" Their average annual sales were $2.4 million. " Six of the 10 averaged 10 percent or more with the remaining four between 9.2 and 5.2. Gross profit ranged from 26.9 to 52.8 percent with the average at 36.1. " Operating profit is profit after all overhead, including an executive salary of $100,000, but before other income and before taxes. " Two of the contractors had double-digit profits in each of the six years; six others had at least one weak year and two never made less than five percent operating profit.

Does size matter?

Contractors with annual sales of between $1 and $2.2 million consistently made good money. Seven fell into that category, averaging 12.2 percent operating profit with overhead of 31 percent (gross profit 47.8 percent). The three larger contractors, who averaged $4.1 million in annual sales, averaged 7.2 percent operating profit with overhead at 21.8 percent (gross profit 29 percent). The contractors in the program with annual sales under $1 million couldnt keep it together on a regular basis.

Materials to labour ratio

The difference between the two groups (the seven under $2M and the three with an average of $4.1M) in material used in relation to labour was not significant. The average was $2.11 in materials for every $1 spent on labour. Materials are our most expensive element of cost, but labour is the most difficult to manage.

Overhead

The 10 companies had overhead ranging from 19.2 to 39.7 percent. The average was 26.3 percent. Overhead in the overall benchmark program was 24.7 percent of sales. Fifty percent of overhead is salary related. This makes it very difficult to reduce overhead in dollars. The only real way to reduce overhead as a percent of sales is to increase sales; BUT you must do this without reducing your gross margin.

Behind the numbers

I then interviewed an owner or senior manager in each of the firms. The common themes among the successful companies were: 1. They tended to be focused on one area of work (in these cases primarily residential service). 2. The owners had trade backgrounds 3. They personally watched the details very carefully. 4. They were using flat rate pricing for residential service. 5. They have very low staff turnover. 6. They liked and respected their customers. 7. They developed and marketed planned maintenance programs. Their biggest complaint was that they couldnt find good management people to take some of the day-to-day management away from them. Any time they did this they ended up losing control or losing the manager. Now that they had a number of good years under their belts, several were ready to try again. They also knew that in order to maintain their profitability they would have to increase their sales (on average) by 15 percent at their current gross margin in order to pay for the additional management. For example: a company doing annual sales of $1.8 million at a gross profit of 40 percent would generate an additional $108,000 in gross profit by increasing sales by 15 percent and this would just about pay for the new manager. The problem is in finding and keeping the right person and then putting the processes in place to make this work.

The right stuff

I dont spend much time analyzing what contractors do that is wrong; I prefer to focus on what they are doing right. Lets recap the points above:

They tended to be focused on one area of work: What area of expertise does your company have? What do you do best? Whats your passion? What type of work do your mechanics like to do? Owners had trade backgrounds: They understand the technical side of the business and know how to interact with technicians. However, they are often weak on sales and business. These particular managers focused on pricing and doing their work efficiently. Watched the details very carefully: Because the owners had trade backgrounds they were able to review bids and job cost reports and know exactly what was right and wrong. They picked up errors quickly so that they didnt under price their jobs and made sure the errors didnt get repeated. Flat rate pricing for residential service: Many customers like flat rate because it takes away the uncertainly of what a repair will cost. These contractors are recovering at an average rate in excess of $135 per hour, which allows them to look after their customers very well. Also, many of the technicians get paid using flat rate and make more money than they would otherwise. Low staff turnover: The technicians on flat rate pricing made very good money. The employer had built good solid relationships with his people and knew how to keep them happy. They also looked after their office people. New technicians tended to be less loyal, particularly in years three to five of their apprenticeships. They did have trouble in some areas, particularly in dealing with sales staff. Their own backgrounds often did not have much exposure to sales and they had trouble managing sales processes. Getting sales people usually meant investing heavily in getting these people up to speed technically; then there was a high risk of them being poached. Liked and respected customers: Many contractors believe that looking after customers means keeping prices low. These successful contractors, however, understood the value that they bring. They know that their customers are looking for reliable, on- time service and that this required well-trained mechanics. If you really understand the value that you bring to your customers you will be able to get them to pay the higher price, just as if you want a really nice meal you know it will cost extra. But if you and your team think you are gouging customers, how are you going to be able to look them in the eye and tell them your price? You must educate yourself, your people and your customers. Planned maintenance programs: Every customer was encouraged to sign up for a preventive maintenance program. This created consistency in workload and gave the company the opportunity to schedule work during shoulder seasons. Its no great magic; no great mystery  just ordinary guys doing the right things right consistently. The next step for most of them is to start replacing themselves. If you want to grow your business or extricate yourself from the daily grind you must put these fundamentals in place first.