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Economics Of The Handyman Business

The new handyman business is an entity that focuses on the "retailing of services". These services are all the handyman projects that were previously handled by the do-it-yourselfer or by one-trade subcontractors in the business. This business is in what is needed to serve today's customer, who is short on time to do the work, and the necessary skills if the time were available.

It is a marketing and management business, for competent tradesmen (known as handymen) who go out and look at a job, estimate it, sell it, perform it, and collect for the work. There is a minimum charge, either by a trip charge or by pre-quoting the price for standard work -- with the provision the handyman would come out and check the work and certify that the job does fall under the normal conditions.

These basic premises dictate the economics of the handyman business.

Cost Plus vs. Hourly

Charging on a cost plus and/or hourly basis makes it very difficult for the company to make a profit. The reasons for this are as follows:

Since the true hourly cost of a handyman will usually exceed $30 an hour, a company must charge about $60 per hour. The American public today has not been educated to pay this high an hourly figure in most trades. Even if the 100% markup on labor is accomplished, it is then difficult to show the cost of materials and mark them up by the same percentage. The hourly rate is nowhere near as effective as a fixed price for a job without itemizing labor and materials.

The second disadvantage is that being paid on an hourly basis encourages inefficiencies in work habits. Not only is there no incentive to complete the job expeditiously, on a job where it is too late in the day to schedule another call the common tendency is to make the present job last until the end of the day. This raises the price beyond what the customer thinks represents good value and will cause problems.

The role model for the handyman business is the automobile repair business, where each mechanic is working from a published price list, and they receive a percentage.

Competitive Bidding

Handyman work is a service business offering value, but it is not a contracting business and competitive bidding has no place in it. As soon as you have a bidding situation with its attendant 20-25% closing ratio, the cost of a full time sales person must be figured into overhead. The overhead cost of the salesperson communicating with production and the lead carpenter/handyman adds as much as 15% of total volume to the overhead figure.

There will continue to be individuals or small companies who will underprice the established handyman business. So, in order to succeed, a company must train everyone to sell the value offered by the company. Any discussion about price must include the fact that hiring your company to do the work includes the administrative organization to schedule, research products, the recruit and train handymen, and so on. In addition, the company offers a full year's guarantee and the ability to pay by credit card.

At a recent seminar, one contractor with a fully outfitted handyman truck was called out by a customer to install an air conditioner in a window. Even though the customer had a price of $145 from Sears to install, they wanted to pay him only $25. Only after he sold hard on the concept that he was not an individual but an actual company (even though he was the only employee), he offered a complete array of services, he was licensed, bonded and insured, were they willing to pay over $100. An established handyman company will be in the same price range as Sears in all of their services.

Direct Job Costs

Every business has direct job costs, which must be marked up in order to obtain the sales price. The same five elements that exist in the remodeling business under direct job costs are also appropriate for the handyman business, but it is important to clearly specify the differences. Let's look at the five elements:

Labor. In the remodeling business, direct job costs consist of labor including fringe benefits. This means that if a carpenter is paid $15 per hour, your labor cost is actually considerably more than $15.

In the handyman business the truck allowance will be higher. This is because the truck is usually a step van, panel truck, or a customized pickup, the number of tools and accessories (drop cloths, power vacuums, etc.) is greater than in remodeling, and the mileage traveled during the day will be substantial.

Another important difference is it is absolutely impossible for a handyman to be gainfully at work doing projects 8 hours a day. The maximum time actually working by the average handyman is 6 hours a day. Therefore, the handyman labor figure should be based on a 6 hour rather than an 8 hour day. In essence, the labor figure for the handyman must be increased 33%, including all fringes, over the normal rate for remodeling.

Materials. Cost of materials in both remodeling and the handyman business includes sales tax, delivery and normal waste.

Subcontractors. The cost of subcontractors is included in direct job cost, whether it is the handyman himself or an outside, single trade subcontractor.

Plans and Permits. Very few handyman jobs require elaborate plans, but a permit will frequently be necessary. When they occur, these are direct job costs.

Cleanup. Cleanup, which is probably the single most important factor in customer satisfaction, is included in direct job costs. Any dump fees are also included in this category.

These five elements comprise job costs. One other factor, credit card expense, might be considered a job cost. This runs between 2-4%, depending on which card is used and on company volume. However, there are two good reasons to include this cost in overhead. One, customers should not be penalized for using a credit card. Two, the handyman himself should not have any stake in whether a job is cash, check or credit card, and try to influence the customer during the course of selling the job. Since about one out of three jobs will likely be on credit card, it should be included as a 1% item in overhead.

Overhead

The total percentage of overhead in remodeling and a handyman business is about the same, but the proportion of what makes up overhead is a little different. In a remodeling operation, 7-10% of overhead is sales cost and 5-7% is production supervision. In the handyman business, these two expenses are covered under direct job costs as either direct labor or subcontract. The savings to overhead by putting these two expenses into job costs is more than offset by the fact that the handyman business must spend more management time on the operating system and on advertising.

The cost of advertising for leads when the jobs average $300-500 is much higher than for jobs where the average project size is $10,000-50,000. Therefore, even after you include in the direct job cost figures the salesmanship and production supervision, the mark-up still must be higher in the handyman business.

Management, 5 - 8%. This includes overall management and goal setting, but it also includes development and implementation of the operating system, recruitment and training of office and field personnel. This is a management-intensive business. Because of the difficulties in scheduling, the multitude of products and services, and the high level of customer expectations, there is a tremendous amount of management.

A basic premise is that what you can find as a product and install as a service, you can sell, so the task of looking at new products, new needs, different market niches and ways to expand the product and service line, is ongoing.

Marketing and Advertising, 8 - 10%. The handyman business requires constant marketing and advertising to keep the company's name in front of potential customers. One difference between a handyman business and a remodeling business is that a typical remodeling job averages $10,000-150,000 so you can do $500,000 worth of business in 20-30 jobs. So you only need 100-150 leads a year, and you run 4-5 jobs at one time.

A handyman business has a multitude of jobs with an average size of $200-500, which means there is a constant need for lead development and marketing. Depending on the seasons and such things as major calamities such as a hail storm, the business has fluctuations. One week the business is swamped and can't handle all the calls, but then a slow period requires aggressive marketing to keep a handyman employed.

When a company is small, the actual cost for advertising might be small: a Yellow Pages ad, brochures or door hangers, site signs, truck signs and calling cards. This is supplemented however, by the efforts and activities of the individual handyman who is running the company. The time it takes to canvass around jobs, make calls to suppliers for referrals, to be on the radio, talk to business managers and so on, is expensive and must be considered.

One way the advertising budget might be reduced is through use of co-op advertising with manufacturers and retailers. Many manufacturers have co-op programs which run from 1-2% of gross sales on a 50/50 basis. That means the contractors puts up half of the cost of the ad and the manufacturer provides the balance. In fact, with many building material manufacturers the cooperative advertising budget is very seldom fully spent, because there are not enough remodeling contractors or handymen who are aggressively advertising or sophisticated enough to learn how to use cooperative advertising.

Rent, 1- 2%. There is seldom a need for an office or showroom. Many handyman businesses start out in the homes of individual contractors or as a part of the office of a remodeler or lumberyard. Even so, there is a need for space for office staff so the budget figure of 1-2% of gross, which is similar to remodeling, is valid.

Office Staff, 4 - 8%. The people who staff the telephone and coordinate the work are key, and are not simply secretaries or receptionists. They must be trained intensively and motivated to be responsive to customers, and must be knowledgeable about all aspects of the business so they can quote prices over the phone, send the proper handyman to the particular customer, and deal professionally with customer problems. This overhead item will grow as the company grows.

General Insurance, 1 - 2%. Since most handymen will be 1099 subcontractors, they will handle their own Workers Compensation and general liability insurance. The company will have to carry an umbrella policy and general liability and property damage insurance. Some insurance riders should be considered that might make the insurance figure slightly higher. One is tool insurance which is a relatively minor item, but because of the vast territory that an individual handyman covers in a day and a high exposure to theft, this should be considered. The second one is bonding, which is usually under $50 per person.

Truck or Automobile. This is an overhead item for management only: the manager, sales manager or production trouble shooter. Truck expense for individual tradesmen is included in job costs. An automobile or truck can cost $5,000-7,000 per year.

Telephone. This does not include Yellow Pages costs, which are included under advertising. It assumes that every handyman will have a cellular phone, with the costs shared equally between the handyman and the company. The cellular phone for a handyman should run in the neighborhood of $100-150 per month if they use it judiciously. The reason for sharing the cost is so they have a stake in how much they use the phone and can be more efficient.

Tools and Equipment, 1%. While most handymen will have their own tools, there may be special products that require special tools. This is not a major item but should be budgeted.

Office Equipment, Computer and Supplies, 3%. The handyman business must be run on computer once it gets beyond one person, and there must be a total operating system. The system will include computers, FAX machines, paper and computer supplies. One thing that is certain about a computer is that you have ongoing costs because there are constant improvements made to both hardware and software.

Education, Seminars, Travel, 1%. Because of the number of different products and services, as well as the need for the handyman to be able to do everything, there will have to be constant training on a regular basis. This will include seminars, installation or product training as well as audio and video tapes and conventions. There is also a need for a tremendous amount of training for office staff on computer usage.

Accounting. The handyman business is relatively simple, and once computerized there will not be much need for an accountant except for a monthly, quarterly or annual audit.

Legal Fees. Hopefully, the business will not have many legal fees but 1/2 of 1% has been budgeted as average for all businesses.

Dues and Associations. This is for joining organizations such as the Better Business Bureau, remodelers' associations, and other professional organizations.

Bad Debts, 1%. Although it is a cash and carry business, there will be some accounts that will require billing, such as commercial ones. This can probably be kept to a minimum with an aggressive collection program.

Credit Cards. About one of every three customers will pay by credit card rather than by check or cash. Since credit card charges average 3%, this means there will be a 1% overhead figure for credit cards that should be figured in every calculation.

Labor Contingencies

Handyman labor is usually a much higher percentage than in a typical remodeling operation. In remodeling, labor and materials usually run 50/50 or 45/55. In the handyman business, the labor figure will be closer to 75%.

The important distinction in the handyman business is that once the price of the job is determined and the contract signed, all the contingency rests with the individual handyman. The company always makes its percentages regardless of how long it takes to do the job. Otherwise, costs of production supervision are so high that it would make this business not economically viable.

The compensation plan for individual handymen is sufficiently generous that a well-organized and motivated individual can make more money than working for a remodeling company as an hourly employee, even after expenses and other tools are deducted.

Callbacks

Each individual handyman or subcontractor, must be responsible for their own call backs. Individuals must be responsible for correcting their own work, or paying for it if they do not have the time or ability. Some companies do nothing but install hot water heaters and HVAC equipment for lumberyards and home centers; they pay installers on a piece work basis, but installers are responsible for all service calls or call backs.

There is no room in the overhead figure, or the quality image of the business, to use any other approach. One way to deal with the issue is to take a small percentage out of every handyman's weekly compensation until $2,000 is built up in an escrow fund. If an individual cannot respond to a callback within 24 hours, a second tradesmen could be dispatched to correct the problem and the escrow fund would be charged. This concept is used by a home service company in Canada; a $2,500 escrow fund is built up for every contractor and is maintained for a year after a contractor has left the company to pay for any warranty items.

Paying the Handyman

Even though many companies doing handyman work are paying their handymen by the hour, it just is not possible to be profitable in a volume business this way. This is not to say, however, that a company cannot have employees in the handyman business. The government is becoming more and more strict about what constitutes a legal 1099. subcontractor. It could happen that the restrictions will become so onerous that a company will have to pay people as employees rather than subcontractors.

But they should not change the compensation plan at all. The company will have to show in percentage amounts all of the fringe benefits and pay the individual on a commission basis after withholding the necessary taxes. Overtime must be avoided or the additional cost passed on to the customer. Since, however, the 6 hour per day of productive time by each handyman is the norm, this issue of overtime will probably be negligible.

A commonly used approach is to pay the handyman a fixed price for the labor or, if the job is estimated itemizing labor and materials separately, the handyman is paid a percentage of the labor figure. Some companies pay as little as 40-45% of the total labor figure and nothing on the materials.

The handyman should have a stake in the overall job, there should be some incentive to "sell up", and the handyman should be compensated more than just the fixed labor figure. Remember that the handyman is a salesperson and production supervisor, as well as a tradesman.

Three factors are key to a compensation plan.

1. Labor has been calculated to include normal waste, and is based on a 6 hour day. This means the well managed, motivated handyman can probably improve this percentage substantially and will as a result average much higher hourly rate than the unit costs indicate.

2. The handyman sales commission is small compared with a remodeling salesperson who, most cases, must make 2-3 calls on each sale, not close more than one out of four or five jobs, do a relatively complex estimate, obtain all decisions from the customer, attend the pre-construction conference and keep in contact with the customer during the course of the job.

In the handyman business, every call to a customer's house will result in a minimum charge or trip charge, of which the handyman will receive 50% if no work is done. That means that the closing ratio is 100% instead of 20-25%. The price to the customer of the item will have been quoted, so price will not become an issue unless there are abnormal circumstances. Some salesmanship is involved in "selling up", but the benefit to the handyman will not come from receiving an additional sales commission, but from raising the total amount of the contract.

3. Although the tradesman is responsible for production supervision, which would be considered in overhead, they are supervising themselves in most cases, so it is not an additional cost.

Take the total price of the job, say $100. Subtract 15% for general and administrative overhead, leaving $85. Then subtract the estimated cost of materials, say $20, leaving $65. Then the company and the handyman split the $65, at $32.50 each. If you take an example of a job that has $20 in material and $30 in labor, then in essence the handyman gets $2.50 extra for selling the job which may not appear to be much.

A second approach is to pay the fixed labor figure and add 10% of the gross profit if gross profit is over 45%. In the $100 job that has $30 labor and $20 material, you have $50 gross profit. The handyman gets the $30 labor and 10% of the $50, or $5 sales commission.