The Hidden Cost of Service

Many technicians wonder why the company bills $100 an hour for their work even though they make $20 and hour. The implication is that if they could collect the $100 for themselves, they would be rich! What follows is a short article I did a few years back in an attempt to answer that specific question. Some of the dollar amounts quoted can vary a good bit from one location to another, and also vary with time. But the basic principles remain the same.

The Cost of Providing Service

The cost of operating a business is an investment which is made with the expectation of receiving a financial return. Logically, why should someone invest a large sum of money in an air conditioning business if they are not going to make at least as much money as they would earn at the bank on that same investment?  For example, look at investment required to purchase a truck, tools, and supplies to put a service truck on the road. A modest truck with minimal tools and parts would easily be $120,000. If the business owner invested in bank notes and bonds, they would earn $6,000 to $12,000 with far less trouble or risk. But that is just the start. 

The original cash investment will not depreciate with time but the service truck will. After 5 years the truck and tools will need to be replaced. So $120,000 must be collected over the span of 5 years to replace the initial investment. That brings the annual total to $30,000 to $36,000 just  to recover your original investment and make a return comparable to bank returns. But there is more.

The truck will need insurance, maintenance, and gas if it is to make any money. This can easily run $100 a day. A service technician will be needed. If the technician is earns $20 an hour, their cost to the company is at least $30 per hour by the time mandatory obligations like social security, unemployment insurance, and health insurance are factored in.  Over a year this works out to $67,600 per year. But wait, there is more.

Unless this is a one truck service company, the company needs a place of business. This represents a much larger investment than the truck, but it is spread out over several trucks. Besides the obvious cost of owning or leasing the business, there is the cost of utilities, maintenance, and insurance on the building. These costs vary widely from one business to another, but it is common for the business overhead cost to be at least as much as the truck cost, so add another $30,000 to $36,000 per year for this truck’s share of the business overhead. 

A tally of these costs reveals that the truck will need to make $139,600 per year just to preserve the original investment and make a modest return that could be gained through bank deposits and bonds. Assuming that the truck is busy 52 weeks a year, 5 days a week, it needs to make $67 an hour just to recover the company’s investment. Also note that this cost does not stop if the truck is not working. If the truck averages 6 billable hours a day, the rate must increase to $90 per hour to cover the cost. 

Notice that the company now must charge $90 an hour to simply recover their cost even though the technician is only earning $20 an hour. If the company does not collect this much money, it will lose money and the technician is out of a job.  Please realize that these figures are for illustration only, every company’s costs are different. What is consistent from one business to another is that there are many costs besides the obvious ones and that failure to recognize and account for these costs will certainly result in failure of the business.