A good way to increase profits is to increase productivity. How do you know when productivity is suffering? One way to determine productivity is by figuring out what percentage of your gross income goes to compensation.

This can be calculated on a monthly basis by adding total payroll and payroll taxes and dividing by sales.

Include everyone's payroll: field and office staffs and the owner or owners. Include payroll taxes. Do not include health insurance, worker's compensation, etc.

Break the figures down by department, if you have them.

Depending on what kind of work your company performs, your targets should be:

- Less than 20 percent for new construction

- 25 percent to 30 percent for replacement work

- Less than 38 percent for service work

If your company does not have departments, then go by the type of work that you do most of the time.

If your compensation is not in line, then you need to increase productivity. The first place to look is on the time sheets. How many hours are you paying your employees for?

How many hours are you billing customers for? If it's less than 75 percent, then start here. Productive residential companies bill more than 85 percent of time spent in the field.

The most productive commercial company I know bills 95 percent of its technicians' time.

Get out and stay out

Keep the service technicians out of the office. They should only be there one day per week for meetings. Send them on their first job of the day right from their homes.

Make sure that your employees understand what costs really are. It is important that they understand profits, losses and overhead.

There are many pros and cons of opening up your financial statement to your employees. Most contractors don't do it. The major reason is that many do not want employees to see their pay. However, you could lump all of the office salaries in one figure, so the boss' pay won't stand out.

If employees don't really understand profits, overhead and margins, they cannot help create more profits for the company and income for themselves.

One of the best things to do is to show everyone the true cost per hour of productive work. This means showing the technicians that they aren't really just making their hourly wage.

There are costs for payroll taxes, worker's compensation, holidays, vacations and truck expenses. After you go through the direct costs, break the rent, utility bills, etc., into a cost-per-hour figure. This is usually an eye-opening exercise for your employees. Once they see this, it is unlikely that they will complain about hourly rates again.

The bottom line

Now show employees how their productivity affects the bottom line. If the service technicians spend an extra 30 minutes in the shop each day, on a daily basis it may not seem like a lot. But add up the costs for a year, assuming five technicians and a $50 per hour service rate. In one day, the technicians waste 2.5 hours. That equals $125 per day, not including the parts you could sell.

In one week, it equals a $625 loss and in one year $32,500 (again, not including parts you could sell).

This $32,500 goes directly to your bottom line.

Installation crews can do a similar exercise. The key is that everyone can help the revenue-generating employees be more productive. Dispatchers can get the first calls of the day to technicians the evening before, so they don't have to come into the shop. Installation crews can have their jobs ready for them when they arrive so they don't have to waste time in the shop. The materials can be delivered to the job.

Once your employees understand these two areas, they will come up with ways to increase productivity, which increases profits for them and for you. So, explain where you are financially, get a consensus on growth and profit goals, teach employees about productivity and let them help you reach the goals.

Once your employees understand profit and loss, they understand the consequences of the lack of productivity. Get their suggestions on company goals and have them suggest rewards for reaching their goals.

(Copyright 2004, Ruth King. All rights reserved. Write to Ruth King's American Contractor Exchange, 1650 Oakbrook Drive, Suite 405, Norcross, GA 30093. Call (800) 511-6844; fax: (770) 729-8028. See www.acecontractor.com on the Internet.)