Top 10 KPIs for HVAC Contractors

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Achieving financial success in your contracting business comes down to knowing what functions are important to measure. With so much going on with the day-to-day operations of your company, which are the right metrics to monitor?

That’s why this week on Cracking the Code, Next Level Business Coaches Bob Larkin and Darrel Yashinsky explain which key performance indicators (KPIs) contractors need to watch and what they mean for your business.

Audio Transcription (in Beta)

On today’s show, you’re going to learn the top 10 KPIs for HVAC contractors. Have

a special treat from EGI’s amazing coaching staff, Bob and Daryl. They’re going to dive into the top 10 KPIs for residential HVAC contractors. Take it away, fellas. Common conversations that we have with our next level coaching clients are You know, financial accuracy, uh, departmentalization in your P& L, pricing methods, uh, labor costs.

Hey, here’s a big one. Recruiting and hiring. Darrell? We’ve got challenges as an industry as we age. I mean, you look at Bob and I and we’ve got a bit of gray in our hairs and I’ve kind of lost some of mine as you can see, um, people are what we do. Our business is our people. When we think about our future, it’s always about our people.

Overhead overhead is a challenge every single day. How do we control it? How do we keep it in containment? Here’s one thing I can promise you tomorrow. Prices will be higher than today. We know that now. Again, looking at the contractors, we speak with a big challenge. People are coming up with his exit strategies.

How are we going to get out of this business? Hopefully, vertically, not horizontally. And some of you may laugh at that, but it’s a factor, um, proper job costing. We’re going to touch on that a little bit in this presentation, but how do you. Price for for costing when we have competitors that are nipping at your heels when we have forces that act upon you don’t or closing ratios.

We don’t know margins. We need to keep. We’re busy. We’ve got teams that sit down. I’m going to take myself back to my contracting days. One of the biggest challenges. It’s January. My technician be sitting out in front of me. On a on a Wednesday, Thursday morning. It’s like, Hey, boss, what are we gonna do today?

And I’m looking around and looking left and looking right, saying, Oh, what are we gonna do today? Uh, better go sell something. All right. What do we do? How do we properly cost proper cost? And how do we get our teams going? And again, managing to the KP eyes, managing the key performance indicators. For those of you don’t know what KP eyes are key performance indicators.

It’s your measurement. It’s your scale. Some of you want Lose a little bit of weight. You gotta step on a scale to see your measurement, see how you’re doing. Comparing yesterday to today, today to tomorrow. With that, I don’t have the buttons. Bob does. So Hey Bob, don’t you? Well, Dar you. Why? What is a KPI? My answer.

All right. Keep performance indicator. Okay. You, he’s supposed to tell me. Bob is supposed to tell me what’s going on and I’m supposed to have a prompt here. I haven’t the prompt. Okay. Bob’s gotta tell me. Sorry. What’s a key performance indicator? Well. It’s derived from consolidators, private equity, best practice groups.

It’s you. When we speak with you, we gather information and we don’t share, by the way, confidential information with anyone else. When we speak to you, it is 100 percent confidential, but your gross margin, your numbers are useful when we talk to you because we can then use your numbers and look at industry comparisons.

We’ve got charts inside EGIA and a lot of you are members. You’re welcome to them. So. Measurements of highly performing contractors are here for you. And we use this to help you do better. We want to establish targets with you. We want to help analyze your business to help you with your processes and create process change.

You’re up, Bob. I’m up. Who does this next ones? I’ll do them. Oh yeah. You go, you can go through this slide. Okay, great. I’m going to do life. Compensation alignment. How much should be paying your people? Do you know what your people should be paid? You want to compensate to keep your costs in alignment to keep everything flowing properly.

Um, what about acquisitions? When we buy, when we sell, when we sell your business, we’ve got some great tools to help you do evaluation so that you can know what your business would be worth. More importantly, if you want to do an acquisition, we can help you do that also with some great tools. Um, departmentalization is a must.

Understanding, for example, 2 million annual revenue company, 70 percent of that’s going to be replacements, give or take a dollar or two, uh, 30 percent would be maintenance and service. What we want to do is know that we can evaluate your company by departments and help you. Our role here, why we’re here is to help you and help you get better.

That’s in fact what this whole presentation is about. And that’s frankly what EGIA is here for. I mean, we’re a non profit and our goal here is to help you and the industry. Okay, well, I’ll take this next one, Daryl. Um, you know, you might be asking yourself, you know, what do you need? What do we need to be able to do KPI management?

Well, it all starts with your financials. You got to have good numbers and most companies, not just in our industry, but every industry, they do their financials and their P and L based on preparing CPA does for them. You know, staying out of trouble with the IRS. Well, what we teach is managerial accounting.

Um, using your numbers to run your business. Our numbers really tell us everything. Um, you know, it’s going to be based on the actual operations of the business. You utilizing numbers to make adjustments. Managing processes to hit KPIs, metrics, and goals.

Darryl, could you tell us what the purpose of KPIs are? Sure, help us in established our targets. So what good is a target? You don’t know where it is. I mean, you can aim left, you can aim right. Where are we going? We want to have targets that we can achieve. We want to then analyze. We want to have an analysis of the targets we are hitting and have an idea as to whether we’re going the right direction or not.

Uh, implement change and process change. Are we doing things as we should to be able to hit our numbers to align our compensation with where our numbers need to be? And again, talking about departmentalization, you do replacements, you do service, you do maintenance. Some of you do commercial, some of you do industrial, some of you do refrigeration.

Well, we can talk about that. Some of you do, uh, uh, new construction. We can talk about that too, but maybe offline, give us a call on that. So departmentalization is a must to be able to evaluate everything going on in your side, your departments. We help you. On these programs, evaluate what you’ve got going on.

And of course, acquisitions, both in selling and buying your, your business or other businesses. Talking about baseline. In other words, where are you compared to best in class. If you go to your doctor, he’s going to take your blood pressure. He’s going to take your temperature with the numbers you report or with the numbers he measures from you, you’re able to compare yourself.

He’s able to compare you to others. Is your blood pressure high? Is your blood pressure low? What’s going on with you? Well, your KPIs are just like that. We are the doctors and we can help you stay in alignment with best in class. Okay, well, what should the top KPIs be? Well, this is what we’re talking about today, but the most important KPIs are going to be unique to each company.

I mean, every company is different, just like Darryl was just talking about. Some companies you may be primarily residential service and replacement. You may be doing commercial, you may be doing new construction. Um, so the KPIs are going to be unique to each company. And like I was just saying, it should vary based on this business mix.

KPIs attached to revenue dollars will change over time, but KPIs with a percentage do not change. The key is to identify, track, and measure what you want and how you want your company to look. So here we go. KPI number one, gross profit per man day, crew day. Daryl, talk to us. So what are we talking about here?

Let’s begin with a KPI number one, gross profit. Understanding firstly, what is gross profit? So for those of you, again, we’ll do a quick accounting lesson. Gross profit is revenue, what you sell. Less your cost of goods sold, your COGS, or direct costs, whatever you want to call it. Revenue, sales, less COGS, equals gross profit.

Here’s a very, very, very quick accounting lesson for you. Five numbers. All you need to know. Revenue, COGS, gross profit, Overhead net. If you can understand that you can read any income statement. I was this morning talking to a member and we very quickly went over a major manufacturers numbers and who report all these big 10 Q reports.

We said, Hey, that company’s got a 16. 9 percent profit. He saw that. Guess what? This profit wasn’t 16. 9%. We got a chance to pick on a major manufacturer. True story from this morning to understand gross profit per mandate. We do the following. We divide gross profit. By the working days. Let me be specific in a year.

We all have 365 except in Georgia. They get an extra day or two. They get extra to you leap years. You’re Bob from Georgia. So, we can pick on Bob for that regard. Uh, all kidding aside, 365 working days in a year, except leap years one every four. But how many working days do you have, uh, take away weekends, take away holiday.

Works out to give or take a day or two, 244, not including Saturdays. If you want to add Saturdays, that’s fine. But the generally not working days across the country. We believe strongly in creating work life balance work life balance, you know, for you and your teams. Hopefully we’re not getting people to work on weekends if we don’t need to.

Hi, I’m Darrell Yeshensky. Hey, I’m Bob Larkin. Many of our contractors meet with us monthly, and you chances are have met with us monthly. We found that members have deeper and greater needs. So we came up with next level coaching, which is we meet a lot more often and there is accountability. To deal with some of the issues of money, growth, finding employees, having an exit strategy to get off this roller coaster.

These are the issues that contractors want answers to and we can provide those answers in Next Level Coaching. When you join Next Level Coaching, you’re going to find solutions that are easy to implement and logical. Most importantly, we hold you accountable to specifics. We’re going to meet all twice a month and have specific to do’s.

And with those specific to do’s, we’re going to discuss and dive into your financials in a very granular way. You’re going to have a clear budget. We’ll be able to establish pricing. We’re going to help you create leadership programs that build your people. We’re going to help you find people. You may think of differing ways to engage employees that will keep them more involved by joining next level coaching.

So if you’re interested in making more money growing your company, Finding good employees and developing an exit strategy. Give Dell an hour call. We’ll be happy to talk to you about next level coaching. And we’re going to see you on the next level. Average capacity sold that we see that we measure is about 65%.

In other words, 159 days. All right. You got 365 days. You’re going to sell 65 percent of them means 159, 160 days will be sold in your year. Again, these are numbers that that we pull from money, not to say that these are exactly your numbers. If your revenue is 2 million and goal 15 percent minimum net profit.

If we get you to 20 percent even better, but minimum net profit goal, 15 percent average company that we speak with. We’ll have a 70 percent add on replacement. Again, this is pure residential. Two million dollars in residential annual revenue. Average company will run 70 percent add on replacement. And when we do this with numbers with our members, this falls true time and time again.

Numbers are fairly accurate within this range. This will give a company about a 1. 4 million dollar add on replacement business. If we look at a 45 percent gross margin, which would give you a 15 percent net, what’s gross margin? Gross margin is what’s left over after your revenue and your COGS. 45 percent gross margin would be 630, 000.

Dividing by our 244 working days gives us 2 25 82. This is on replacement business, so to get to a selling price, one could take 25 82. Adding it to your direct costs to give you potential selling price. We want to go speak to you privately. Together with your numbers, uh, offline or online together will help you establish your numbers.

The KPI minimum. Is 2, 500 per day per crew. So, question for you. How many days do you install a year? If you are selling your 160, 59 days, your gross profit becomes 3, 962 per day. Basically saying that we got 630, 000 divided by 159, 000. This becomes the target we have for our pricing. You take your add on replacement department Down to a singular day.

You can even break this down to the hour. If you know that you’ve got to generate 3962 in gross profit dollars for the day, added to your direct costs, you get the selling price. This doesn’t need to be super complicated. Goal fill as many days as possible sell as many days as possible to lower the gross profit per man day And needing to understand what your breakeven is.

It’s also really really important and we help you do that You will find this content in the best practice library on egi’s tools in section 4. 5 Bob number two. All right Capacity to sell versus actual this is going right into what darryl was just talking about And I’m going to ask you a question, and I’d like you to write down the answer.

Don’t feel bad, most people never get this um, question right. I didn’t, first time it was asked of me, but what do you sell? What do we sell? Think about that. Write it down, and Give you a second here. I’ll give you the answer. We are contractors. We sell labor. We’re not Home Depot. We don’t have boxes on the shelf that we get to sell boxes.

Everything we do has a labor component to it because we’re contractors. We sell a service call. We have to pay someone to run it. We sell a system. We have to pay someone to install it and sell a thermostat. We got to pay someone to hang it on the wall. And the labor we have available to us is finite.

Okay. This is actually one of the least tracked KPIs in the trade. The more days I sell, the more overhead is covered up. That is key. As Daryl was saying, 244 days per crew available. Industry average, 65%. So 159 days sold, 86 days unsold. Target KPI, 80 percent of labor days sold. So 195 sold. 49 unsold shoulder season strategies to get to 80%.

That’s right shoulder season strategies. Let’s think about that. Ask another question. What time of the year do you think you have the most opportunity? And I can tell you right now, most of you are saying, well, obviously summer. Now I’m going to respectfully disagree. The most opportunity is when we have the most availability of labor.

So that’s the shoulder ceases. And Daryl, you and I have discussed this a great deal, but I bet most of our viewers don’t know where the concept of Black Friday, you know, the Friday after Thanksgiving whereby Puts everything on sale, where that came from. Well, I’m gonna explain it to you cause it really fits what we’re talking about here.

Um, Black Friday came from the fact that manufacturers and retailers figured out that by Thanksgiving, they had pretty much covered their overhead for the year. So everything they sold after Thanksgiving to the year above their raw cost was going to be profit. So I think that’s very interesting. Now, how do we apply that to our crazy seasonal up and down business?

Or industry. Well, that tells us that the most opportunity is in the shoulder seasons. And can we have strategy to get more sales in the shoulder seasons, therefore covering up more overhead, because if we don’t cover it up in the shoulder season, we’re going to have to cover it up in the summer, which makes our summer jobs less profitable.

If you want to look at it like that. Um, a lot of contractors will ask me. You know, Bob, would you really take a job at breakeven, say, in March? Well, my true breakeven, including overhead, yes, I will, because it does two things. It gives my crew something to do, number one, that they wouldn’t have had otherwise, but more importantly, it’s covering up overhead, and that is absolutely key.

So, the next slide is KPI number three, service efficiency. So, And this is getting into the same concept, but for the service department.

And basically, we’re looking at hours billed versus hours paid. If I bill four hours in a work day, and my service tech works eight. My efficiency is obviously 50 percent and that is the industry average, about 50, 52%. KPI is 75 percent efficient

and the KPI is 75%. I am now billing six hours out of the eight hours that I pay my technician. Well, there’s a lot of things that affect service efficiency. Um, non billable time is the enemy of, enemy of efficiency. Uh, traffic, we’re all dealing with traffic. You know, that’s going to affect our efficiency.

A lot of times there’s nothing we can do about that, uh, vehicle issues, uh, poor dispatching can greatly affect our efficiency. And this is a pet peeve of mine, time in the supply house, when you send a service tech to the supply house to pick up a part, it will crush your efficiency. Think about it. A supply house is really an amusement park for a service tech.

And there is not a soul in that building that we get to build. The bills actually go the other way in that building. Um, sending the wrong tech to the job, taking too much time on a job, or as we all know, callbacks. Callbacks we can’t bill for, that will crush our efficiency. And the last one on here is diagnostic only and what we’re saying there is on a service call.

We’re talking about calls that we only are able to collect the diagnostic. Maybe the homeowner decided not to do the repair, whatever the situation may be. Those should be less than five percent.

So okay on to kpi number four darryl service labor rate What are we discussing here? Well, let’s talk about what your labor rate should be How do you get to your labor rate your service ticket’s got two components? obviously Your retail parts, your retail labor rate. How do we get to the labor rate? We want to focus on the ratio between the cost of your labor and the selling price of the labor.

That’s what this conversation becomes. The KPI is the labor cost as percentage of the retail labor must be 22 percent or less. We’ll give you an example. The average service company is 50 percent efficient as Bob said a couple minutes ago. You pay your tax every week, 40 hours, but inevitably, when you do the analysis, you’ll find you’re billing only 20.

Now, if you’re better than that, great. We’ll speak about that in a minute. And due to the inefficiencies that Bob mentioned just a moment ago. So, for example, a 30 tech. Average. No, I’m gonna speak on behalf of techs. I am a tech. I’m a service tech at heart. I cannot walk past a condensing unit without putting my hand on top of it.

I admit it freely. I’ve got a fridgerant in my blood. In fact, my blood is refrigerant. So I go way back. Maybe R12, R22, R502. Sorry about this, but, um, paying techs 30 an hour, 60, 000 a year. is barely enough. We want our people to earn more. And if you attending our webinars and seminars, you’ll you’ll hear, uh, our leadership talk about the fact that tech labor is what we’re about.

We’re competing with other industries for tech labor. Having a 30 an hour employee, 60, 000 employee today in America. It’s not a big number. But let’s use it for the sense of the example. Uh, 30 an hour using this factor, 22 percent would give us a charge out of 136 at 100 percent labor capacity. In other words, your tech works 40, you build 40.

The challenge is our efficiency isn’t 100%. It’s 50 percent industry average 52 percent when you go on our website You will find calculators that help you calculate this using this calculation 30 tech by 22 And 50 efficiency means that your charge out in your book should be 272 Minimum i’ll say minimum minimum.

I’ll say it real quickly. That’s 30 tech using a 22 Uh calculator Is 136 when you’re 50 percent deficient, it equals 272. This is what your minimum should be. Awesome content right there as always. Now, if you like this content, please share it with your friends on Facebook. And if you’re not a member, go ahead and click the button below to get a free 30 day trial of our entire contractor university platform.

We’ll see you next week until then, my friends, bye bye for now.