Why does keeping the same rate for months become a problem?
If you hold your charge-out rate flat while your costs rise, you move closer to a loss without realising it. Inflation alone means that if you have not adjusted your pricing in line with what is happening in your industry over the last few years, you are likely making less than you were two or three years ago. The gap is invisible until you run the numbers properly.
The lesson covers a real situation where a business owner had charged the same rate for 18 months, taken on two employees, and applied a standard markup on materials. When they modelled their profitability properly, they found they were heading for a loss within two years. They responded by raising their hourly rate by $35 and increasing their materials markup from 20% to 50%, and the business moved back into a viable position.
What does a 5% efficiency improvement actually add up to?
Efficiency, in a financial sense, is how much of your hourly rate you can convert across your available working time. If you have an eight-hour day and can only charge for six hours, you are running at 75% efficiency.
Moving from 75% to 80% efficiency, two extra chargeable hours per person per week, across two billable staff at $120 an hour, produces around $21,000 of additional income over 44 working weeks. No new staff, no price increase, no extra costs. The only change is capturing a slightly higher proportion of the time already available.
On a per-job basis, if you are completing four jobs a day, that improvement works out to roughly $12 extra per job per person across the week. Broken into those units, the change is small. Across a year, it is material.
How much does a small rate increase add to annual income?
Using the same scenario, two billable staff, 40 hours a week, 44 working weeks, a $5 per hour increase from $120 to $125 adds approximately $17,600 a year. That is around $200 per person per week, or about $10 per job if you are completing 20 jobs a week.
Neither of these changes requires growing the business. They require knowing your numbers well enough to act on small gaps before they become large losses.
How do you think about efficiency if you use fixed pricing?
Fixed pricing does not remove the need to understand your efficiency rate. Your fixed price still contains a labour component, even if you do not show an hourly rate to clients. The question becomes whether the labour value built into your fixed prices covers what it actually costs you to run your business across a full day.
If your cost base works out to $120 an hour and you need to cover eight hours of operating costs each day, you need to recover $960 a day in total from your pricing structure, regardless of how many individual jobs that covers. If your fixed prices are built on a labour rate that assumes 100% efficiency but you can realistically only achieve 75%, you need to either price the labour component higher to account for that gap, or find ways to capture more of the available time.
What should you check before hiring your next person?
Adding a staff member is an income-producing decision if it is planned, and a cash flow problem if it is not. The key concept covered in the lesson is cost-neutral hiring: working out at what point a new employee stops costing you money and starts adding profit.
For a billable staff member in most trade businesses, at a typical charge-out rate, that crossover tends to occur somewhere around the 50% mark of their available hours. If they are charging out four to five hours a day, they are roughly covering their own cost. Everything above that, including materials markup, contributes to the business.
The cash flow vulnerability is the gap between when you start paying that person and when the first client payments arrive. On short payment terms this might be two weeks. On project work with end-of-month invoicing and 45-day terms, it can be considerably longer. Knowing that gap before you hire gives you time to manage it.
How do non-billable costs and non-billable staff fit into this?
Non-billable costs are one of the most commonly overlooked parts of the cost of operations. Many business owners have a reasonable handle on what billable jobs cost, but underestimate what the rest of the business is spending. Every time you add a non-billable cost, it needs to be reflected in the rate or pricing structure that covers it.
Non-billable staff, including admin or operations roles, are a cost that needs to be supported by the billable output of the rest of the team. However, work done in the back end of the business, building processes, managing clients, improving scheduling, often creates efficiencies and better client outcomes that lift the overall profitability of the business beyond what the individual cost of that person would suggest.
