There are numerous things to consider when pricing HVAC services. From setting competitive/ reasonable rates to making a profit, you have to strike a balance that will keep both you and your customers happy. So before you set the prices, take sufficient time to determine your costs, how you’re going to handle a range of pricing situations in the future, and how much you need to make it profitable.
By simply being proactive and advance, you will build a stronger pricing strategy, a strategy you can depend on for the years to come. Read through this guide we prepare for you to learn some valuable tips to correctly pricing out your HVAC services.
The Basics of Pricing
When running your HVAC business, you need to keep in mind the two types of costs that serve your basis – direct and overhead. The direct cost is anything that goes into executing or performing a particular HVAC job as intended. It includes everything from ductwork and general HVAC equipment to permits and labor. On the other hand, the overhead cost keeps the business up and running every day. Your overhead costs include salary, vehicle expenses, uniforms, and employee training and trash removal.
If you don’t have any insights into HVAC pricing, both terms are likely to mean nothing to you. As an HVAC contractor, it is your main role to understand how to baseline a project and how the costs flow in the grand scheme of things. The worst thing you may do when running the business is making some assumptions.
For instance, if you’re a small-name contractor, setting HVAC prices absurdly lower thinking you’ll gain profit from there sounds like a big joke. Take a step back and take enough time to calculate your costs. One more straightforward way to determine what to charge is by simply multiplying your overhead by a hundred. Next, divide the number you get by the value sales you make. If you want to try other ways, here are three pricing methods you can use:
1. Single Divisor Method
There’s one similarity among these three pricing methods – your set prices have to cover direct and overhead so that you can make a profit. Yet, there’s a possible risk of setting an HVAC price, especially when the price is equal to the two types of costs. It may lead you to break even where your profit may lose.
But the first method, “Single Divisor method,” leans on the idea that any HVAC services you’ll offer require a balanced amount of labor and tools. The divisor is 1.00 and with equal parts percent overhead as well as net yield before taxes.
Go follow up the whole thing by using the divisor to calculate your pricing. Also, your sales prices are calculated by dividing the particular job’s expenditures by the divisor.
2. Turning Divisors into Multipliers
You can also set HVAC services by changing divisors into multipliers. In the simplest terms, the selling price multiplier will be 1.00 and divided by the divisor, which is set to 1 as well. What makes this specific method unique is that you’re going to multiply the selling price multiplied by the job’s direct costs.
While the mathematics behind the calculation is somewhat different from the first method, you still get the same selling price. The main reason is that both estimates depend on similar assumptions – that tool and labor costs are equal with the same value of 1.00.
3. Dual Overhead method
The last method from the three basic HVAC pricing methods is none other than the dual overhead. It is unique from the first two. Dual overhead largely depends on the idea that costs of tools and labor stated in the first two methods aren’t similar or equivalent. In this method, labor is more costly in every instance, meaning it may not make sense to account equally whenever calculating costs.
It’s far more expensive for the HVAC contractor to cover worker compensation, health insurance, uniforms, and training than to recover the costs for materials and tools.
To calculate service prices using this method, find first the material overhead multiplier known as MOM. The equation will be:
(Labor cost divided by the material cost) x (overhead cost/ (material + labor)) +1.
Next, calculate the LOM (labor overhead multiplier) using the following equation:
((material cost divided by labor costs) x (overhead cost/ (material + labor))
Then, you have to calculate the break-even selling price using the equation to figure out the minimum price you should set to avoid losses:
(MOM x material and equipment) + (LOM x labor)
Your fourth and last step will help you figure out the actual selling price to ensure your ideal profit. You may do it using the following equation:
Break-even value x profit multiplier
Pricing any HVAC Services and Turning it into Profit
1. Calculate your costs
So the very first step in pricing the HVAC services is to calculate your costs. By determining how much you need to spend, you can figure out what you need to make. The costs can be actually divided into three categories – materials, labor and overhead.
It is the amount you pay your subs, employees, and even yourself for every specific job. It might eat up almost thirty percent of the revenue. Usually, the labor is an hourly rate or cost per job. If you’re not tracking how long it takes your laborers to complete jobs within allotted timeframes, you can reference your experience. Start thinking back to similar jobs, and figure out how many team members you need to get the job done.
Pro Tip: You must keep all of the vital information. With a contractor software tool like Pro Crew Schedule, everything is listed, organized, and time-tracked, including job notes, details about the crew, and even inventory.
Materials are made up of all the supplies you necessarily need to finish a specific job. For instance, there are replacement parts like drain pan or fuse and new thermostats. You need to use an inventory software system like Pro Crew Schedule to keep records of parts and any other job-related materials.
It is the mixed costs of everything you need to run your HVAC business. Overhead is usually not specific to any individual jobs. Yet, it includes licensing fees, vehicle leases, insurance, office spaces, cell phone bills and uniforms.
2. Research competitor rates
Make sure you do some competitor research to figure out what average HVAC prices look like in the city or town. Ensure reviewing both new and well-established HVAC businesses to get some ideas of how pricing varies based on experiences. Not all of the competitor pricing can be seen on their website. You may want to give them a call and begin asking about their rates. Doing so will give you some helpful ideas of what they charged.
Make sure to get familiar with the services they offer and compare how similar they are to your offers. Pay attention to the following listed below:
- Whether your competitors offer commercial or residential HVAC services or a mix of both
- How long they are in the business
- What size jobs they more focus on
- How big their company is
- Whether they hire contractors and employees
All of this affects how much the business charges for every service. Commercial-focused and well-established HVAC companies usually have higher rates since they need more equipment or employees. Alternatively, small and commercial HVAC startups offer lower rates since they have lesser overhead.
3. Never forget about taxes
You probably know that you must pay business taxes. However, never forget to consider them whenever you set the pricing. It is also crucial for you to have two main options when quoting your customers for your HVAC services.
- Charge taxes on each invoice separately
- Includes taxes when setting pricing
TODAY, most HVAC businesses prefer to list taxes separately on each invoice or quote because it is easier to calculate and manage. It only means that they set a special price for every service. If you plan to include taxes in your pricing, make sure they don’t cut the profit significantly when tax rates change.
Manage clients, leads, jobs, and tasks using subcontractor scheduling software like Pro Crew Schedule, so everything stays well-organized and tracked. You can empower your HVAC tech team to communicate effectively, change schedule dates if necessary, and track changes and hold each other accountable.
4. Determine your HVAC markup
How much you plan to charge/rate on top of all your costs is called markup. Markup can be measured in a dollar percentage or amount. You typically set up your markup for the services and materials separately. Apparently, markup for service business and profit margins are nearly related.
5. Make use of construction scheduling software
Pricing HVAC services and getting the desired profit can be challenging for HVAC contractors. In addition to pricing, tracking all of the job extras that can be added to the calculation is also a trivial task. On top of everything, you also wanted to know the job profit and loss.
Good thing that Pro Crew Schedule’s newest HVAC contractor software is here! Profit and loss reporting is just one click away! With this software tool, everything is simplified and organized. The following are its powerful features and advantages:
- Real-time team collaboration
- Crew and resource management
- File sharing and control
- Task visibility
- Scheduling in construction
- Easy-to-use and understand interface
- Cloud-based storage
Get your 30-day FREE trial by simply requesting a LIVE Demo!
Pricing any of your HVAC jobs/services can be a lot of work from the start. But when you take the time to set good strategic prices, it will benefit you and your clients in the end. Not taking this crucial step is what causes many HVAC businesses to flop early on. So by doing competitor research, understanding your costs, and calculating markup, you’re sure to set your HVAC business up for profitable and healthy growth in the future.