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Will Adding a Service Tech Make You More or Less Money?
When you first got into business you probably thought there was a direct relationship between growth and profit. The thinking was “If I do more work I will make more money. Therefore, if I do a lot more work I will make a lot more money.” Well if you have been around for a number of years you have learned that the above principle doesn’t always hold true. With that in mind have you ever wondered what would happen to the overall profitability of your service department if you added an additional service technician? Keep in mind there are a lot more additional costs than just hiring the tech. The company must also pay matching taxes for Social Security, Medicare, Federal Unemployment Tax and State Unemployment. Lots of overhead costs will also go up from the cost of training and cell phones to gasoline and workman’s compensation insurance. And guess what, the tech is going to need a vehicle to get the job. All sorts of costs increase when you hire that additional tech. So the basic question is whether adding an additional service tech will increase or decrease your service departments overall profit.
During our three-day “Basic Business Boot Camp” we use our Labor Pricing software program to go through an exercise with the class. I am going to take you through the same exercise so you can learn what the class learns. The beginning basic assumption is that the company currently has enough work to hire a third service technician (two service techs are currently employed). The company is now charging the customer $91.29 per hour which is generating a 15% pre-tax net profit or about $45,000 pre-taxed profit per year. I then ask the class several questions concerning the cost of adding the third tech.
Questions Concerning the Service Tech:
Q: How much do you want to pay the new service tech, per hour?
A: $18.50/hour
Q: Are you going to provide holidays, vacation and paid sick days the first year?
A: We will provide one week of vacation, holidays and no sick days
Q: How many non-billable hours will the tech have per week?
A: Most service techs average 50% non-billable time. That means the average tech will have about 15 hours a week (shop time, travel time, callbacks, etc.) they cannot charge the customer. When you add in the normal holidays, vacation and sick hours the total will be about 50% non-billable for the year.
Questions Concerning the Techs Vehicle;
It’s great to have a new tech but without a vehicle he or she cannot get from Point A to Point B. We are going to have to purchase a vehicle.
Q: How much do you think it will cost to purchase a new van including shelving, inventory, tools and painting/decals?
A: About $45,000
Q: How long do you expect the van to last before it needs to be replaced?
A: 6 years
Questions Concerning Parts Sales:
Q: What is the cost of parts a service tech sells per year?
A: The other techs sell about $20,000 of parts a year at 100% markup. Our new tech is projected to do the same.
Questions Concerning Fixed Overhead Costs?
Q: What “fixed” costs of overhead will increase because we added a third service tech?
A: The following costs will increase for the new tech:
• Vehicle Insurance - $900/year
• Medical Insurance – Company pays 50% of cost or about $5,000 for the year
• W/C Insurance - $1,800/year
• Office Supplies - $300/year
• Loan on the new vehicle - $600/month or $7,200 for the year
• Communication (cell phones, pages, general telephone bill) - $100 per month or $1,200 per year
• Uniforms - $300/year
• Training - $500
Questions Concerning Variable Overhead Costs?
Q: What “variable” costs of overhead will increase?
A: The following costs will increase for the new tech:
• Gasoline - $6,000 for the year
• Vehicle Maintenance - $ 1,000 for the year
• Credit Card expense – Assume the tech produces $150,000 in gross sales and half that is paid via credit card with a cost of 2%. The annual cost would be $1,500.
We now know the additional costs that will be incurred when we hire a new service tech. To summarize a bit, the total company overhead will increase, in round numbers, by the following amount.
Fixed Overhead ------------------------------- $ 17,200
Variable Overhead --------------------------- 8,500
Vehicle Replacement ($45,000/6yr) ----- 7,500
Cost of non-billable time (Tech is paid
about $38,000 per year of which
50% in non-billable) ----------------------- 19,000
Company matching taxes on tech ------- 3,000
Total “added” overhead = $ 55,200
Now before the third tech was hired the service department, with its two techs, looked like this:
Produced 2,365 billable hours
Price to the customer was $91.29/hour
Gross Sales = $296,000
Net profit before taxes = $ 44,472 (15%)
Now the third tech is hired which has increased the overall company overhead by about $55,000 for the year. The question is this:
When the company adds the third tech, with the
additional $55,000 in overhead costs, will the company
generate a total profit above or below the
previously earned $44,772.
When this question is asked of the students in the class their input is usually mixed. Usually about 60% of the class thinks the overall profit the first year will drop by $10,000 to $15,000. That means they expect the overall service departments net pretax profit to drop to about $30,000 to $35,000 for the year. A few think it will not change, that is they expect total net profit to remain about $44,000 for the year. The remaining 40% of the class usually expect the company’s total income to increase to around $60,000. What do YOU think will happen?
In class we enter the information into our software program to see what the “real impact” on profits will be. Below are the results:
Produced 3,490 billable hours
Price to the customer was $91.29/hour
Gross Sales = $439,120
Net profit before taxes = $91,251 (20.28%)
Wow - net pre-taxed profit didn’t decrease, in fact it doubled! Surprised, most are. What is not obvious is that three things are taking place, all at the same time.
Number 1: The new tech sold $20,000 worth of parts at a
100% markup. That means parts sales alone
absorbed $20,000 worth of overhead.
Number 2: The first two techs generated 2,365 billed hours.
Adding the third tech increased the billed hour to
3,490. That means the existing overhead is now
spread over nearly 50% more hours. That lowers
the overhead cost on all currently billed hours,
making current work more profitable.
Number 3: The additional tech is billing out an additional 1,125
hours at $91.29/hour therefore creating an
additional $102,701 in gross income!
The combination of all three things above results in doubling the companies overall net profit. The basic principle is this. Adding an additional service tech (if you have the work) will always, always make the company more money, until. Until the increase in gross sales requires the company to add additional office staff to support the field. So what is your company’s current maximum profitability? Your maximum profitability will be achieved by adding as many additional technicians as you can, without having to add additional office staff to support them. THAT is your point of maximum profitability. Sure you can grow past that point but when you add the additional office staff overall profits will fall for awhile until gross sales significantly increase.
If you a need a little help calculating your hourly rate you may want to purchase Grandy & Associates “Labor Pricing” software program. Simply enter your costs of doing business and it will instantly tell you exactly what you to need to charge per hour, by department. Another option is to attend our three-day “Basic Business Boot Camp”. You will be given a copy of the software and will model your company during class. Give us a call or check out our website at www.GrandyAssociates.com.
Tom Grandy, president
Grandy & Associates
One Executive Blvd.
Suite LL-4
Owensboro, KY 42301
Phone: 800-432-7963
FAX: 270-684-7425
E-mail: TomGrandy@GrandyAssociates.com
Website: www.GrandyAssociates.com
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