Here's a question I get on a fairly regular basis: "Tom, my techs install and repair equipment. Why should I waste time explaining what it costs to run a company? They are techs, not owners."

Think about that for a moment. More than 90 percent of all owners in the trade industries used to be techs working for someone else. But again, you may ask, "OK, my techs may be owners someday. But they are techs now, so why should I invest time and money helping them understand what it costs to run a company?"

The answer is twofold.

1. Underpricing

If technicians don't believe what you are charging is fair to the customer, they will tend to under-bill the customer. They at least need a general idea of what it costs to run a company in order to justify, in their own minds, what you are charging per hour. It's up to you, as the owner or manager, to help them believe the hourly rate you are charging is both necessary and needed in order for the company to survive — and, therefore, provide a certain degree of job security for the tech.

Try this. During your next service meeting, make a list of your 10 highest costs of doing business. The No. 1 cost of doing business is the cost of non-billable time. Non-billable time is the time for which the company pays the tech that cannot be charged directly to the customer. That includes things like shop time in the morning and afternoon; travel time between jobs; sick, holiday, and vacation time; warranty work; callbacks; and company meetings.

The second highest cost of doing business is equipment replacement. This is money that needs to be saved each year in order to be able to replace equipment when it wears out. Other costs would include things like insurance, vehicle maintenance, gasoline, rent, office salaries, etc. You get the idea.

Pick 10 items, then ask your employees to guess how much it costs your company per year for each one. Make it fun by offering a prize for the closest number to each item. As the game comes to a close, simply mention that these 10 costs only represent a few of the costs of running your company, which is why you need to be charging what you are charging.

2. Future Competition

As I mentioned earlier, more than 90 percent of all company owners used to be techs working for someone else. Most techs who go out on their own tend to undercharge the customer because they actually believe the difference between what they are paid, and what you are charging the customer, is all profit.

The thinking is something like this. "The company is paying me $20/hour and they were charging the customer $100/hour. When I start my own company, I don't need to rip off the customer like my boss does in order to make a nice living. I can change $50/hour and still make a nice profit."

So they do just that. Now your new competition is grossly underbilling the customer, which makes it really tough on all the contractors in your area.

Teaching your techs the basics of what it costs to run a company will result in one of two situations. Either they will understand what's involved in running a company and therefore might just decide that they really don't want to go out on their own. Or, should they decide to go out on their own, at least they will be pricing their work properly and therefore become fair competition without messing up your local market.

Comments or thoughts on this article? Please e-mail editors@aquamagazine.com.

Tom Grandy is an industrial engineer by training, and worked as the general manager of a service company. He founded Grandy & Associates in 1987 to teach contractors how to run profitable businesses. He can be reached at tomgrandy@grandyassociates.com.