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Increase Replacement Profitability

Originally published: 06.01.16 by Ruth King

Your residential replacement sales, or commercial project sales, can dramatically increase the cash flow of your business quickly. But, will it increase its profitability?

Many years ago, I worked with a contractor who grew his business from zero to $2 million in 12 years. He always had cash to pay his bills and take his vendor discounts. When the business hit $2 million, however, the growth stopped, as did the positive cash flow. On occasion, he either didn't have the cash to take vendor discounts, or was having problems making payroll and this didn't make sense to him.

When I analyzed his business, I discovered he was losing a nickel for every dollar he took in the door. It's easy to do if you don't pay attention to material usage, don't pay attention to labor productivity, don't pay attention to getting the best prices and don't pay attention to job costing.

Don't do what this contractor did! Here are seven ways to increase replacement profitability.

Accept/Decline Warranties

Include a place on your proposals where customers accept or decline extended warranties. If you're selling extended warranties, your sales people will discuss them. Make sure there is a spot on your proposals where, if the customer

declines an extended warranty, the customer signs that she declines the warranty.

This solves many problems a few years later if there is a problem with the system. Without a signoff box, the customer thinks they have an extended warranty and may not. They remember talking about it, but don't remember declining it.

Job Cost Every Job

Gross margin doesn't tell the whole story (Net Profit Per Hour is a Better Way to Price). Know your overhead cost per hour and net profit per hour for every job. When you include overhead in job costing, then you really know what net profit that job brought in the door.

Net Operating Profit

Pay commissions on net operating profit rather than gross margin or gross revenue. If you pay commissions on gross margin, or worse, sales, then the sales person can get his commission without caring what happens to the job.

Why should a sales person get a commission on a job that was not profitable? If it wasn't profitable because the installation crew's truck broke down on the way to the job, then that is an act of God, not the sales person's fault and he should not be penalized for it.

If the salesperson estimates 12 hours because he wants the job, however, and it really needs 16 hours, then he should participate in the losses.

Pictures & Materials Sheets

Have pictures and a materials sheet completed for every job before the installation crews get it. This is the sales person's responsibility.

Take pictures of where the equipment is to go, what the existing equipment looks like, and any "problem areas." And, an accurate materials sheet is essential for ordering the right equipment and having the right materials for the installation crew.

No Warehouse Supermarkets

Once the material list is created and the equipment ordered, have a specific place in the warehouse for each job. Then, when all materials are gathered, the installation crew just has to load from that specific place in the warehouse.

This staging area prevents warehouse supermarkets — where the crews choose what they think they need on a job. If your crews have the option to choose what they think they need, they will always take more. This increases your job costs unnecessarily.

Take Post Job Pictures

The crews take pictures of the completed jobs. These go into the files for future reference. Then, if there is ever a question about the job a few years later, then you have photographic proof that the job was installed properly. The pictures prevent "your word against our word."

Review Accuracy and Close

At the end of the job, ensure all warranty paperwork has been filed, the job has been paid for (or all financing paperwork signed and submitted) and the job costed.

Salespeople should return to the home to review the system operation, warranty information and maintenance with the customer. Included should be the operation of programmable thermostats. The customer should sign off that they understand the operation of the thermostat. If not, you may be going back many times at a cost to you.


Ruth King is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. She has more than 25 years of experience in the HVACR industry, working with contractors, distributors and manufacturers to help grow their companies and make them profitable. Contact her at ruthking@hvacchannel.tv or call 770-729-0258.


About Ruth King

Ruth King

Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at ruthking@hvacchannel.tv or 770.729.0258.

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