Understanding how to price HVAC jobs is one of the biggest obstacles to a profitable business. Many HVAC contractors find themselves extremely busy but without the profits to show for it.
There are many variables to consider when setting prices, including billable and unbillable hours, overhead, and labor rates to name just a few. There are also local competition rates to consider.
For your prices to be profitable, you must account for all time and expenses. But it can be hard to know how to estimate HVAC jobs if you aren’t clear on how much time and material each job will need.
This HVAC pricing guide will show you how to properly price your HVAC jobs and how to estimate HVAC jobs to win more bids.
Flat Rate vs Hourly Rates for HVAC Jobs
The two pricing models used most often in the HVAC industry are the hourly rate model and flat-rate pricing. Depending on what’s best for your HVAC business, you may decide to use one over the other or a combination of the two.
Hourly Rate (Time + Materials) Pricing
The hourly rate (or per hour) model for pricing HVAC jobs bills the customer by the hour at a rate that covers time and materials. The total cost of the job is determined largely by how long it takes to complete.
Hourly rates can be very appealing to some customers because there’s more perceived transparency into the charges. The itemized estimate shows the customer the hourly rate and material costs. However, the customer will also start watching the clock.
Hourly rates can be very appealing to some customers because there’s more perceived transparency in the charges. The itemized estimate shows the customer the hourly rate and material costs. However, the customer will also start scrutinizing your hours.
“Typically, when you start to work, the customer’s watching the clock. Which puts pressure on the technician to speed up,” said Lowe.
“When a technician is rushed, he’ll make mistakes but also, he won’t take the time to find the other things that could be contributing to the major problem. Or he may leave things that should have been recommended to the customer.”
The hourly pricing model also costs you more in unbillable hours. Every new project requires time spent on creating new estimates and invoices.
KEEP READING: How to Make an Invoice for HVAC
The flat-rate pricing model factors in labor cost, materials, and overhead to create a set price. The customer pays a flat rate for the job, regardless of how long it takes to complete.
With this model, you can offer a menu of add-on and upgrade HVAC services that customers can include with the original job. You also won’t need to create a new estimate and invoice for each project, saving you unbillable admin hours.
HVAC flat rate pricing also gives customers peace of mind knowing how much they can expect to pay when the job is complete. Plus, you know exactly how much money this job will bring to your HVAC business.
Having a process to properly evaluate the issue upfront is critical to setting an accurate flat rate. Without an accurate evaluation of the problem, you could find yourself working long hours without proper compensation.
HVAC flat rate pricing software can help HVAC businesses can see significant bottom-line improvement just by incorporating flat rate pricing.
Profit Rhino’s Jeremy Lowe, shared a case study featuring one of their customer’s success stories. Arctic Bear Plumbing, Heating, & Air inc. increased its profit margin from 3% to 18% over the course of just one year.
“Our average ticket is up 100% since [starting with] Profit Rhino,” said Jason Ball, Arctic Bear’s Founder. “We were averaging about $180 a ticket, now we’re swinging at about $400, so a little more than 100%.”
Investing in HVAC estimating and invoicing software can help improve accuracy when you price HVAC jobs.
Accu-Temp Heating & Air Conditioning, Inc. attributes their companies come back to HVAC flat rate pricing software. In fact, their founder Bob Hutchinson bought some of their flat rate books with his last bit of credit.
“From the verge of bankruptcy to becoming a millionaire, I owe it all to flat rate,” said Bob.
Complex jobs that require extensive labor where time and materials are largely unknown, it might be better to use a hybrid pricing model.
Using a combination of the hourly & flat-rate approach for pricing HVAC jobs may help you get more accurate pricing without cutting into profits and get you closer to your financial goals.
For example, some HVAC business owners choose to use an hourly rate model on large, complex jobs while offering flat-rate prices on smaller, more straightforward jobs like filter changes, maintenance calls, and appliance installations.
Using a hybrid model also offers flexibility when pricing HVAC jobs. For instance, all HVAC jobs, regardless of size, will require a preliminary inspection to both evaluate the problem and determine the solution.
With hybrid pricing, you can choose to charge an additional fee for the inspection while waiving it on bigger jobs. It also gets customers to stop watching the clock and gives you the space to do quality work.
How to Calculate HVAC Costs
Regardless of which pricing model you use, it’s critical that you learn how to price HVAC jobs accurately.
Labor costs, the cost of materials, unbillable hours, and additional overhead all need to be accurately accounted for and included in the estimate for your HVAC jobs to be profitable.
How is HVAC Labor Cost Calculated?
The first step in calculating HVAC labor cost is determining your hourly base rate. That’s the amount you pay your employees or yourself before you add in material and overhead costs.
To estimate your HVAC labor costs, take the amount of money you’d like to earn every week and divide it by the number of billable hours you work.
Weekly Income ÷ # of Billable Hours per Week = Hourly Base Rate
For example, let’s say you want to make $800 in a 40-hour work week. Out of those 40 hours, only about 55% will be billable. The other 45% is spent on unbillable things like driving to jobs and administrative tasks. That leaves you with 22 hours of billable time.
We’ll divide your $800 in weekly income by the 22 billable hours and get an hourly base rate of $36.36, which we’ll round up to $36.40.
It’s important to be thorough when calculating your material costs. Start with an itemized list of all the materials and supplies necessary to do the job. To calculate the exact cost of materials, use the following formula:
Total of required materials x Sales Tax at Counter = Total Materials Cost
If the materials to repair ductwork add up to $46.79 and sales tax in your area is 6%, for instance, your total material cost for the job is $49.60.
When pricing your HVAC jobs, be sure you’ve considered all potential costs. Forgetting to account for expenses will cut into your profit margin and potentially embarrass you in front of the customer.
Here are some possible costs and expenses to include in your HVAC estimate:
- Garbage and debris removal from the job site
- Correcting any violations of existing building codes in old or neglected properties
- Replacing damaged ductwork
- Electrical upgrades necessary to support new HVAC system
- Equipment rentals
- Opening, repairing, or replacing walls or ceilings as required to complete work
- Any required permits
How Do You Calculate HVAC Overhead?
The operating expenses you pay to run your HVAC business are your overhead costs.
Overhead costs can include:
- Business equipment such as computers, printers, or cell phones
- Rent and utilities
- Employee salaries
- Permits and licenses
- HVAC tools such as drills, thermometers, and nitrogen regulator
- Vehicles, fuel, and maintenance
- Taxes and business insurance
- HVAC advertising and marketing
- HVAC business management software
- Credit card processing fees
- Employee benefits
Calculate your hourly overhead costs by dividing your total yearly overhead costs by the number of billable hours per year. To address businesses affected by the seasons, we use a full year to calculate overhead.
Total Yearly Overhead Costs ÷ # of Billable Hours per Year* = Hourly Overhead Costs *Total # of Employees x # Hours They Work Over the Week x 52 Weeks
For example, if your HVAC business’s total yearly overhead costs are $42,000 and we divide it by your team’s 4,800 billable hours a year, your hourly overhead costs are $8.75.
Once you’ve determined your hourly overhead cost, you’ll use that to determine your overhead costs per job. To calculate the overhead costs for an individual HVAC job, use the formula below:
Hourly Overhead Costs x # the Hours to Complete the Job = Overhead Cost for the Job
Going back to our earlier example, if the ductwork repair will take an hour and a half to complete, we’d multiply $8.75 by 1.5 for a total overhead cost of $13.13.
How to Determine Competitive Rates/Pricing
You need to strike a balance between pricing to be competitive and pricing to be profitable. There’s a fine line between staying competitive and racing your competition to the bottom of the bargain basement.
Doing Competitive Research
You can use the rates and prices of the competition as a measure of how reasonable your prices are. However, it might be better to use the competition to assess your cost of operation. If you are way above or below your competitors, then you know you should reevaluate and adjust your rates.
But don’t try to match the competition’s rates exactly. Their costs, overhead, and goals will undoubtedly be different from yours. If you try to fit your prices to the competition rather than your unique process, costs, and goals, you will certainly cut into your profits and affect your bottom line.
Remember that you can set yourself apart from the competition with more than just lower prices. Most people are willing to pay for top-notch customer service and efficient, quality work.
What is the Ideal Profit Margin for HVAC Companies?
Your profit margin is the percentage of “net earnings” you’ve made after you’ve paid your employees, covered materials costs, and addressed overhead. Understanding and incorporating profit margin into your final pricing help you to reach your financial goals.
The average profit margin for an HVAC company is about 25%. Your ideal profit margin will depend on your individual costs and financial goals.
How to Calculate HVAC Profit Margin
To calculate your existing profit margin, start by calculating your net profits by using this formula:
Total Revenue – Material Costs – Labor Costs – Overhead Costs = Net Income
Once you have your net income, you can determine your profit margin using this formula:
Net Income / Total Revenue = Profit Margin
To factor your profit margin into the pricing for a particular job, use the formula below:
Total Project Material Costs* + (Total Project Material Costs* x Profit Margin) = Total Project Pricing *Total project material costs include labor.
Based on your current profit margin, you can begin to set ambitious, achievable goals. You may need to test out exactly which profit margin will best help your HVAC business reach its financial goals.
How to Calculate HVAC Markup
Markup refers to the difference between your cost and the price charged to the customer. Adding a markup to the cost of materials accounts for both overhead and profit. Calculate your markup percentage by using this formula:
(Selling price – Your cost)/Your cost x 100 = Markup percentage
For instance, if you pay $10 for a filter and charge your customer $15 for it, you have a markup of 50% on your materials.
How to Create a Professional HVAC Estimate
Knowing how to estimate HVAC jobs accurately will make the difference between making a profit and taking a loss.
After you’ve established how you are pricing HVAC jobs, you’ll still need to determine how much to charge for each specific project. To create an estimate, follow these steps:
- Total the cost of materials, including parts, chemicals, and disposal.
- Determine total labor costs.
- Calculate the total cost of the project.
- Incorporate profit margin.
- Compare total to HVAC pricing guide to stay reasonable.
Once you’ve determined your price for the job, you want to create a professional HVAC estimate.
Presenting a potential customer with a professional-looking, branded document is the first step to establishing yourself as an expert and winning the bid. A professional HVAC estimate should include the following elements:
- Business name and logo
- Business contact information
- Client name and contact information
- A quote/estimate number
- Detailed breakdown of the service you’ll be providing, materials, and costs
- The total cost for the service, including taxes
- Date that the estimate expires
In the HVAC business, time is money. And time spent creating estimates and invoices is unbillable time. Joist, an estimating and invoicing app, allows HVAC technicians to create and deliver accurate estimates in just minutes.
Our easy-to-use mobile estimating tool will put more billable hours back into your week. Joist lets you build custom estimates, invoices, work orders, and more from any web-connected device.