HVAC Payroll Percentage: Target and How to Fix It

What counts as payroll for this calculation

Payroll percentage is not just the wages on a paycheck. It includes base pay, overtime, payroll taxes (Social Security, Medicare, unemployment), workers comp insurance, and any benefits like health insurance or retirement matching. Add these up for both field technicians and office staff, then divide by total revenue for the same period. Owners who only track base wages routinely underestimate their true payroll cost by 20-25 percent, because payroll taxes and workers comp for HVAC field labor run higher than many other trades due to the physical nature of the work. This gap matters because pricing built on base wage alone will always underprice the real cost of putting a technician on a truck.

The 30-35 percent target, and why it exists

A range of 30-35 percent of revenue leaves enough margin to cover materials, overhead, vehicle costs, and a healthy net profit after everyone is paid. Go above 35 percent consistently and there is usually not enough revenue per technician to support the crew size, or too much of that payroll is going to overtime and non-billable hours. Go below 30 percent and it can look great on paper while masking a real risk: understaffed crews working unsustainable hours, missed calls going to voicemail, or a maintenance agreement backlog that never gets serviced on time. The target is a range for a reason; where you sit within it should track with your revenue per technician and your growth plans.

What pushes payroll percentage up

Most of these causes are scheduling and pricing problems wearing a payroll costume. A company that fixes its routing so techs run 6 billable jobs a day instead of 5, with the same crew and the same wages, will see payroll percentage drop without a single layoff, because the denominator, revenue, went up instead of the numerator going down.

• Chronic overtime, which costs 1.5x the base rate for the same billable hour
• Too much drive time and windshield time between jobs, paid but not billed
• A crew sized for peak season carried through the slow season
• Flat-rate or hourly pricing that has not kept pace with wage growth
• High turnover, which means constantly paying for training and onboarding time with no offsetting revenue

How to fix a high payroll percentage

Start by separating the problem into two buckets: is payroll actually too high, or is revenue too low for the crew you already have? If revenue per technician is well below the $250,000-$400,000 healthy range, the fix is more billable hours per tech, through better routing, dispatch discipline, and reducing no-show or reschedule rates, not a hiring freeze or layoffs. If revenue per tech is healthy but payroll is still high, look at overtime hours specifically; converting chronic overtime into a second shift or an added technician is often cheaper than paying time-and-a-half indefinitely. Finally, check pricing: if wages have risen 8 percent over two years and flat-rate prices have not moved, payroll percentage will drift up no matter how efficient the crew is.

When payroll percentage looks too low

A payroll percentage sitting well under 30 percent is not automatically good news. It can mean the crew is thin, running back-to-back with no slack for training, callbacks, or slow-season dips, which eventually shows up as burnout, turnover, and declining service quality. It can also mean an owner is working far more hours in the field than a fair market wage would reflect, which understates true payroll cost and overstates apparent profit. Before celebrating a low payroll percentage, check revenue per technician and average hours worked per tech; if both are stretched thin, the business needs a hire, not applause.

How payroll percentage connects to gross margin

Payroll percentage and gross margin are two views of the same underlying question: is labor priced and used efficiently? A service call priced to deliver 50 percent gross margin, at a fully loaded labor cost that matches real payroll numbers, will naturally keep payroll percentage in range across the whole business, assuming utilization stays healthy. When the two numbers disagree, for example gross margin looks fine but payroll percentage is high, it is usually a signal that non-billable hours (drive time, admin time, bench time) are eating more of the payroll budget than the job costing system is capturing.

Why this number needs a monthly check, not a yearly one

Payroll percentage can drift for months before an owner notices, because a P&L reviewed once a quarter, or once a year at tax time, hides the trend inside a lot of other numbers. A company that checks this monthly, or even weekly during a busy season, can catch overtime creep or a hiring mismatch within a few pay periods instead of a few quarters. This is one of the clearest examples of why real-time visibility matters more than an accurate-but-late report: the fix (adjust the schedule, add a tech, or revisit pricing) is cheap and fast when caught early, and expensive and slow when caught in April.

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