Top 10 Critical KPIs for Contractors: Part 1

Are you measuring what really matters in your business?

Achieving financial success in your business is built on understanding what functions truly move the needle. That starts with knowing which key performance indicators (KPIs) to track, how to track them, and how to interpret what they’re telling you.

On this episode, Next Level Business Coaches Bob Larkin and Darrel Yashinsky break down the essential KPIs every contractor should track and how to use them to improve financial and operational performance. When you understand the right KPIs, you gain real insight for smarter decisions, better processes, and sustainable growth.

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00;00;00;00 – 00;00;10;12

On today’s show, you get to learn the top ten KPIs for Hvac contractors.

00;00;10;14 – 00;00;40;28

Today we have a special treat from Inga’s amazing coaching staff, Bob and Darrell. They’re going to dive into the top ten 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, part mineralization in your PNL pricing methods. Labor cost. Hey, here’s a big one.

00;00;40;28 – 00;01;04;20

Recruiting and hiring their. 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 hair, and I’ve kind of lost some of mine. As you can see. People are what we do. Our business is our people. When we think about our future, it’s always about our people.

00;01;04;23 – 00;01;27;01

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 contract as we speak with a big challenge, people are coming up with his exit strategies. How are we going to get out of this business?

00;01;27;01 – 00;01;54;12

Hopefully vertical, not horizontally. And some of you may laugh at that, but it’s a factor. 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 our closing ratios, we don’t know margins we need to keep.

00;01;54;18 – 00;02;15;05

We’re busy. We’ve got teams that sit down. You know, I’m going to take myself back to my contracting days. One of the biggest challenges is January. My technicians be sitting out in front of me on a, on a Wednesday. Thursday morning, it’s like, hey, boss, what are we going to do today? And I’m looking around and looking left and looking right, saying, oh, what are we going to do today?

00;02;15;08 – 00;02;35;17

I 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 KPIs, managing to key performance indicators for those of you who don’t know what KPIs are key performance indicators, it’s your measurement. It’s your scale. Some of you want to lose a little bit of weight.

00;02;35;17 – 00;02;52;26

You got to 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, why of what? What is a KPI?

00;02;52;29 – 00;03;14;18

My answer. All right. Key performance indicator. Okay, so you supposed to tell me Bob is supposed to tell me what’s going on? I don’t supposed to have a problem. I haven’t the problem. Okay. Bob’s got to 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.

00;03;14;18 – 00;03;43;11

By the way, confidential information with anyone else. When we speak to you, it is 100% 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 Gia, 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.

00;03;43;17 – 00;04;06;01

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? Dax. Once. I’ll do them. Yeah. You guys, you can go through this lab. Okay, great. I’m going to do life compensation alignment. How much should be paying your people, right?

00;04;06;01 – 00;04;23;09

Do you know what you people should be paid? You want to compensate? To keep your costs in alignment, to keep everything flowing properly? What about acquisitions? When we buy, when we sell, when we sell your business, we’ve got some great tools to help you do a valuation so you can know what your business would be worth.

00;04;23;09 – 00;04;49;17

More importantly, if you want to do an acquisition, we can help you do that also with some great tools. Departmental ization is a must. Understanding. For example, $2 million in annual revenue company, 70% of that’s going to be replacements, give or take a dollar or two, 30% will be maintenance and service. What we want to do is know that we can evaluate your company by departments and help you.

00;04;49;19 – 00;05;09;27

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 EGA is here for. I mean, we’re a nonprofit, and our goal here is to help you and the industry. Yeah. Okay. Well, I’ll take this next one. Darrell. You know, you might be asking yourself, you know, what do you need?

00;05;09;27 – 00;05;30;07

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 they’re paying out based on preparing their, tax return. That’s what their CPA does for, you know, staying out of trouble.

00;05;30;07 – 00;06;00;12

The IRS well, what we teach is managerial accounting. Using your numbers to run your business. Our numbers really tell us everything. 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.

00;06;00;14 – 00;06;23;04

Daryl, could you tell us what the purpose of KPIs are? Sure. Help us establish 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 so we can achieve one of them and analyze. We want to have an analysis of the targets we are hitting, and have an idea as to whether we’re going in the right direction or not.

00;06;23;07 – 00;06;42;01

To 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 departmental ization, you do replacement, you do service, you do maintenance, some of you do commercial, some of you do industrial, some of you do refrigeration.

00;06;42;07 – 00;07;08;23

Or we can talk about that. Some of you do, new construction. We could talk about that too, but maybe offline give us a call on that. So departmental ization 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 acquisition both and selling and buying your, your, business or other businesses talking about baseline.

00;07;08;23 – 00;07;27;23

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?

00;07;27;25 – 00;07;53;22

What’s going on with you? Well, you’re 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.

00;07;53;22 – 00;08;16;16

Just like Daryl 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. 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.

00;08;16;18 – 00;08;37;07

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.

00;08;37;10 – 00;09;02;12

So here we go. KPI number one gross profit per man. Day to day. Darrell, talk to us. So what are we talking about here? Let’s begin with, 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.

00;09;02;12 – 00;09;29;06

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 who report all these big 10-q reports.

00;09;29;09 – 00;09;53;17

We said, hey, that company’s got a 16.9% profit. He saw that. Guess what, his profit wasn’t 16.9%. We got a charge back on a major manufacturer. True story from this morning. To understand gross profit from 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.

00;09;53;17 – 00;10;14;02

They get an extra day or two. They get extra if you leave your boss from Georgia. So we can detect on board for that regard. All kidding aside, 365 working days in a year, except yours one every four. But how many working days do you have? Takeaway weekends. Take away holiday works out to give or take a day or two.

00;10;14;03 – 00;10;33;28

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.

00;10;34;00 – 00;10;49;19

I think we all need a coach. I mean, I guess I look at Tiger Woods needs a coach from golf, man, we surely need a coach for elsewhere on our business. Help us for our business. When I talk to my coach Bob, about different things, he’s constantly give me directions of where I need to go, do some studying and getting all.

00;10;49;19 – 00;11;14;13

It’s nice. It has all that stuff in it. I contract university, so we’ve gotten a lot of really good advice for starting to implement some things that, we weren’t doing where we’re unique because we only discussed. So we have to kind of tweak the Hvac industry into our world. But we’ve been doing that. And with, both Jerome’s help and Bob’s, we’ve been able to really rethink a few things.

00;11;14;14 – 00;11;36;06

We’re starting to mix two big programs. The experience with next level coaching so far has been really good. It’s been really great to be able to talk about all things business and even the, the social or the the difficulties that we’re enduring. Not just it’s not just KPIs, it’s actually, you know, it’s it feels like it’s human coaching more than business coaching.

00;11;36;06 – 00;11;54;21

Sometimes I would say the biggest thing that I learned is about pricing. When I realize that I don’t sell anything but labor, I control all my pricing through my kids, and that’s where my labor is built on. And so it’s made me more competitive because I’m not I’m not marking up big, expensive items as much as I was.

00;11;54;21 – 00;12;24;24

And yet I’m getting it all back from my labor. So it works. It works really well. I’m getting paid for what we install. Can fit for a service. The biggest thing that we’ve learned from the next level coaching would be the implementation process. So being encouraged on a regular basis to implement the things that we talked about and to be able to go back and either look at the numbers or to talk to you, where you remind us of where we left off and to make sure that we’re actually doing the things we said we’re going to do.

00;12;25;01 – 00;12;45;19

Somebody else has already done this, and there are people who know how to do it. So go ask them and get the answers. Because it’s already been invented. You’re not going to reinvent the wheel. You just have to tweak it that your company and these guys have broad knowledge and and it just they they bring it in and they can make it work for you.

00;12;45;21 – 00;13;01;21

Do it I mean next level coaching. If I could convince everyone to be a part of it, I think that’s a big a big thing for us to all participate. We need to participate in every avenue that’s available to us.

00;13;01;23 – 00;13;05;24

You.

00;13;05;26 – 00;13;35;07

Average capacity sold that we see that we measure. It’s about 65%. In other words, 159 days. All right. You got 365 days. You’re going to sell 65% of them means 150, 960 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% minimum net profit, if we get you to 20%, even better.

00;13;35;10 – 00;13;59;21

But minimum net profit goal 15% average company that we speak with, we’ll have a 70% add on replacement. We get this pure residential $2 million and residential annual revenue average company will run 70% 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.

00;13;59;28 – 00;14;37;23

This will give a company but a $1.4 million add on replacement business. If we look at a 45% gross margin, which would give you 15% net, what’s gross margin? Gross margin is what’s left over after your revenue and your Cogs. 45% gross margin would be $630,000. Dividing by our 244 working days gives us to 2582. This is on replacement business, so to get to a selling price, one could take 2582, adding it to your direct costs to give you potential selling price.

00;14;38;00 – 00;15;09;03

We want to go speak to you privately together with your numbers. Offline or online together will help you establish your numbers. The KPI minimum is 2500 per day for crew. So question for you. How many times do you install a year? If you are selling your 160 59 days, your gross profit becomes 3962 per day. Basically saying that we got six out of 30,000 divided by 159.

00;15;09;06 – 00;15;31;09

This becomes the target we have for our pricing. We take your add on replacement department down to a singular day. You could 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 cost, you get the selling price. This doesn’t need to be super complicated.

00;15;31;12 – 00;15;57;04

Go fill as many days as possible. Sell as many days as possible to lower the gross profit per man day, and needed to understand what your break even is. It’s also really, really important and we help you do that. You will find this content in the best practice library on ego’s tools in section 4.5. Bob. Number two.

00;15;57;06 – 00;16;20;04

All right. Capacity to sell versus actual. This is going right into what Daryl 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, question right. I didn’t for some, it was an estimate estimate, but what do you sell? What do we sell?

00;16;20;07 – 00;16;48;23

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 contract. We sell a service call. We pay someone to run it.

00;16;48;25 – 00;17;03;29

We sell the system, we have to pay someone to install it. And so the thermostat we got to pay. So when the hanging on the wall and the labor we have available to us is finite.

00;17;04;01 – 00;17;44;07

Yeah. This is actually one of the least track CPAs in the trade. The more days I sell, the more overhead is covered up. That is key. Is Darryl saying 244 days per crew available industry average 65%. So 159 days sold, 86 days unsold target KPI 80% of Labor Day sold. So 195 sold, 49 unsold shoulder season strategies to get to 80%.

00;17;44;10 – 00;17;51;01

That’s right shoulder season strategies. Let’s think about that.

00;17;51;03 – 00;18;08;13

Ask another question. What time of the year do you think you have the most opportune? And I can tell you right now most of you are saying, well, obviously, Summer, no, I’m going to respectfully disagree.

00;18;08;16 – 00;18;38;04

The most opportunity is when we have the most availability of labor. So that’s the shoulder seasons. And Darryl, 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 because it really fits what we’re talking about here.

00;18;38;07 – 00;19;03;01

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 till the end of 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?

00;19;03;03 – 00;19;06;16

Our industry?

00;19;06;18 – 00;19;33;23

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.

00;19;33;26 – 00;20;00;24

A lot of contractors will ask me, you know, Bob, would you really take a job at break even, say, in March? Well, my true break even 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.

00;20;00;27 – 00;20;14;29

So the next lot is KPI number three service efficiency. And this is getting into the same concept. But for a service department.

00;20;15;02 – 00;20;44;05

And basically we’re looking at hours build versus hours paid. If I bill for hours in a workday and my service tech works eight my efficiency is obviously 50%. And that is the industry average, about 5,052%. KPI is 75% efficient.

00;20;44;08 – 00;21;11;10

As a KPI of 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. Non billable time is the enemy of efficiency. 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.

00;21;11;12 – 00;21;36;18

Vehicle issues, 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 stack 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 the bill.

00;21;36;18 – 00;22;04;23

The bills actually go the other way in that building, 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 the is diagnostic only. What we’re saying there is on a service call. We’re talking about calls that we only are able to collect the diagnostic.

00;22;04;27 – 00;22;17;08

Maybe the, homeowner decided not to do the repair. Whatever the situation may be, those should be less than 5%.

00;22;17;11 – 00;22;46;16

So okay, on to KPI number four. There are service liberate. What are we discussing here? Well let’s talk about what your labor rate should be. How do you get to your liberate your service ticket’s got two components. Obviously your retail hurts 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.

00;22;46;21 – 00;22;51;26

That’s what this conversation becomes.

00;22;51;28 – 00;23;17;22

The KPI is the labor cost. As a percentage of the retail labor must be 22% or less. We’ll give you an example. The average service company is 50% efficient. As Bob said a couple minutes ago, you pay your techs every week, 40 hours. But inevitably when you do the analysis, you find you’re billing only 20. Now, if you’re better than that, great.

00;23;17;22 – 00;23;34;11

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, now I’m going to 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.

00;23;34;11 – 00;24;02;10

I admit it freely. I’ve got refrigerant in my blood. In fact, my blood is refrigerant. So I go way back. Maybe hour 12 hour 22 hour 5 or 2. Sorry about this, but, paying techs $30 an hour or 60,000 a year is barely enough. We want our people to earn more. And if you’re attending, our webinars and seminars, you’ll you’ll hear, our leadership talk about the fact that tech labor is what we’re about.

00;24;02;13 – 00;24;29;05

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, $30 an hour. Using this factor, 22% would give us a charge out of $136 at 100% labor capacity. In other words, your tech works 40, you built 40.

00;24;29;07 – 00;25;04;19

The challenges. Our efficiency isn’t 100%, it’s 50%. Industry average 52%. 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 of in your book should be $272 minimum to minimum. Minimum. I’ll say real quickly that’s $30 tech. Using a 22% calculator is 136.

00;25;04;24 – 00;25;24;27

When you’re 50% efficient, it equals 272. This is what your minimum should be. That’s 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 contract university platform.