The bottom line is do the math for your company, and then see what changes you are going to have to make. The question then comes up, “But Tom, even if we all do this, there will still be a tech shortage.” You’re right, but we all know by experience that everyone will not run the numbers, and few will increase their rates to where they need to be. Those of us that make the changes will attract the top techs, and will go on to be successful and profitable companies.

Tom Grandy

Posted In: ACCA Now, Management, Money

Looking for an ACCA QA Accredited Contractor?

Are you a homeowner or building manager?


join now

PLUS It's Risk Free!