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Saturday, January 05, 2013

The Furnace and the Tax

My furnace recently quit.  Fortunately, it wasn't that big of a deal because I live in San Diego and it's just not that cold, even in the middle of winter.

It was obvious what was wrong.  A motor started making lots of noise and then quit completely.  I looked it up and it was the "Draft Inducer Motor".

I got a local furnace repair place that I qualified with Yelp to come start the repair process.  I told the dispatcher what was needed.  The repair guy showed up without the part ("We don't stock our trucks with that part").  He verified that it was indeed that the "Draft Inducer Motor" needed to be replaced.

The next day he gave me a quote of around $900 to fix the furnace.  I was in the middle of a meeting in the middle of some lettuce fields when he called so I told him I'd get back to him.

$900 sounded like a lot to me so I removed the motor assembly from the furnace (took 1 minute), got the part number off of the motor, and looked it up on the Internet.  I found it for well less than $100.  Ultimately, I bought from a place that seemed reputable and was able to deliver it overnight and from them the motor was $140.

When it arrived, I disassembled the draft inducer motor assembly and reassembled it with the new motor and put it back in the furnace.  Everything was very straightforward and easy and took me about an hour and the furnace works fine again.

A $900 estimate for a $100 part and an hour of time (or less for someone who does this frequently)?  Great work if you can get it!

I gave them a bad Yelp!  The owner commented to my Yelp!:

"We appreciate this members concern with regards to pricing.  However there are a lot of things to account for when running an HVAC business that this customer fails to see. 
"First of all the service call and diagnostic are totally refunded from the repair charge that I quoted at $865 bringing it down to $770 when all is said and done. Secondly of course when you buy a non factory part online that comes with no warranty and install it yourself you are going to get it for cheaper, much cheaper!  We only install factory parts from the manufacture that comes with a 5 year warranty not to mentioned installed by a licensed and insured contractor. 
"For example my son's braces cost me over $4,500 this year however all the parts and metal only cost the dentist $185.  Do I feel I got ripped off because of this?  Absolutely not!  When you acquire a professional service to perform work; you are paying for many things, not just the part. You are paying for the skill and technical know how of the technician.  Not to mention things like Insurance, trucks, liability, workers compensation, employee training, vehicle maintenance, gas, test equipment, state and federal taxes, employee compensation, advertising, tools, warehouse and  office rent, phones, lighting, warehouse and truck stock, management administration, office equipment, computerization, legal fees, employee benefits, office staff and supplies just to name a few. [...]"
The motor I ordered was new and an exact replacement part with a 5-year warranty.  I remembered his quote being $900, but maybe he said $865, not really a significant difference.  The braces analogy made me laugh - my kid's orthodontist and assistants spent many, many hours over a period of years working on my children's teeth.

But then he gets to some valid points: "Insurance, ..., liability, workers compensation, ..., state and federal taxes, ..., legal fees, employee benefits, ...".  A whole lot of costs imposed by government and lawyers.  I rather doubt they justify charging $900 for a $100 part and less than an hour of time, but it justifies part of it.

Now let's consider what I would have to earn in order to cover that $900 fee.  Since I'm a programmer and I do some hourly consulting, I actually can consider what it costs me on a marginal basis pre-tax.  Between FICA (15.3% - both halves since I'm a consultant),  Federal Taxes (36%), and State Taxes (11% in California), with AMT ensuring that there are no deductions, my marginal rate is 60+%.  In order to pay that $900, I'd have to earn $2,250 pre-tax.  Of that $1,350 off the top would go to various governments, $800 would go to the furnace repair company of which a significant portion would also go to various governments, I estimate that $15 would go to the motor distributor, and finally $85 would go to the motor manufacturer and much of the manufacturer's cost also would reflect taxes and costs imposed by various governments.

This is a great example of a simple transaction in which governments are sucking the life out the economy.  Probably near 80% of the money required for this simple repair would've gone to governments.  All for no real gain by me, rather just trying to repair a rather critical household item and get back to where I was before it broke.

15 comments:

erp said...

Most things nowadays are either so complicated they can't be fixed except by those with specialized tools or made to be thrown away and replaced when they break down.

Congrats that you solved the problem on your own.

BTW - Any pics from your trip to paradise?

Bret said...

I find that most things with pipes (gas or water) can still be fixed. Electrical too, but not electronic.

This furnace actually indicated what the fault was so it was pretty obvious.

Harry Eagar said...

Replace 'furnace' with 'boiler' and get back to me.

Harry Eagar said...

Replace 'furnace' with 'boiler' and get back to me.

Hey Skipper said...

A couple years ago I had my furnace inspected, and due to a high startup current, the guy told me the fan motor was on its way out -- $600 if he did it, $200 if I did. I figure he told me that on account of he was in a garage full of tools.

In Anchorage, that is rather a bigger deal than in San Diego, so I jumped on it. What with learning curve, plus an awkward section of PVC pipe (whoever did the installation didn't give a tinker's darn for servicing the thing), it took me just under four hours.

He probably could have done it in half the time.

I'm betting he wasn't making anything like $200/hour, nor was the company getting anything like all the rest.

(Which is why our tax system is much flatter than it appears at first glance.)

I find that most things with pipes (gas or water) can still be fixed. Electrical too, but not electronic.

Absolutely -- and that is still most things even on modern cars.

As for all the electronic bits on them, in most cases it is pretty easy to figure out whether it is something other than the electronic bit at fault. If there isn't, then it is almost always easy to get the thing from a dismantler, and R&R is almost always straightforward.

Recently, the ABS went out on my old enough to drink car. Checking the speed sensors and a couple other things was easy. Had to be the ABS control module. $90 from a dismantler, 15 minutes to remove & replace.

Dealer charge? $900.

Bret said...

So, maybe the guy wasn't overcharging me relative to what all these sorts of repairs cost when you have someone else do them.

Taxes and regulation conflict with the whole specialization concept which is the basis of trade and wealth creation.

erp said...

... Yup and we've only seen the tip of the iceberg. Over the next few years, the noose will get tighter so that nothing will be left to chance and we'll become ciphers.

Harry Eagar said...

'Taxes and regulation conflict with the whole specialization concept which is the basis of trade and wealth creation.'

I cannot follow this as regards regulation. Seems to me that regulation tends, often, to enforce specialization -- you should listen to the optometrists on the subject of prescription drugs here.

Whether that is a good thing or not depends on circumstances. Given a choice between having a brain surgery by a general surgeon and a brain surgeon, I suspect most people would go with the specialist, even if he charges more.

OTOH, when I lived in Iowa, there was a scandal about a brain surgeon who kept operating on the wrong hemisphere. Even after the nurses wrote "CUT HERE" in magic marker on the right spot, he kept cutting the wrong part out.

Last I heard, he was teaching brain surgery, after being regulated out of practicing.

Curiously, he was NOT excluded from finding work by market forces.

Hey Skipper said...

Curiously, he was NOT excluded from finding work by market forces.

More than curious, every bit of this anecdote is very, very difficult to believe.

erp said...

Harry, How is this different from Bill Ayers and his beautiful bride skating much more serious charges and living the good life as shapers of college students.

Bret said...

Harry Eagar wrote: "Seems to me that regulation tends, often, to enforce specialization..."

That's a good point from the worker point of view.

I was more looking at in from the consumer point of view. It's becoming too expensive for me to hire folks who are much better than me at things (like furnace repair) because of taxes and regulation. So instead of focusing on what I'm good at, I need to learn to be marginal at a whole bunch of skills.

Harry Eagar said...

Specialists make more than non-specialists. Why is that surprisng?

I was talking with a man who runs a helicopter business a while ago and I mentioned to him that I was surprised when a friend of mine who runs a small airline told me he hires mechanics for $16 an hour.

"I really, really want the man who maintains the helicopter I fly in to make more than I do," I told him.

He told me that he paid his experienced mechanics far more than $100K/year.

Hey Skipper said...

... friend of mine who runs a small airline told me he hires mechanics for $16 an hour.

The word "mechanics" needs qualifying. There are people who might be called "mechanics", but are really operating at an apprentice level, and are probably building experience in order en route to an A&P certification.

(Kind of like civilian pilots typically progress through various instructor levels and small commuters earning low wages en route to a major airline job.)


[Bret:] I was more looking at in from the consumer point of view. It's becoming too expensive for me to hire folks who are much better than me at things (like furnace repair) because of taxes and regulation. So instead of focusing on what I'm good at, I need to learn to be marginal at a whole bunch of skills.

Which is one of the problems. Unlike a sales tax, or income taxes, these business taxes are hidden from those who pay them, which makes it easy for politicians to hide their profligacy.

I get the need for many regulations -- there are many things that we want in a wealthy society, and the only way to get them is to level the playing field.

Unfortunately, too often regulations have the effect of corporatism.

Bret said...

Harry Eagar wrote: "Specialists make more than non-specialists. Why is that surprisng?"

That wouldn't be surprising in the least. Unfortunately, it's not true in this case if taxes (and costs imposed due to regulation) are taken into account.

As I pointed out, to pay for the $900 repair, I would've had to have made an $2,250 pre-tax. Since the repair took me an hour and about $250 pre-tax paid for the motor, that's an effective pre-tax wage of $2,000.

So mediocre me makes $2,000/hr for self-furnace repair. I rather doubt the specialist makes more than a small fraction of that.

That's the problem.

Hey Skipper said...

Now let's consider what I would have to earn in order to cover that $900 fee. Since I'm a programmer and I do some hourly consulting, I actually can consider what it costs me on a marginal basis pre-tax. ... In order to pay that $900, I'd have to earn $2,250 pre-tax.

Another way to look at it is to compare the amount of time you would have to work to pay that $900 bill, vs. how much time it would take you to do the work yourself, plus the costs of the motor and any tools you might have to get. After all, in economic terms, the tradeoff is between time consulting and time installing.

Obviously, your net hourly rate makes a difference, but as a ballpark estimate, if you spent five hours installing the motor instead of five hours consulting, you would be at a break-even. (Clearly, you came out way ahead.)

That's why I own a lot of tools.