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Ask Mr. Sparky

Aug 1, 2005 12:00 PM

Money Matters and Commercial Concerns

Need some help improving your electrical service business? Just ask Mister Sparky (AKA Patrick Kennedy). As the owner of Mister Sparky, Inc. in Atlanta and the president of Electricians' Success International in St. Louis, he knows a thing or two about the industry.

How would you advise developing an hourly rate for my technicians and a price for my services?

What you have here are two questions, and how you address each of them will have a drastic effect on your business. On the subject of hourly rates you want to offer your technicians, the decision is basically up to you. There are some things to bear in mind here, though. You have to consider what the going rate for a technician is in your market, and that requires some old fashioned detective work. Once you know what some of the other companies in town are paying, you'll have to decide what caliber of technician you want. If you want what they have, you can offer about the same rate as they do. However, if you want the best, you have to pay the best.

Once you've determined an hourly wage, you have to decide what price you're going to offer your clients. If you use time-and-material pricing, you have to determine what your labor cost is going to be, but if you're on a flat-rate system, you have to determine how those wages fit into your price.

Now, one important factor to consider when determining your pricing is technician efficiency. If you sit down and figure out what hourly rate you need to charge the client, make sure you're covering all of your costs of doing business, but be aware of what you'll need to pay your team for inefficiency. Even the best technicians aren't 100% efficient, but you have to pay them 100% of the time. Think about it — your technicians will need training, they may have to run to the supply house on occasion, there's drive time to the job, vacation time, etc. That's time that your techs aren't in front of customers generating revenue, so be sure to factor that into your hourly rate as well. And don't make the mistake of believing your techs are more efficient than they are. As a rule of thumb in the service world, start with 50% efficiency. Few companies are much more efficient than that. So first off, figure all of your costs of doing business, including a proper salary for you. Then divide that by 2,080 (40 hours × 52 weeks) and then divide that number by the number of techs you have. Now multiply that by 2 to get your hourly rate.

I'm a residential service contractor, but I'm thinking about expanding my service offering to commercial clients, too. Is that something you would recommend?

Actually, that's something that I would recommend against. Don't turn your back on the residential market. It's really where the opportunities for service and profits are in this day and age. Here's why you should stay away from commercial work:

• You won't get your prices

  With residential service you can charge the homeowner the rate that your services are worth — your retail rate. That's not so when you try for large-scale commercial accounts. Oftentimes, they'll ask you for your lowest hourly rate and demand that, or in some instances they'll dictate to you what price they're going to pay you for your services.

• Say goodbye to your parts margins

  If you're a time-and-material service contractor, often your commercial accounts will also dictate your parts markup. I've had commercial accounts that demanded to see my original receipts and then told me what markup they would pay.

Basically, if you want that business, you have to play by their rules and your independence as a business owner will be gone. On the other hand, in the residential market you can charge what you need to run a profitable business, pay your techs what they're worth, and provide your clients with unbeatable service and guarantees.

So even though going after large-scale maintenance agreements with commercial accounts may seem attractive, the best choice for you, your business, and your clients is to stick to the market where you can play by your own rules.

Send your business-related questions to askmistersparky@primediabusiness.com

Illustrations by Clint Metcalf

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