Most contractors I talk to that do service and repair have no idea how to properly price for their work. What they usually do is mystery call other contractors in their area, find out what they charge by the hour (the going rate) and set their prices accordingly. If you are like some who think charging $5 or $10 an hour less will bring you more business, then it becomes the going broke (faster) rate.

If you are basing your pricing on someone else’s hourly rate, ask yourself this: How did he come up with this number? Is it based on his actual costs of doing business or did he just pull a number out of his hat?

Even if he is smart enough to sit down and actually figure out what he needs to charge to run his business and make a profit, is that number right for you?

Think about this. Let’s say the guy who sets the going rate in your area works out of his house, is a one-man operation and works under the radar with no license or insurance. Then there is you. You rent office space outside your home, pay someone full time to answer the phone, are properly licensed and insured but you still only charge his going rate. My question to you is: Who’s making more money?

Labor should be five times hourly rate
The rule-of-thumb is that your labor rate should be five times the hourly wage of your highest paid tech. For instance, your highest paid field employee makes $25 an hour. Multiply that by five and your labor rate will be $125 an hour. That labor rate stays the same for all your revenue-producing employees even if they are paid a lower hourly wage.

To break that down, once you subtract that employee’s hourly wage, what’s left ($100) goes to pay for everything else. And I mean everything: trucks, insurance, rent, lights, water, office wages, office supplies, taxes, owner’s compensation, benefits … everything.

Charge for the helper
The one thing it does not pay for, and a lot of people miss this, is a helper’s wages. They confuse by the hour as the same thing as per man-hour. For instance, you are charging the going rate of $80 an hour and you send two people, a tech and a helper, out on a call. Math never was my strong suit, but isn’t that only $40 an hour per man? We have never come up with a definitive multiplier for a helper’s wages, but at minimum you should charge double his wages to cover the cost of his hourly pay and the associated overhead.

Do the materials markup math
The other area that most service contractors don’t charge enough is in the markup for their materials. If they are brave enough to charge a 25 percent markup (which is a low number in my opinion) they usually do it wrong. The correct way is not to multiply your cost by 0.25 and add that back, but to divide it by 0.75. I know his sounds backward, but I have had more than one numbers guru tell me this is the proper way to figure markup.

For example, if you are going to mark up a $100 item 25 percent, you naturally think, well 25 percent of 100 is 25 so it gives you a selling price of $125. Now do it the right way and you come up with a selling price of $133.33. That is a difference of $8.33 and as the saying goes, every $8.33 counts!

If you want to make money and be successful you must mark up your materials correctly and base your labor rate on your own costs of being in business and not someone else’s. Otherwise you are no longer in control of running your business – the other guy is.

About the author 
Steve Huff is president of Steve Huff Plumbing in Kingsport, Tennessee. Founded in 1975, Huff was a good plumber but a poor businessman. In 1999 he faced bankruptcy. Seeking outside help, he learned how to run a business, not own one. Today, Steve Huff Plumbing is the largest service and repair business in the area.