Show Me the Money
An Insider’s Look at Labor Rates and Parts Markup
Righteous indignation flows when homeowners discover what their contractor pays for parts. Their displeasure is understandable: $295 for an hour of work and a part that costs the contractor $35? That certainly seems outrageous.
To temper the outrage, most contractors have implemented flat rate pricing. Ask them to itemize and they won’t. Ask them what their hourly rate is and they’ll claim to not have one. That’s not true of course, but half-answers are the only answers most contractors have for tough questions.
As for me, I never learned professional prevarication. Ask me a tough question and you’ll get a straight answer. That gives my competitors fits of apoplexy. That gives my customers fits of joy. What will it give you? Read on to learn what contractors are actually charging and together we’ll find out.
Look at the labor rate posted on your favorite auto shop’s wall. Do you believe what it says? You shouldn’t. The sign may say they charge $100 per hour, but when they tally your bill there’s a book or software that tells them how many hours to bill you for. If they happen to perform the repair quicker than what the book says, you still get charged “book time“. Book time happens all the time. Auto mechanics routinely bill their customers for twelve to sixteen hours of work in an eight hour day. Since you’re not there to observe actual repair times, you’re in no position to quibble about the fact that $1,600 charged for eight hours of work means you’re actually paying $200 per hour.
The situation is different for HVAC contractors. First, since they’re in your home, they can’t bill you for imaginary hours. Second, since he’s mobile, an HVAC repairman may spend less than six hours per day repairing equipment. Third, HVAC repairmen earn higher wages than auto mechanics and there’s a fleet of vans to pay for. So, to make the same profit per hour as an auto shop, an HVAC contractor may have to charge $300 per hour. And they do! They just don’t want you to know about it. So they hide that reality by charging you a fixed amount that’s not itemized – in other words, a flat rate. The true purpose of flat rate pricing isn’t to save you money as some suggest. It’s to hide their hourly rate.
If you find this hard to believe, you’re not alone. Nevertheless, from what I’ve seen most HVAC contractors, plumbers, etc. charge two to three hundred dollars per hour whenever they can get away with it. I know because I’ve become the local go-to contractor for second opinions. As a result, I’ve seen many dozens of invoices from other companies. For example, $800 seems to be the going mega-contractor price to replace a run-of-the-mill circuit board or blower motor. A well-stocked repairman will usually have those parts on the van. Those parts typically cost around $100 wholesale and can take as little as sixty minutes to replace. Do the math. In some cases HVAC contractors are charging $400 per hour.
Contractors mark parts up. This is common knowledge. Even so, it’s decidedly uncommon for them to tell you what their markup is. In fact, the repairman might not even know what his company is charging for the part. Just like auto shops, flat rate HVAC shops have a price book that tells the repairman how much to charge. While the company owner tells the price book publisher what he wants his hourly rate and parts markup to be, he may not tell his repairmen. While it’s easy to reverse engineer the numbers and figure it out, a lot of repairmen choose not to. Or at the very least, they pretend they haven’t. When a homeowner asks for a breakdown of the bill, being able to say “I don’t know.” is the easiest way out of answering the question.
So how are they marking up the parts? Old timers say the rule of thumb used to be “double your money”. If the part cost them a buck, they’d charge you two. Sam Walton changed that rule forever. A lot of what Walmart sells costs them seventy, eighty, even ninety percent of what they sell it to you for. But when it comes to HVAC contractors, “double your money” is only the beginning. Old markup sheets I’ve seen have sliding scales that start at five. In other words, if the part costs the contractor $3 then the customer pays $15. If the part costs $30, the customer pays $90. If the part costs $100, the customer pays $200… and so on. Some markup sheets in use today are even worse.
When it comes to the price for new equipment installations, the double your money rule is a long time standard. If on-site costs for a new furnace or air conditioner total $1,500, the customer might be quoted $3,000. On-site costs include the cost of new equipment, parts, labor. etc. The other $1,500 pays for overhead. There’s a lot of it. Office staff, workman’s comp, advertising, taxes and the rest represent a huge financial burden.
On smaller jobs the double your money rule may hold up. On bigger jobs it tends to break down. When business is booming almost no one discounts their price. But if business is slow and a contractor just wants to keep his employees working, he can take a job that costs $5,000 on-site and charge $7,500 rather than $10,000. That’s less money to pay for overhead, but sometimes that’s better than having nothing for his employees to do.
What really starts to break down is workmanship. A quality installation may take twice as long as a low bid installation. Just as importantly, a quality installer is paid twice as much as the glorified day laborers employed by low bidders. Twice the man-hours at twice the hourly wage means a quality installation may have four times the labor cost. When a contractor bids too low, the easiest way to compensate is to hire cheap labor and tell them to hurry up.
High prices aren’t the real problem.
If you’re appalled by the prices, I get it. Nevertheless, a high price is neither right nor wrong. Some contractors need to charge those seemingly outlandish fees just to make ends meet. Few contractors accomplish more than that. A trade magazine found that roughly half the HVAC shop owners surveyed made more working for someone else than they do working for themselves. As for superstar HVAC contractors that are featured in trade magazines, the very same ones who charge $300 per hour or more, many of them make around ten percent profit. There’s nothing unethical about making ten percent profit.
I’m not supporting gouging, but I am being realistic. Business owners should do more to educate consumers about that reality. And, if you’ll forgive my bluntness, consumers should pull their heads out of the sand. Thanks in no small part to the government, the cost of doing business is incredibly high. That contractors charge high prices to cover high costs isn’t the real problem. The real problem is how most contractors arrive at those prices and what they do after they’ve arrived at your home. It seems like almost everything the “superstars” do is designed to manipulate you.
The low trip fee? It’s bait and switch. Waiving the trip fee? There’s no such thing. Highly trained technicians? Not the way you think. No extra charge for after-hours service? Technically speaking, yes. In reality, no. That’s just the service call experience. Then BAM! They kick it up a notch. Getting you signed up on a sometimes worthless maintenance agreement is a top priority. Pushing new equipment whether you need it or not is too. Installing it right? Not a priority. And of course the crown jewel of this dirty laundry list is duct cleaning, which is almost always useless and sometimes damaging.
If I’ve somehow managed to give you the idea that the HVAC industry is a remorseless blob that’s going to devour us all, that may not be too far from the truth. But seriously, large and medium-sized contractors are amazingly monolithic in how they think and act. That’s because most of them have implemented highly structured systems developed by high-priced consultants. Consultant groupthink has resulted in contractor groupthink. The blob is coming.
But what about the little HVAC contractors? I speak of one-man to several-men operations. They can’t afford the groupthink gurus, but they still want a piece of the action. So some of them copy the big contractors as closely as possible. Others are looser in their implementation. I call the loose ones “wildcards”. They make it up as they go. Here’s how a phone call to a wildcard might go…
- You ask the wildcard about his trip charge. He quotes something nice and cheap. Not to worry. He’ll still charge you $800 out-the-door for the aforementioned circuit board that costs him $100.
- Realizing the out-the-door price is more important than the trip charge, you ask the wildcard for that. He says it’s impossible to quote a repair before he comes out and makes the diagnosis. I beg to differ.
- So you dig a little deeper and ask for the wildcard’s hourly rate. He quotes a very reasonable rate of $100 per hour. Not to worry. He’ll mark that circuit board up by 600% and still get $800.
- You then ask for his parts markup. He says it’s 50%. Now you’ve got him! He’s quoted a firm time and materials formula, so he can’t charge more than $400 for that circuit board – right? Right. So he condemns your furnace and quotes for a new one instead.
As you could have guessed, getting a wildcard to tell you his labor rate and parts markup is nearly impossible. It changes so often that he doesn’t even know himself. And he’d certainly never publish his rates online like this. That would put him in the position of having to treat everyone the same all the time, thereby depriving himself of spur-of-the-moment opportunities to jack the price up. Do you live in a nice area? Now you’re getting it.
The wildcard does what he wants, when he wants. And believe it or not, sometimes he wants to treat you right. Call him when business is booming and he may not feel the need to charge insane prices or sell unnecessary equipment. Or it may be that you remind him of his Uncle Buck whom he likes so much. But call him when business is slow, or remind him of his Uncle Sam, and you may suddenly “need” a whole new system. He’s not called the wildcard for nothing.
The Ace up Your Sleeve
Having read this extremely educational and mildly depressing essay, you skip all that rigmarole and call someone highly rated on Yowl. After all, a highly rated contractor with tons of reviews must have fair prices, right? Not necessarily. The overwhelming majority of the bad-actor contractors featured in that blog are highly rated. Review sites aren’t worthless, but they’re also not an ace up your sleeve for reasons you might not have thought of.
You are your ace up the sleeve. If you understand that a contractor’s skill and character are more important than a good price or quick response time, then you’re smarter than most. If you actually read their reviews and ask them informed questions before they show up, then you’re also more diligent than most. And if you don’t hesitate to watch and ask questions after they show up, well now you’re playing with a full deck.
Which contractors answer questions openly before showing up, are perfectly happy with you watching after showing up, and make their labor rate and parts markup available online? I can think of one. And that one may indeed charge you $295 for sixty minutes of work and a part that costs him $35. If I’ve written well then indignation has become appreciation for the education. Education is our common trump card. Let me show you the education.