HVAC profit margins: how to benchmark yours
Most HVAC companies keep a single-digit share of revenue as net profit. In ACCA's Contractor of the Future study of more than 1,000 HVACR contractors, the ones using flat-rate pricing on service calls averaged 7% net profit, and the rest averaged 4%. Brandon Vaughn, who coaches home service owners, sets the bar at 20%.
To see where your company stands, you need three numbers from a P&L that's set up to compare: gross margin by department, overhead as a share of revenue, and net profit after you pay yourself a fair wage. Gross margin is what's left after the labor and equipment on the job. Net profit is what's left after everything else too.
What's a good HVAC profit margin?
The ACCA survey numbers sit between 4% and 9% net. Besides the flat-rate split, contractors who put at least 12% of revenue into marketing saw net profits of 9%, against 5% for those who spent less. Those are survey averages, which isn't the same as what a shop should make.
Brandon aims higher. Here's what he told two business partners after going through their payroll numbers:
You guys need to be way more profitable than you are. It needs to be way more profitable. I mean, you really need to be operating at a 20% net profit regularly.
Most shops start well below that, so the target forces a hard look at each department.
Split service from replacement
A blended margin can hide a weak department. Here's an example HVAC company doing $2 million a year, with every number made up to show the math, not to set a benchmark.
| Line | Service and maintenance | Replacement | Whole company |
|---|---|---|---|
| Revenue | $800,000 | $1,200,000 | $2,000,000 |
| Tech labor, fully loaded | $240,000 | $240,000 | $480,000 |
| Equipment and parts | $120,000 | $540,000 | $660,000 |
| Permits, subs and disposal | $0 | $60,000 | $60,000 |
| Gross profit | $440,000 | $360,000 | $800,000 |
| Gross margin | 55% | 30% | 40% |
| Overhead, including the owner's salary | $600,000 (30%) | ||
| Net profit | $200,000 (10%) |
A 40% blended gross margin and 10% net look respectable next to the survey. The split shows where the money is: service carries the company, and replacements bring in 60% of the revenue at a 30% margin.
What moves the number
Price moves it fastest, because a price increase costs nothing to deliver. Brandon made the point with a calculator on a coaching call about budgets:
Let's say right now, your business is doing $300,000 a year and you have a net profit of, let's say it's low. Let's say it's only 10%. So 30,000 net profit. Well, if all of your expenses stayed exactly the same and you did nothing, but just raise your prices by 15%… That all goes straight down to your bottom line. All of that extra $45,000. You've in essence doubled your profitability just by raising your prices by 15%.
Apply a smaller version to the example. Raise service prices 5% and that's $40,000. Raise replacement prices 5% and that's $60,000. Net profit goes from $200,000 to $300,000, about 14% of the new revenue, with the same trucks and the same crew. How to price HVAC jobs shows how to set those prices from your costs instead of guessing.
The next lever is labor hours. If installs run long, job costing shows you which jobs and which crews.
Set up the books so the comparison is fair
Your margins only compare to a survey, or to last year, if the P&L is built the same way every month:
- Tech wages, payroll taxes and workers' comp go in cost of goods sold. In overhead, they make gross margin look better than it is.
- Service, maintenance agreements and replacements each get their own income line, with their own costs under them.
- Your own salary sits on the P&L at what you'd pay someone to do your job. If you only take draws, net profit is overstated by that amount.
- Equipment bought for next month's installs gets matched to those installs, not dumped into this month.
- Maintenance agreements count as income when the visits happen, not the day the plan is sold.
The chart of accounts for contractors shows the accounts that make this work, bookkeeping for HVAC covers maintenance agreements and callbacks, and our HVAC bookkeeping services page covers the rest.
Compare to your own plan first
A survey tells you where the industry sits. Your own budget tells you whether you're getting better. One plumbing owner Brandon coached was sure he had to raise prices, until they put his actual numbers next to his budget for the first time. He'd budgeted about $40,000 of net profit for January through August. He'd actually made about three times that. Check margins by department every month against your budget and the same month last year. Then decide whether prices, labor hours or overhead need the work.
If you want a second set of eyes on yours, bring last year's P&L to a free profit call. With YetiBooks you get the same specialist every time, who walks you through your numbers in plain English (here's how it works).
Questions owners ask
What is a good profit margin for an HVAC company?
The average profit margin for an HVAC company in ACCA's survey groups runs 4% to 9% net. Brandon pushes owners toward 20%. For gross margin, the whole company needs at least your overhead percentage plus your profit target: at 30% overhead and a 15% goal, that's 45%.
Why is my gross margin high but my net profit low?
Either overhead is too heavy for your revenue, or costs are in the wrong place. Tech wages coded to overhead make gross margin look strong and push the problem down the page. Check the setup before you start cutting.
Should my salary come out before net profit?
Yes. Put a market-rate salary for your role on the P&L. Otherwise you're comparing your profit, which includes your pay, with companies that pay a general manager.
