Control Labor Costs by Hiring Top Techs
Labor costs have been a problem for many years but have gone through the roof since the pandemic. The main problem for field service business operators is that there aren’t enough techs to meet the needs of all the companies wanting to hire them.
Good techs are valuable business resources. Their work generates the company’s revenue and helps build your brand. However, techs also account for a big portion of the direct expenses required to make the money flow.
Why We Overspend on Labor
It’s easy to spend more than necessary on direct labor. Poor job time efficiency is one of the biggest causes, taking a big slice of profits. As a result, many field service companies offer financial packages they can’t afford.
The bottom line – quite literally – is that every dollar you overspend on direct labor gets subtracted from your bottom line. That’s why a lot of service business owners make less money than their top techs.
Let’s look at the nature of the problem and then how to correct it.
The Effect of Labor Cost on Profit Margin
The chart below shows a simplified year-end Profit and loss statement for a company generating revenue of $2.5 million. The cost of direct labor for techs is part of the Cost of Goods and Services (COGS) and should not be included with overhead.
We added two columns that show how reducing COGS makes a big difference in profitability. More importantly, it shows how dollars saved in COGS move straight to the bottom line.
Net profit margin is calculated by dividing Net Income by Sales Revenue. When the COGS number is $1.2 million the net profit margin is 4.2%, which is below the industry average of about 8%. (Net profit margin = net income (105) divided by sales revenue (2,500.)
A reduction of less than 10% in COGS puts the net profit margin in a much better position. For example, if you trim COGS by $100,000 it moves to the net income line, which boosts net profit margin to 8.2%.
If you reduce COGS by $200,000 (Column B), net Income increases by that amount. This results in a net profit margin of a solid 12.2%.
You may be wondering, “How do I cut my cost of labor without anyone quitting?” Good point. The answer may not seem obvious, so keep reading as we unpack the details.
First, cost reductions don’t all need to come from tech pay. Tech pay is the part of COGS where you have the most control, and it is a big piece of the pie. Reductions in Sales, General, and Administrative (SG&A) expenses also provide opportunities, but our immediate goal is to reduce COGS.
What Should Your Direct Labor Cost Be?
For field service businesses such as HVAC, plumbing, electrical, garage door, and others, keeping direct labor costs to less than 20% is best. Too many companies end up spending 25% – 30% on labor because of inflated pay plans they think will attract techs, or because they simply don’t know what their true labor costs are. Many of these costs are not as visible as salaries, including the following.
- A high tech turnover rate has hidden costs including lost productivity, overtime, recruiting time, background checks, training, and other measurable costs. HR professionals place that at $3,500 – $10,000 for salaried employees. That doesn’t include stress on other employees, lost revenue, and reduced customer satisfaction.
- Poor job time efficiency can result in overpayment if you price jobs by flat rates or book rates. Most businesses are not equipped to measure the labor cost of an extra 10 – 15 minutes for routine jobs day after day.
With the right FSM software and workflows, techs can achieve efficiency approaching 100%. Automated dispatching and routing reduce drive time, so techs spend more time on jobs.
- Lack of skills or training often results in callbacks and re-work that can turn any profit into a loss. Money invested in training reduces turnover costs while it increases efficiency and profitability.
Now, how do you resolve these profit-robbing issues? You do it with some creativity, beginning with looking at things through the eyes of the techs. Here’s what we mean.
Hiring the Best Techs Reduces Labor Costs
Do you need to pay the highest wages to get top talent? Not necessarily. But you can’t go low, either. Offer value, not just pay. Ask yourself if you would be happy working that job if you were the tech.
Hire for character and a good fit in your company culture. Then provide continuous training for personal and professional development. The result will be better overall efficiency and less turnover.
Get What You Want by Giving Techs What They Want
Think back to what you wanted when you were working for wages. It was probably not very different from what techs want today – a place they would be proud to call their employer, work they enjoy, and opportunities to learn and advance their careers.
- Be the Preferred Employer in Your Market
Create a company culture that welcomes and supports techs, where they know they are valued and respected. Show them clearly how they can advance their careers working with you and have a healthy work/life balance. Help them be organized so they can get more real work done instead of busy work. Train them to take your job. Coach them on life lessons, personal finance, and goal setting.
- Have a Simple, Straightforward Pay System
Keep things simple and easy to understand. Techs want to know how much money they have coming in the next paycheck and how they can get paid more. Complicated pay systems almost always aren’t worth the confusion they cause.
Here’s how that might play out. Let’s say you decide to recruit aggressively and land top techs with a 20% commission on sales. You mark up new systems 100%, giving you a comfortable 50% gross profit margin.
When you run the numbers, you see that the 20% commission reduces your gross profit margin to 30% and your net profit margin gets cut nearly in half.
You might try paying a smaller commission, adding spiffs, or devise some kind of combination plan, but these only make it more difficult for techs to figure what they are owed.
Wondering what pay system to use? We have found hourly pay systems the easiest and fairest for everyone. You also can sweeten the pot with bonuses or perks, too, but be fully transparent and work with techs to help them earn pay raises. This would be a good time to ask if they want this pay plan.
Tie pay increases to job performance. Metrics should have a direct bearing on the business’s profitability and must be clear to the technicians. They should understand how labor cost affects business health. Examples include:
- Job time efficiency
- Revenue generated
- Jobs sold
- Closing rate
Pay techs better who perform better. Educate them on the business’s costs and show them their role in its success. See this article for a broader discussion of how hiring the best field service technicians helps bottom line performance.
- Provide Technology that Makes Techs’ Jobs Easier
Top field service management software today helps techs do more and earn more. Ensure that your field service management software saves time and makes techs’ jobs easier and less stressful. The preferred software now includes these tech-friendly attributes:
- Completely paperless
- Part of an integrated field service management software solution that keeps techs, office staff, and customers in sync at all times
- Provides a full job brief when an assignment is made, which includes customer notes and images
- Automatic GPS routing that requires no action or input from techs
- Ability to create Good-Better-Best proposals for customers in a few minutes
- Tracks job time efficiency and labor cost for each job, for each tech every time
- Ability to schedule a follow-up or installation appointment, as needed, while on the premise
- Creates invoices, accepts payments, and provides full descriptions of work performed
We Have Never Had More FSM Software Choices
Field service management software is an essential tool for owners of service businesses of any size that want a straight line to success through greater efficiency and profitability.
Automation of scheduling, dispatching, invoicing, and other operational tasks frees up time to work on business development and have more time of your own.
Software as a Service (SaaS) FSM software is cloud-based subscription software you can operate from anywhere you have internet access. It costs less because you don’t host or maintain it, it is easier to use, and you always have the newest version.
The number of FSM software companies in the US has nearly tripled over the past decade due to increasing demand from business owners. If you aren’t using FSM software your competitors very likely are or soon will be.
When you do, take a look at Sera FSM software, which is disrupting the industry. Techs love the intuitive Tech App because it simplifies their jobs, and helps them work more efficiently and earn more. It is the only software that calculates job time efficiency as each job closes out so you can track labor costs.
Sera provides everything a small-to-medium-sized home services business needs to improve efficiency and become more profitable fast.
Companies that switch to Sera have improved efficiency by 30% and averaged revenue gains of 52% in the first six months. It is the only FSM software that ties everything to your company’s profit and loss statement to focus on profitability.
Direct labor costs of service techs in the field account for a big piece of the cost of goods and services home services companies provide. Those costs have increased as the number of jobs for techs keeps running ahead of the number of available techs.
As a result, many companies are competing to hire them with pay plans the companies cannot afford. Conversely, companies that offer long-term opportunities for professional and financial development can win the recruiting competition, get direct labor costs in line, pay techs more, and become more profitable at the same time.
Owners can get more of what they want from their businesses by helping techs get more of what they want from their jobs by (1) becoming the preferred employer in their markets, (2) using simple, straightforward pay systems, and (3) investing in technology to improve efficiency and job satisfaction.