Business Practices Question
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18-05-2017, 10:10 AM
Business Practices Question
Doing the annual inspection for a client's Piper one of the spark plug helicoils backed partway out, which the logs indicate had happened before on that cylinder and, I'm reasonably certain, had happened again because it had not been correctly dealt with those earlier times. To properly correct it requires possession of $1600 of specialty tooling, to meet FAA requirements for type of replacement helicoil (serrated) and the proper tool applied at each of three insertion steps (reduction, expansion and staking).

Options were to remove the cylinder & send it to a repair shop or do the remedy in the hangar (without removing the cylinder) with the $1600 set of tools that I would have to procure on my dime. It's the my dime aspect that raises my question. Obviously as possessor of this tool set any other similar occurrence would be a simple labor charge, but this particular problem is exceedingly rare - this is the first time I've encountered it myself in many years of engine work - so it'll spend most of its life in my toolbox gathering dust. Hence the question: would it be appropriate to bill my client some portion of the cost to acquire the tool set - keeping her net expenditure still less than what it would have cost to pull the cylinder, get it repaired and reinstall it, but reimburse me somewhat for having to obtain a tool further uses of may not fully recover its cost?
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18-05-2017, 11:58 AM
RE: Business Practices Question
Typically your tool expenses should be part of the overhead rate you tack onto your labor rate. The cost of your tools plus any cost of money should be prorated over the life of the tools and added to your labor rate as a percentage of your labor rate. When I calculate labor rates the formula would be Base + Fringe + Overhead + G&A + Fee = Hourly Rate. Given a calculated fringe rate of 38%, overhead rate of 22%, G&A rate of 12% and fee of 10% the hourly chargeable rate for someone getting paid $75,000 a year would look like this:

Base ($75,000 / 2080) = $36.06
Fringe @ 38% (base x fringe rate) = $13.70
Overhead @ 22% (base x overhead rate) = $7.93
G&A @ 12% ((base + fringe + overhead) x G&A rate) = $6.92
Fee @ 10% ((base + fringe + overhead + G&A) x fee rate) = $6.46
Chargeable Hourly Rate (base + fringe + overhead + G&A + fee) = $71.08

So yes you should be charging your customers for your tools but not as a separate line item like you would charge for materials such as parts. The tool cost should be part of your hourly labor rate.

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18-05-2017, 12:34 PM
RE: Business Practices Question
Yeah, I don't know dick about business, but capitalize that shit popped into my head because I must have heard of it once. Got no clue if it applies or not. Not really even sure how it's useful. You can deduct the value of the asset from income over time instead of blowing your $1600 wad in one tax return? What if I want to deduct it all in one year? Can I do that? Probably not I would think. And if you itemize that deduction is it legal to charge the customer? Seems like you'd somehow have to deduct whatever you charged here from your tax writeoff. Anyway, like I said I don't know dick about business but at least I learned something new today. Thumbsup

#sigh
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18-05-2017, 12:37 PM
RE: Business Practices Question
(18-05-2017 11:58 AM)Popeyes Pappy Wrote:  Typically your tool expenses should be part of the overhead rate you tack onto your labor rate. The cost of your tools plus any cost of money should be prorated over the life of the tools and added to your labor rate as a percentage of your labor rate.

See, now I know the sailorman was talking about capitalizing it. Big Grin Is it more typical to pass off the amortized costs of equipment to the customers or to take them as tax deductions? I'm assuming you're not allowed to do both, are you?

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18-05-2017, 01:02 PM
RE: Business Practices Question
You could do both, but most companies set a minimum value for assets to be capitalized. For us that's a $1000. Someone else might use $500 or $10,000. The capitalization is a tax write off that helps over the long term, but the bottom line is you have to get paid for your expenses. Otherwise or you aren't in business very long.

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18-05-2017, 02:09 PM
RE: Business Practices Question
Just want to add here that you can only deduct the expense of the equipment once. If it is something you are going to use up in a year you can take it all at once. If you list it as an asset that you use for several years you capitalize it and deduct the depreciation over time.

But you still have to make enough money to pay for it...

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18-05-2017, 02:42 PM
RE: Business Practices Question
My advice:
  • Don't buy a tool you are only going to use once.
  • Have a talk with your customer. Explain the situation. Give her the following options.
    • You can farm the job out. You will charge her for the removal and reinstallatio.
    • She can pay for work done thus far, if any, and take to job to another shop. Recommend one or two.
    • She can buy the tool. Afterwards she can do with it what she wants. Sell it on eBay or keep it for future use.
  • Can you rent the tool?
  • Could someone who has the tool come to your shop and do the job, negating the necessity of removing the head?

Sapere aude
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18-05-2017, 05:57 PM
RE: Business Practices Question
Thanks all for your insights. I'd already sent a check for the tool so for better or worse it's in my inventory - I'll tactfully bring the issue up with my customer and see where it goes - while she's using my services specifically to avoid going to a shop (an annual inspection in a shop would run about $6 - 10K for her airplane whereas I'm hoping to keep the process under $1K for her) she's also fair and doesn't quibble about expenses. In answer to whether the tool can be rented, no, it can't, and a shop I have a good relationship with offered to let me use theirs for free - except they didn't have it, they only thought they did. It's the type of tool you only buy when confronted with what it's needed for. I'll let that shop know that I have the tool and they can borrow it when they need it - it always helps to keep potentially sticky competitive situations well greased. And they will very likely offer me a fee if they do. Many thanks again!
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19-05-2017, 07:08 AM
RE: Business Practices Question
I couldn't resist to comment here. Purchasing a tool that would be depreciated over time does indeed enable you to recognize the use of the tool as a business expense over the expected useful life of the item. Depreciation is, however, a non-cash event. You still need to outlay the full purchase price and then recognize the annual estimate of depreciation as a deduction against revenue in future years.

Facts do not cease to exist because they are ignored- Aldous Huxley
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