How to Calculate Profitable Inspection Fees
by Nick Gromicko, CMI® and Ben Gromicko
The most important factor in any business is figuring out how much to charge for services. That’s what we call pricing. It’s crucial. Many inspectors have no idea how to go about it. They don't know what price is both competitive and profitable. That's why you need to develop a strategy for pricing your services.
Figuring out how to bill clients is also very important. In a home inspection business, you have to learn how to set competitive prices and also how to bill clients efficiently.
Let’s learn about those two things: pricing and billing. They are two essential tasks for an inspection service business.
Pricing
Inspectors find it difficult to figure out how to price their services and what rate to use. Many professionals struggle in assigning a value to their time. You should know your hourly rate or how much you charge per hour. And remember, your hourly rate needs to cover not just your valuable time, but also your overhead. And it has to also bring you profits.
Two Ways
Figuring out how much to charge is not easy. And there is no standard way for how service businesses like yours do it. But there are two common ways you can consider. One way is to adjust your number of billable hours so that your revenue equals salary, overhead and profits. And the other way is based upon the local market. This means that you set your hourly rate based on what your local market will bear. Let's explore more in-depth explanations about these two methods: billable hours and market-based.
Billable Hours
The billable hours method is based on how many hours you work on your inspection service. The more time you spend doing an inspection, the lower your hourly rate. Given the same rate, the less time you work, the more you make per hour.The goal here is to figure out your billable hours or your hourly rate. Then you’ll multiply that rate by the number of hours it takes you to perform one home inspection. This will result in a number that we’ll call your flat rate. The goal is to calculate your flat rate or what you charge for a home inspection on average. This flat rate can be adjusted up or down by a few other factors, including the size of the job or the amount of time spent doing the inspection.
For example, Inspector Mary may have figured out that her business is profitable when she charges an average of $400 for a typical home inspection. This flat rate represents her calculated hourly rate of $100 per hour, assuming that it takes Mary about four hours, on average, to do one typical home inspection. So, Mary's flat rate is $400, which can be adjusted up or down, depending on other factors. She figured out that, on average, she works four billable hours at $100 per hour to be successful--or profitable--in her business.
To figure out billable hours, let's consider how many total hours you work in a week. If you consider that there are 40 hours in a typical work week, and there are 50 working weeks a year, then you work a total of 2,000 hours a year. If you work 10 hours a day, that’s 50 hours a week, and 2,500 hours a year. But how many of those working hours are billable? That’s the question, and you’ll have to do some figuring on your own to answer it. But let’s make some assumptions about doing home inspections to come up with an example from which you can learn how to figure out your billable hours.
You may have no idea how many inspection jobs you’ll have during the year, and, therefore, you really don’t have a clue as to how many hours you’ll actually be working for your clients. Brand new inspectors face this dilemma. You don’t have any jobs scheduled, but you need to figure out how much to charge for your services, just like Mary did.
If you don’t have any jobs scheduled, or maybe you just don’t know how many jobs you will be scheduling in the future, you can calculate your billable hours to include the number of hours you desire or plan to spend, at most, per inspection job. This does not include business-related work, such as administrative stuff: filing paperwork, cleaning the office, marketing development, extra training, answering the phones, replying to emails, working on taxes, paying bills, research, shopping for tools, etc. You may think of billable hours as the maximum amount of time you want to spend per inspection job, including driving, inspecting, and report writing.
So, ask yourself: How many hours, on average, does it take you to do a typical home inspection?
Again, to calculate billable hours is to think about how many hours you’ll actually work on each home inspection job, even if you don’t have any jobs scheduled. The hours would be only the time you spend working on the inspection itself. Assume each job takes five hours, including driving time, inspecting time, and report-writing time. And you expect to do one job per day. That’s five hours per day of billable hours, 25 hours per week, and 1,250 billable hours per year.
To figure out billable hours, let's consider how many total hours you work in a week. If you consider that there are 40 hours in a typical work week, and there are 50 working weeks a year, then you work a total of 2,000 hours a year. If you work 10 hours a day, that’s 50 hours a week, and 2,500 hours a year. But how many of those working hours are billable? That’s the question, and you’ll have to do some figuring on your own to answer it. But let’s make some assumptions about doing home inspections to come up with an example from which you can learn how to figure out your billable hours.
You may have no idea how many inspection jobs you’ll have during the year, and, therefore, you really don’t have a clue as to how many hours you’ll actually be working for your clients. Brand new inspectors face this dilemma. You don’t have any jobs scheduled, but you need to figure out how much to charge for your services, just like Mary did.
If you don’t have any jobs scheduled, or maybe you just don’t know how many jobs you will be scheduling in the future, you can calculate your billable hours to include the number of hours you desire or plan to spend, at most, per inspection job. This does not include business-related work, such as administrative stuff: filing paperwork, cleaning the office, marketing development, extra training, answering the phones, replying to emails, working on taxes, paying bills, research, shopping for tools, etc. You may think of billable hours as the maximum amount of time you want to spend per inspection job, including driving, inspecting, and report writing.
So, ask yourself: How many hours, on average, does it take you to do a typical home inspection?
Take that number you work per inspection job multiplied by the number of jobs you plan to work per year (hours per job x number of jobs), and that will be your billable hours. For example, let’s say Inspector John assumes that it takes him an average of five hours per inspection job, including driving to the job, doing the actual inspection, driving back to the office, and writing the inspection report. John plans to work five inspection jobs per week (that’s 250 per year, assuming 50 work weeks per year). So, John’s billable hours are 250 jobs x five hours per job = 1,250 billable hours. Now, you try this. Just for this exercise, pick some numbers to play with. You don't have to have the exact numbers, but do your own calculations, like John.
Again, to calculate billable hours is to think about how many hours you’ll actually work on each home inspection job, even if you don’t have any jobs scheduled. The hours would be only the time you spend working on the inspection itself. Assume each job takes five hours, including driving time, inspecting time, and report-writing time. And you expect to do one job per day. That’s five hours per day of billable hours, 25 hours per week, and 1,250 billable hours per year.
Now that you've figured out your billable hours per job and per year, let's work on your flat rate, or your average fee for one inspection of a typical home in your market.
Billable Hourly Rate
To calculate your billable hourly rate (assuming you have no employees yet), use the following simple formula:
(Desired Annual Salary + Overhead + Desired Annual Profit) ÷ Annual Billable Hours =
Billable Hourly Rate
Billable Hourly Rate
Let's review what the terms in the above calculation mean. Your "desired annual salary" is how much you want to make every year. This should be fairly straightforward. How much money do you want to earn annually? $50,000 per year? $100,000 per year?
The term "overhead" is the fixed costs of operating your inspection business. This usually includes rent and utilities (electric, HVAC, phone/Internet), computers and software, other office equipment, cameras and other inspection tools, vehicle and fuel, training and certifications, etc. These are the business-related expenses that you must pay for all the time, no matter what is going on or how your business is doing. Your overhead is your fixed costs.
The term "desired annual profit" is how much profit you want your business to make. A reasonable goal is 20%, and that’s not including your salary or overhead. That's 20% of the gross revenue (all the money you make).
Now, add everything together (desired annual salary + annual overhead + desired annual profit) and divide that result by your annual billable hours (the total number of hours you work doing the inspections per year; for John, it's 1,250 hours). The result is the hourly rate you need to charge to cover your salary and overhead, and also make profit.
Here’s an example of Inspector John figuring out his billable hourly rate. John's goal is to make $100,000 per year in salary (that’s his desired annual salary as gross income, before taxes). And he figured out that his overhead is $25,000 per year. So far, John's business needs to make a total of $125,000 to pay for his salary and overhead. Now, John sets his profit margin at 20%. The question is: How much money (gross revenue) does John's business have to make in a year to reach his goal?
The equation we have is:
Gross Revenue = Salary + Overhead + Profit. Entering known values, we have Gross Revenue = 100,000 + 25,000 + 20% of Gross Revenue. Adding and changing the percentage into decimal, we have Gross Revenue = 125,000 + 0.2 (Gross Revenue), which brings us to Gross Revenue - 0.2 (Gross Revenue) = 125,000. And that brings us to 0.8 (Gross Revenue) = 125,000. Dividing both sides by 0.8 gives us Gross Revenue = 125,000 / 0.8 = 156,250.
Now, John's business needs to make a total of $156,250. John plans to work one five-hour inspection job per day. Assuming 50 work weeks per year, that’s 1,250 billable hours per year. So, John takes $156,250 (salary + overhead + profit) and divides that by his annual billable hours of 1,250. The result is $125 per hour.
John should be pricing his inspections at $125 per hour. Assuming John’s typical inspection takes five hours, John’s home inspection service should be priced at $625. This is John’s flat rate, the average fee for one inspection for a typical house in his market. John should do a home inspection for $625, give or take a little.
John figured out that $625 per inspection will cover his $100,000 salary and $25,000 overhead, and yield a 20% profit. John has successfully set his pricing.
Market-Based
Another way to figure out your hourly billable rate is to base it upon what the market will bear. This method is imprecise because you’re not using any math. You’re just using your understanding of the local market, including what other businesses with similar services are doing and what they’re charging. It’s also based upon what you have experienced in your business using different pricing.
Some inspectors simply price their services high and see if potential clients hire them. If they don’t convert based on a certain price, they’ll lower it until their market responds.
Some inspectors look at their competitors' websites to see how they price their services. Then they decide to price their own services based upon what they see their competition doing. To check out your competition, use InterNACHI's home inspector search engine at InspectorSeek.com.
Combination
It’s probably a good idea to set your pricing based upon both methods: billable hours and market-based. You may consider that doing the calculations of your billable hours will result in a number that will pay the bills, pay yourself, and yield a profit. And after using the formula, you can make adjustments to your pricing using the market-based approach.
For example, Inspector John’s calculated hourly rate resulted in $125 per hour, which equals $625 for a five-hour inspection job. Now, if John’s competitors are charging $400 per inspection, then John will have to work on his marketing strategy and communicate to potential clients why he charges more than everyone else and why he's worth it. Or maybe John combines additional value or ancillary services to the "core" home inspection service. To reach $625 per inspection, John may focus on selling inspection packages. An inspection package might include a home inspection and a discounted radon gas test or wood-destroying organism inspection and report. The total of the inspection package (home inspection and radon test) could add up to reach the $625 fee per inspection, assuming the additional value or service does not extend the time allotted for the home inspection.
For help with creating your own persuasive marketing materials that express why you're worth what you're asking, contact our Inspector Marketing Department at marketing.nachi.org
If a client hires John at $625 to do an inspection, and John realizes that the house is very large, then he can adjust his fee upward. If it takes him an extra hour, then John knows that, according to his hourly rate, he needs to charge an extra $125 dollars for a total $750 for the job. Likewise, if the job is extra-small, and it takes him one less hour to do the inspection, John can have confidence in discounting his inspection fee by $125 and still follow his hourly rate formula.
Fee Calculator
InterNACHI provides a free inspection fee calculator at https://www.nachi.org/fee-calculator.htm. Give it a try to figure out your pricing strategy. It’s free.
Outsourcing Inspections
Sometimes an inspector has to hire another inspector to do all of the inspection services that the client wants. Maybe Inspector Mary does not perform mold inspections, but she wants to provide the service. If Inspector Mary hires her inspector friend Manny the Mold Inspector, the common approach is for Mary to charge a little more than what Manny would charge.
If you use another inspector to perform some services that your business offers but that you don't do yourself, then you should inform your client that you intend to hire another inspector to perform certain inspection services. Be transparent. You should also inform your client of the total price of the service, including the subcontracting work. Don't surprise your client with a big bill.
For example, let’s say Inspector Mary is hired to do a home inspection and a mold inspection. Mary has figured out that to maintain profitability, she must charge an average fee of $500 for a typical inspection. Mary decides to hire Manny the Mold Inspector to perform the mold inspection. Manny charges $200 for a mold inspection. Mary will mark up the cost of Manny's mold inspection by 20%, a common approach to yield a profit. Mary's goal is to make a reasonable 20% profit for managing Manny and his mold inspection. Mary informs her client that the total fee is $740 for both the home inspection ($500) and mold inspection ($240). This calculation takes into consideration Mary’s annual salary, overhead, profit margin, and outsourcing management fee.
If you hire another inspector to provide services that your business offers but that you don't directly perform, then your pricing strategy must include your flat rate, the subcontractor's fee, and a management fee in order to yield your desired profit.
Summary
- Figure out your billable hourly rate by using a formula that factors in your desired salary, overhead and profit.
- Adjust your flat rate for your inspection service up or down using your hourly rate.
- Do market research on your competitors.
- If you outsource services, mark up your costs by your desired profit margin.
Every business owner--large and small--must calculate these figures in order to run a business that will not only sustain itself, but also provide some room to grow, whether you intend to fold your profits back into the business, expand your family, or elevate your lifestyle. Most business owners desire to do all three. It all starts with the numbers.
