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HVAC Mastermind Wisdom

More Profit Dollars: Properly Price Your Replacement Jobs

More Profit Dollars: Properly Price Your Replacement Jobs


Ruth King, Founder,


When asked, “How do you generate revenue?", most HVAC contractors respond with something like maintenance agreements, selling indoor air quality products, repairing broken equipment, replacing old equipment, or installing new systems.

Dig deeper... 

How do you generate revenue from these common services that you provide your customers?

The only way you generate revenue through these activities is through billable hours.  A PERSON, who bills his or her time, generates the revenue.

Here are three steps to properly price your replacement jobs:

Step 1: What is your billable hour percentage?

Billable hour percentage is the number of billable hours each field person generates every day as compared to payroll hours paid for that field person every day.

On average, employees work 40 hours a week or 2080 hours a year. Assuming you deduct for vacation, holidays, meeting time, and training time, you can only sell about 1900 hours a year…about 91% of the employee’s time can be sold, i.e. billed.

How many hours a year per employee do you actually sell?

Your pricing must include the cost for those hours you cannot sell. It is in your overhead cost per hour – step 2.

Step 2: What is your overhead cost per hour?

Once you know your billable hours, the next thing to calculate is your overhead cost per hour. This answers the question: "For every billable hour, how much overhead do I need to add before determining profitability?"

Things to be aware of:

  • Overhead cost per hour is the basis for all pricing: service, projects/replacement, new construction, maintenance.
  • For larger companies, overhead cost per hour should be departmentalized with each department having a different overhead cost per hour.
  • For smaller companies, overhead cost per hour can be one number for the entire company.
Overhead percentages don’t work!

Here’s why: Some company owners say, “I’ll just add 35% of revenue to cover overhead cost.”

This is NOT a good idea.

Here’s why: Let’s take a look at two jobs. Each job has $10,000 in labor and material sales. Using the "35% of revenue" method, each job is assigned $3,500 in overhead cost.

  • Job A:  $2,000 in labor + $8,000 in materials + $3,500 in overhead = $13,500 sale price
  • Job B:  $2,000 in materials + $8,000 in labor + $3,500 in overhead = $13,500 sale price

Let's assume that the pay rate for the person working on this job is $40/hour and that the actual overhead cost for this department is $30/hour.

  • Job A has 50 hours of labor and should cover $1,500 in overhead cost (50 hours x $30 overhead/hour).
  • Job B has 200 hours of labor and should cover $6,000 in overhead cost (200 hours x $30 overhead/hour).

The person managing Job A should be complaining loudly that he got charged too much overhead since he only had 50 hours of labor. Plus, he could have sold the job for $2,000 less and still covered all their costs.

The person managing Job B should be rejoicing because he did not get charged his fair share of overhead. In fact, the company lost money on Job B since labor was $8,000 and overhead should be $6,000. That alone is $14,000 in real costs – more than the price paid by the customer.

I find this typical of duct jobs in HVAC companies. The labor is so high that the company doesn’t earn a profit on duct jobs. PLEASE NOTE: This does not mean you shouldn't do duct jobs... it simply means that your duct jobs need to be sold at a higher price.

How to calculate overhead cost per hour

Take your year end total overhead costs and divide it by the total number of billable hours for the year. Since most contractors don’t track total billable hours until they use this pricing method, use an estimate the first time you calculate overhead cost per hour.


You might have some of these issues:

  • Many companies list all labor, both direct labor and overhead labor, in the "overhead section" of their profit and loss statement. The only labor/salaries that should be included in the overhead section are those that are true overhead labor/salaries. Any labor expense that is incurred for producing products and services (billable labor) should be included in the "direct cost" section of your company’s profit and loss statement. It should not be included in the "people expense section" of the overhead cost per hour calculation.
  • Many profit and loss statements have an “other expense” section. Look at the categories listed and make sure that normal business expenses are not included in this section. For example, some companies list interest expense in other expense. Interest expense is usually an overhead expense. Include it in the people section of the overhead cost per hour calculation.

Usually you get an eye opening experience the first time you calculate your overhead costs per hour for your company. Make the best estimates you can. Then, you can refine the costs as you increase productivity and get more exact with billable hours.

Step 3: What is your desired net profit per hour?

I hear business owners brag all the time about generating $X in revenues. Or, they brag about earning X% profit. Let’s look at what this really means.

Look at the profit boast in real terms. Business owners brag that they earned 10%, 15% or more at the end of the year. But, 10% of what? Is it 10% of $100 or 10% of $1,000,000? I’d much rather have the 10% of $1,000,000. You can’t take a percentage to the bank. Look at the real dollar bottom line.

Here’s why gross margin pricing doesn’t work:

Pricing by mark ups and gross margins is dangerous. Whenever I start working with a new client, I always calculate their overhead cost per hour (see the description later in this section) and pull several jobs from the files of a contractor. I don’t let the contractors do it because they will tend to pick the jobs they think were better jobs. Most times they aren’t.

Here is the result for one contractor’s jobs:

  • Look at JE with a gross margin of 40.51%. That job had a net profit per hour of $73.34.
  • Look at HT with a gross margin of 40.27%. That job had a net profit per hour of -$21.37. It lost money!
  • Same gross margin.  One job earned $73.34 for each hour. The other job paid the customer a $20 bill plus a little more for every hour on the job!
  • Another example:  Look at LP with a gross margin of 19.41%. The job had a net profit per hour of $52, despite the “lower gross margin.”

The overhead cost per hour for this contractor is too high. The company was vastly unproductive when I started working with them.

How to Calculate Net Profit Per Hour

Determine how many revenue producing (billable) hours you had last year. This is the number of hours that you billed a customer, the number of hours that were spent installing systems, on repairs, or on maintenance calls. It is the same number you used in the overhead cost per hour calculation.

Get last year’s net operating profit (net profit before other income, other expenses, and taxes) from your profit and loss statement.

Your net profit per hour = Last year’s net operating profit / Total number of revenue producing hours last year

If you had a loss last year, you PAID your customers to provide the products and services you sold to them.

If you had a positive net profit per hour, what was it? Are you satisfied with that number?

You, as the owner, are the only person who decides the desired net profit per hour for a department or job.

How to Price Jobs Using Overhead Cost per Hour and Net Profit per Hour

I’ve used the net profit per hour method very successfully for a number of years and which, in my opinion, is more accurate. This method looks at the gross profit per hour, the overhead cost per hour, and the net profit per hour that you want to earn. It explains how, in slower seasons, contractors can seemingly price a job “so low” that you can’t match the price. However, they know what their total cost of the job is before profit and have decided to break even on the job rather than make a profit. That is a business decision you can make once you know what your costs truly are.

Here's how to properly price your jobs:

  1. Determine the net profit per hour you want on the job. (NPPH)
  2. Determine the overhead cost per hour. (OCPH)
  3. Determine the total number of hours on the job. (JOBHOURS)
  4. Determine the gross profit (GP) for the job by multiplying the overhead cost per hour plus the net profit per hour by the total number of hours.
  5. Determine the direct job costs (DJC) by totaling direct labor, material, equipment, subcontractor, and miscellaneous costs associated with the job
  6. Determine the selling price by adding the gross profit and direct job costs together.

For the math nerds in the room, here's a simple formula: SALE PRICE = JOBHOURS x (NPPH + OCPH) + DJC

A word of warning, or encouragement:

Your field labor must do the project in the hours you estimate for this job. I found that when field labor knows what is expected of them each day, they become more productive. As management watches the hours, the field labor watches their hours too.

Net profit per hour calculations rely on an accurate labor estimate. If you estimate a job at 16 hours and it comes in at 12 hours, you make more profit. If you estimate a job at 16 hours and it comes in at 18 hours, a break even job turns into a loss. Accurate labor estimates are critical!

Calculating a replacement sales price conceptually is very simple. Estimate your total direct cost for the job (labor, materials, commissions, warranty, taxes, shipping, service plan, subcontract labor, etc.).  You know your overhead cost per hour. Multiply overhead cost per hour times the total number of estimated hours on the job to get total overhead applied to the job.  Then, add the overhead to the total direct cost to get total cost of the job. Finally determine how much profit you want to earn on the job. You then have your price to the customer.

I created a spreadsheet to do the math for you. Email ( or call me at 770-729-8000 if you’d like a copy.

I hope this helps you have a profitable day!


  • Comments

2 comments on article "More Profit Dollars: Properly Price Your Replacement Jobs"

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1/4/2024 7:47 AM

Ruth really knows how to make it easier to earn the profits we deserve in the HVAC industry.

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1/6/2024 2:01 PM

Thanks for sharing this, Ruth.

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Posted: Oct 24, 2023,
Categories: Sales,
Comments: 2
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