Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Last month I discussed how to wrap your head around your business to ensure its profitability and the three essential “Ps” for running it. Price it right, produce it right and produce enough of it. If you do these three things, you’re going to make money.
He wanted to determine how much revenue a three-man general tree work crew should produce per day to generate either a 10 or 20 percent net profit margin as well as his break-even point (BEP). He particularly wanted to know his BEP so that if things got slow, he could reduce his price but still cover all of his costs.
Here are the formulas we will use to determine the crew’s BEP and net profit margins:
- Total Direct Costs + General & Administrative (G&A) Overhead Costs = BEP
- Price – BEP = Net Profit Margin (NPM)
Calculating crew day-rate and man-hour rate for a three-person GTW crew.
Our climber makes $27 per man-hour. The two groundsmen earn $21 and $15 per man-hour. This calculates to be a crew average wage (CAW) of $21. They work 45 man-hours each per week. Adding a 5.6 percent overtime factor and a 10 percent risk factor to the $21 CAW we get $24.27. Labor burden (payroll taxes, workers compensation and general liability insurance, paid time off, etc.) is 35 percent. The bucket truck has a replacement cost of $125,000 and should last 15 years. It should cost roughly $8,000 per year to maintain, be billed a minimum of 1,000 hours per year, accumulate 15,000 miles per year and get about 5 miles per gallon. Add these all up and we reach a cost per hour (CPH) of roughly $27. Its cost per hour (CPH) is calculated as follows:
- (($125,000 + (15 yrs x $8,000))) ÷ 15,000 lifetime hours = ($245,000 ÷ 15,000) = $16.33
- 15 yrs x 15,000 miles = 225,000 lifetime miles
- 225,000 miles ÷ 5 mpg = 45,000 gallons
- 45,000 x $3.50 per gallon = $157,500 lifetime cost of fuel
- Fuel cost per hour = $157,500 ÷ 15,000 lifetime hours = $10.50
- The total CPH of the bucket truck is $16.33 + 10.50 = $26.83
- We’ll round up to a total cost per hour of $27.00
Without going through all the calculations, we’ll use a CPH for the chipper of $35, a CPH of $8 for the chain saws and a CPH of $20 for the F-800. To calculate our BEP, well use a general and administrative (G&A) overhead cost per man-hour (OPH) of $20.00. We’ll then add both 10 and 20 percent net profit margins (NPM) to our break-even point (see below to find out how it works).
This three-person GTW crew needs to generate a minimum of $2,600 per day every day of the week to generate a 20 percent net profit margin. To achieve a ten percent NPM, it would have to generate $2,326 per day. The hourly rates are as follows:
Roger now has the tools to price his work competitively and accurately. He has a profitable bidding envelope, so to speak, between $2,300 and $2,600 (roughly $75 to 85 per man-hour). If he consistently prices his GTW crew at $2,500 per day (plus or minus $100), he’ll cover all of his costs and make between 10 to 20 percent net profit. If sales get slow, he could lower his price to near his BEP of roughly $2,100 per day or $75 per man-hour.
Knowing your numbers and understanding how you arrived at them makes all the difference when it comes to pricing your work confidently. It gives you the assurance that each day you work, you’re making money. Calculating and establishing daily revenue benchmarks for all of your crews is critical if you’re going to operate a profitable business … and sleep at night!
Note: If you’d like a copy of the MS Excel worksheet, email Huston at the address below.