Toolboxplaybook-back-btn Playbookplaybook-back-btn Chapter 5

CHAPTER 5

Setting a Path to Maximum Profitability

To understand where you are and where you need to go to truly influence the bottom line requires an up-to-the-minute knowledge of your financials. It also requires a financial plan that leverages that data for profitability and growth.

SECTION 3 OF 7

Calculate Billable Hours

Totaling billable hours takes into account how many paid holidays and vacation or sick days each tech gets in a calendar year, so grab your PTO calendar and start counting. 

Once you know those days aren’t billable, you subtract that time from the 40 hours the technician clocks each week multiplied by the 52 weeks in a year, which equals 2,080 total work hours to start.    

Say your service company takes seven days off each year for federal holidays and every technician gets 10 paid vacation days, here’s how you would calculate the available working hours per year for each technician:

Cost of an employee: Paid time off

(Holidays + Paid Time Off) x 8 hours per day = Hours per year spent not working on business days:

17 days x 8 hours = 136 hours

Then, subtract that total from the 2,080 hours available for work each year, and enter the total available working hours per year into the employment costs calculator above.

Avg. working hours annually

2,080 - 136 = 1,944 hours per technician

Labor Cost Definition

Just because a technician clocks 1,944 hours per year, it doesn’t mean he or she produces profit that entire time, so you can’t use that total in your billable labor calculation. 

To determine projected billable hours per tech, you must calculate what percentage of a technician’s workday results in billable hours, on average.

It’s important to be realistic about your billable hour labor cost percentage, because most company leaders like to think their technicians bring in more profit than what’s truly doable in a day, especially when you figure in non-billable time spent doing general and administrative tasks, such as:

  • Traveling and fuel stops

  • Delivering free job estimates

  • Warranty services and callbacks

  • Stocking work vehicles and tool maintenance

  • Logging job details like mileage and parts used

  • Generating paperwork, such as invoices and estimates

Billable hour efficiency rate: How to calculate labor cost percentage

Projecting how many billable hours each technician works on average requires knowing your average billable hour labor percentage, also known as utilization rate. Out of an 8-hour workday, what percentage of your technicians’ time gets spent on billable tasks, where they’re actually on a job site performing repairs, doing maintenance for customers, or installing equipment? 

What is a good labor cost percentage? Utilization rates vary by industry, but for the skilled trades it tends to be lower than other professional services because you must be onsite to actually perform billable work—while an office-based worker at a consulting agency, for example, can do billable work at all hours of the day or night.

For most service companies, 30 percent is considered a good efficiency rate, while 50 percent would deliver extremely efficient employee costing. That means out of eight hours, if a technician does approximately 2.4 hours of billable work per day, the billable hour percentage averages 30 percent. 

At a 50 percent billable hour efficiency rate, a technician does four hours of billable work, spending half a workday inside a customer’s home or on a commercial job site performing services. 

Remember, while a half-day HVAC or electrical system install may mean 50 percent billable efficiency for that day, you need to figure the average total of every work day throughout the year—and it’s unlikely all your technicians work daily on large install jobs. 

Projecting billable hours per technician

Once you estimate that average billable efficiency rate, convert the percentage into a decimal (30 percent = 0.30) and multiply it by the total available working hours per year you figured above. 

So, using the total of 1,944 available work hours at a 30 percent utilization rate, you're left with 583.2 billable hours per technician annually. You’ll enter that total for projected annual billable hours into the labor calculator to help calculate your direct labor cost. 

Direct labor cost formula: 1,944 X 0.30 = 583.2 projected billable hours per technician each year

Go to Section 4: Hourly Rate to Cover Overhead Only