Business Diagnostics

When a mechanical system fails and the contractor is asked to rectify the issue he will likely have the best outcome for both him and the customer when he follows the following steps:

1. Diagnose the problem
2. Recommend a solution
3. Get the customer’s approval
4. Quickly restore the system to working order

The customer gets the work done on time, on budget, and to the expected standard—and retains his confidence in his contractor.

The contractor completes a job as above, makes money, and enhances his relationship with the client.

I don’t know anything about diagnosing problems in mechanical systems. I do know that technicians are trained in the process and have specialty tools to assist them and, of course, there are detailed drawings and diagrams of the equipment available. I am not saying that it is simple or that mistakes don’t occur. I am saying that there is a process, and that process has a lot of support.

However, when I talk to business owners about the areas of their businesses that fail, we move into a whole new world.

There seem to be no drawings or diagrams, no specialty tools, and no one trained in how to diagnose the problem, never mind fix it.

In order to succeed in business we need to start by improving our business diagnostic ability. Where is the pain and what, specifically, is causing it?

I was recently asked by an HVAC contractor to help him improve profitability. He is fairly typical of this type of contractor. He does new construction, retrofits, and service and maintenance work. As he didn’t have a specific issue in mind other than “we need to improve profitability.” I wasn’t sure where to start. This the equivalent of the customer who phones and says “no heat.”

Often a technician who is experienced in dealing with diagnostic issues will know what the most likely cause of the failure is, and will start checking out that part of the equipment first. Most of the time he is right and can quickly recommend a solution.

In the case of my contractor I made a judgement call. I didn’t want to spend hours analyzing his financial information because, unlike the diagram for the mechanical equipment, the financials would not be a complete map of the business.

Rarely do contractors have a complete set of diagrams to show how their business works. They have bits of the system in a variety of places. The accounting system is comprehensive but rarely accurate or detailed enough to assist in a correct diagnosis. The accounting systems are usually designed for compliance. That means when the Canada Revenue Agency wants information from the company it can be provided. Likewise, if your bank or bonding company want information it will be available from your accounting records. But the management information is usually lacking.

It’s like giving a customer a brochure about a specific piece of equipment. It highlights certain points but lacks detail.

Like the experienced diagnostic technician, I decided to focus on one key area.

From my many years of working with HVAC contractors, I had a fairly good idea of where I would find the problem and the solution.

I told the client that I believed I could help him get an additional $10 per hour for every hour he bills out on an hourly rate. I asked him to calculate how many hours he bills out in a month and multiply that by $10. I said that will be our solution. It will have a huge impact on his profitability. And, if I can only get him an additional $7 per hour, well, it will still be “wow.”
Getting the right outcome is what is important.

The owner of the mechanical system has no interest in your diagnostic process. He wants an outcome—how much it will cost and when will it be operational.

In business, profit is not an activity it is an outcome—a result of a variety of activities.

This is the initial approach I took. I needed the following information in order to diagnose where there are potentials for improvement:

  • What hourly rates do you use? (Please explain if there is more than one rate)
  • Include minimum rate, travel time allowance, truck charge, and discounts for special customers or situations
  • Include sample invoices for the different types of work
  • Do you track hours paid to hours billed?
  • Do you know how many un-billed hours you pay for with each payroll?
  • How do you track hours for payroll and for billing?
  • How do you monitor and record warranty work?
  • Do you do any menu pricing or flat rate pricing for service or planned maintenance work?

There are reasons getting this diagnostic information is critical. You can only manage what you measure and if you don’t know how you are doing now, how will you know if it gets better?

Making small improvements to all the variables will have a huge impact on profits.

My diagnostic process included:

  • How much the company can likely increase its charge out rate
  • Where and when it can charge more per hour
  • How to minimize non-billable hours
  • What other elements can be added to an invoice to make more profit
  • How increasing the amount of menu pricing or flat rate pricing can improve the hourly recovery rate.
  • I recall Gerald Inch telling me when he reviewed service invoices, they were often understated by 25 per cent

Using technology-based tracking systems linked to payroll can easily increase billable time by 15 minutes per day, per technician.

Consider this: an employee starts five minutes late, finishes five minute early, and takes an extra five minutes for lunch and coffee breaks. That’s a total of 15 billable minutes lost per day per person. $25 revenue per day. Spread over 7.5 hours per day, this equates to an additional recovery of $3.34 per hour.

Do you charge for consumables and supplies? If you charged only $10 on a two-hour service call (or increased your current charge by this) you would recover an additional $5 per hour.

If you could improve your scheduling by reducing travel time by 15 minutes per day that would be another $3.34 per hour.

If you ensure you charge all the items you should on an invoice, you could easily pick up $10 per hour. This would include vacuum pumps and other specialty tools and equipment that are not standard on all jobs.
Let’s sum up:

  • Managing payroll hours: $3.34
  • Recovery for consumables: $5
  • Reduced travel time: $3.34
  • Correctly invoicing: $10

That’s a total of an additional $21.68 per hour and you haven’t even increased your charge out rate. Most contractors could increase their charge out rate by $10 per hour and lose very little business. They would, in fact, make more money doing less work.

I started off telling my client he could get an additional $10 per hour and now I am telling him it is closer to an additional $30 per hour.

In this article I have not addressed other opportunities such as menu pricing, flat rate pricing, higher pricing for specialty work, higher diagnostic rates, building in warranty labour provision, and several other elements that would allow you to make more money without upsetting your clients.

So, multiply the service hours you bill in a month by $31.68 and see how quickly you will make some serious money and become one of the top 10 per cent of contractors in Canada.