HVAC companies that service residential and commercial heating and air systems have an important job — no one likes to be hot in the summer and cold in the winter. Even though people need your services, they don’t want to pay an exorbitant amount to get their HVAC systems repaired or replaced. At the same time, you need to make enough money to pay your staff and your bills.
Break-Even Point
- Before you decide on how much to mark up your materials, know how much you need to make on the job to break even. Add up all your bills and divide that by the number of jobs your staff typically complete in a month. Calculate the number of hours the job should take, how much your staff person makes per hour — including costs such as health insurance and workers’ compensation — how much your charge per hour and the cost of the materials. If you need $50 per hour to cover all your staff costs and you charge $100 per hour for labor, that’s $50 toward your break-even point. If you need a profit of $100 per job to keep yourself in business, mark up the materials accordingly so they make up the other $50.
Markup vs. Margin
- Markup and your profit margin are calculated differently. The amount you mark up your materials doesn’t equal your profit margin percentage. Understand the difference so you can more accurately set your markups to make the profit you’re expecting. For a part that you paid $100, marking it up to $150 gives you a 50 percent markup: multiply 100 by 0.50 to get a $50 markup. To get your margin, divide the markup — in this case $50 — by your cost, $100. You get 0.33, or 33 percent. In this example, a 50-percent markup equals a 33 percent profit margin.
Parts Markup
- A standard markup in a non-retail business is 100 percent, meaning you charge the customer twice what you spent on the part or material. This requires accurate bookkeeping and estimating skills because prices change constantly. Know what you spent on each part before you can mark it up correctly. Your overall cost for the job also includes a labor markup, charging more per hour for your technician’s time than you pay him. These two markups can work together to make your business profitable. When you mark up your materials by 100 percent, you typically mark up your labor less, such as 25 percent.
Overall Markup
- Instead of setting a percentage to mark up your materials, provide overall job estimates. Decide how much you need to make on each job and provide an estimate that increases the total by a percentage instead of breaking labor and materials into different pieces that need to be marked up. For example, if your actual labor cost, including insurance and commissions, is $400 and your materials are $300, your total cost to do the job is $700. Mark that up so you get a net profit of 30 percent by dividing $700 by 0.70, and you get an increase of $300, for a total customer cost of $1,000. Set your overall markup percentage based on your break-even point to ensure that the job makes enough to pay your bills and, hopefully, makes a profit for the company.