Contracting Business/Kelly Faloon
Contracting Business/Kelly Faloon
Endeavor Business Media
Contracting Business/Kelly FAloon
Kelly L. Falloon
Kelly L Faloon/Contracting Business
Ahr Day 2 Profit 5e3a453589307

Answering 3 Questions Can Increase Your Profits

Feb. 5, 2020

Caption: Ruth King schools HVAC contractors at the 2020 AHR Expo on the financials they need to be monitoring and tweaking to make their companies more profitable.

Profit is defined as the “difference between the amount earned and the amount spent in buying, operating or producing something.”

Many HVAC contractors have no idea if they are profitable, or assume they are because of the money coming in. They aren’t paying attention to the correct numbers, noted Ruth King, CEO of, Feb. 4 at the 2020 AHR Expo in Orlando, Fla.

She said that HVACR contractors could determine if they were profitable by answering three questions:

  1. For every dollar you bring in the door, how much are you spending on payroll and payroll taxes?
  2. For every billable hour, how much overhead do you need to add to the cost of that billable hour?
  3. For every billable hour, how much profit do you generate?

Regarding question No. 1, how much contractors spend on payroll can be calculated using the Productivity Ratio (also called compensation percentage), King said: total payroll plus payroll taxes divided by sales.

The ratios for each business segment are:

  • Service Productivity Ratio — less than 40 percent
  • Replacement Productivity Ratio — less than 30 percent
  • New Construction Productivity Ratio — less than 20 percent

For question No. 2, calculate overhead cost per hour dividing total overhead with billable hours. For service, that number should be less than $40 per hour; the replacement overhead cost per hour should be less than $30.

“Start tracking billable hours; they will go up!” King noted.

Lastly, question No. 3 is where contractors focus on the wrong number. “Net profit tells you nothing,” she said. “Net profit per hour is what you need to look at.” Determine your net profit/hr. by dividing total net profit with billable hours.

King added that contractors should have a net profit/hr. for every technician: “If someone’s not making you money, you’re probably the last one to know. Always be hiring!”

About the Author

Kelly L. Faloon | Freelance Writer/Editor

Kelly L. Faloon is a contributing editor and writer to Contracting Business magazine, Contractor and HPAC Engineering. The former editor of Plumbing & Mechanical magazine, Faloon has more than 20 years experience in the plumbing and heating industry. She started a freelance writing and editing business in 2017, where she has a varied clientele.

Faloon spent 3 1/2 years at Supply House Times before joining the Plumbing & Mechanical staff in 2001. Previously, she spent nearly 10 years at CCH/Wolters Kluwer, a publishing firm specializing in business and tax law, where she wore many hats — proofreader, writer/editor for a daily tax publication, and Internal Revenue Code editor.

A native of Michigan’s northern Lower Peninsula, Faloon is a journalism graduate of Michigan State University. You can reach her at [email protected].