Your technicians are booked. The phones are ringing. Revenue is up. So why does payroll still seem to swallow so much of the money coming in?

That question comes up in HVAC businesses of every size. The answer is not simply to cut hours or push technicians harder. First, you need to know what you are counting, which work is producing the revenue, and whether your pricing supports the people required to deliver it.

There is no reliable, universal percentage that every HVAC company should spend on payroll. A service-heavy company, a replacement-focused contractor, and a commercial installer may have very different labor requirements. Your useful target is the percentage that allows your specific mix of work to cover direct costs, overhead, taxes, reinvestment, and a reasonable profit.

Calculate fully burdened payroll divided by revenue for the same period, then review the result by service line and against your own budget and prior periods. A rising percentage is a signal to investigate—not automatic proof that employees are overpaid.

Start with a consistent time period. For a monthly company-wide measure, use:

HVAC payroll percentage = Fully burdened payroll cost ÷ Net operating revenue × 100

Fully burdened payroll is the entire employer cost of employing your people—not just their gross wages or the net pay hitting their bank accounts. Include base wages, overtime, commissions and bonuses; employer Social Security and Medicare taxes, federal and state unemployment taxes; employer-paid health and other insurance benefits; employer retirement contributions; workers’ compensation premiums; and paid time off or holiday pay when those costs are not already captured in gross wages. Include other recurring employment costs only if you define and apply them consistently. Do not double-count benefits or PTO.

For decisions, calculate two different ratios: (1) total fully burdened company payroll divided by net operating revenue, including office and management staff; and (2) fully burdened direct field labor divided by the revenue of the service line or jobs it supports. The first measures the company-wide staffing load. The second shows whether service calls and installations are priced to cover the labor needed to perform them.

In this example, payroll is 30% of revenue ($60,000 ÷ $200,000). That is a calculation, not an industry benchmark or a judgment about whether this company is profitable. To answer that, you also need equipment, parts, subcontractors, trucks, rent, insurance, and the rest of the cost structure.

• Direct field labor: technicians, installers, apprentices and field supervisors performing customer work.
• Indirect labor: dispatch, office administration, marketing, management and other support roles.
• Employer burden: employer payroll taxes, applicable benefits, workers’ compensation and other employee costs, allocated consistently.
• Owner compensation: separate owner W-2 wages from distributions and identify whether the owner performs billable field work or management duties.
• Subcontractor labor: normally not payroll; include it in job costs when comparing direct labor economics, or you may understate the labor required to deliver the work.

Do not combine employee payroll with subcontractor invoices in one month and separate them the next. Consistency matters more than making one report look favorable.

A $10,000 service revenue week and a $10,000 equipment replacement week can require different labor hours and material costs. Service departments may have more technician time relative to parts. Installations may carry substantial equipment costs. Commercial projects can include long travel, scheduling gaps, and progress billing.

That is why your HVAC financial reporting needs to separate service, maintenance, and installation economics.

If one line of work grows faster than another, your company-wide payroll percentage can change even when individual technicians are just as productive as before. Review gross margin and direct labor by department, then examine total payroll at the company level.

Suppose an HVAC business has $2.4 million in annual revenue. Fully burdened payroll moves from 28% to 32% while sales remain flat. That four-point increase equals $96,000 of additional annual payroll cost ($2,400,000 × 4%). Unless something else improves, that cost comes out of money available for overhead, reinvestment, and profit.

The right question is why the percentage moved. Were there extra callbacks? Did overtime spike during a heat wave? Did the company add a dispatcher ahead of planned growth? Were jobs priced using outdated wage assumptions? Or did lower-margin installation work replace higher-margin service work?

• Revenue per paid field hour: net revenue divided by paid field hours, interpreted by work type.
• Billable utilization: productive or billable hours divided by paid hours, using a clearly defined method.
• Direct labor cost per job: wages and employer burden assigned to a job or service call.
• Gross margin by service line: revenue minus relevant direct costs, divided by revenue.
• Callbacks, overtime and travel time: hours that consume payroll without producing expected additional revenue.

These metrics work together. A technician can be busy all day and still produce weak margins if dispatch routes are inefficient, pricing is too low, or repeat visits are frequent.

Use a clearly defined revenue base, consistently. For most internal management reports, net operating revenue—after discounts, returns and similar reductions—is more meaningful than gross invoices. Avoid treating collected sales tax as revenue. Match the payroll and revenue periods as closely as possible; cash collected this month may relate to jobs performed earlier.

For installation jobs spanning several weeks, use job costing and appropriate revenue recognition so one large customer deposit does not make payroll look artificially low for a week.

Review field labor, overtime, callbacks and scheduling weekly, when you can still change next week’s dispatch and staffing decisions. Review fully burdened payroll as a percentage of revenue monthly, after payroll entries and revenue are reconciled. Compare a trailing three-month or seasonal period to avoid overreacting to one unusual week.

An additional technician may allow you to take more calls, shorten lead times, and protect customer service. But wages are only the starting cost. Consider payroll taxes, benefits, training, truck costs, tools, insurance, dispatch capacity, and whether there is enough profitable work through the slower season.

Before committing to another salary, work through the numbers in our guide to hiring another HVAC technician.

A new hire can temporarily increase payroll percentage before new revenue catches up. That can be sensible if you planned for the ramp-up and have the cash to support it. The concern is adding permanent payroll without a realistic workload and margin forecast.

Payroll is one of the biggest levers in an HVAC company, but it cannot be judged in isolation. A low payroll percentage does not guarantee good profit if equipment costs, fleet expenses, warranty work, or overhead are high. A higher payroll percentage may be sustainable in a service department with stronger gross margins.

Payroll is only one part of the picture; our guide to HVAC profitabilityexplains the other numbers owners should watch.

• Verify the numbers first. Reconcile payroll and revenue, and make sure owner pay, benefits and subcontractors are classified correctly.
• Separate service, maintenance, replacement and commercial work before drawing conclusions.
• Check job pricing against actual technician hours, burden and callback rates.
• Review overtime, route efficiency, scheduling gaps and nonbillable time.
• Model the cash-flow effect of changes before reducing staff or raising prices.
• Set a company-specific target using a realistic budget and review it every month.

Do not start by cutting your best technicians. The problem may be underpricing, unproductive scheduling, poor job costing, or a department mix that your reporting does not show.

If revenue is growing but there is never enough left over, guessing at a “normal” payroll percentage will not solve the problem. You need to know what your technicians cost, which jobs produce the best margins, and whether your staffing and pricing decisions are working together.

Profit Wise Accounting & Tax helps HVAC business owners make sense of payroll, job costs, financial reporting and cash flow so they can make decisions using numbers—not assumptions.

About the author: Sharon Heinz, EA, owner of Profit Wise Accounting & Tax in Huntsville, Alabama, advises small-business owners on accounting, payroll, tax planning and financial decisions.

Educational information only. Actual payroll targets depend on your business model, cost classification, accounting practices and goals.