Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
A residential landscape installation contractor in the Midwest was doing about $2 million in annual revenue but barely breaking even at year’s end. He had no idea what the problem was. A residential maintenance contractor in California needed to bill $700 per day for his two-person crew. When analyzed, he was billing far less than his goal.
His crew was getting paid for nine man-hours of work each per day but the contractor was only billing his clients for the time that the crew was on site – missing an average of two hours of revenue per day per man. An irrigation client on the east coast had 11 service technicians working 10-hour days. The service billing rate was reasonably priced at $80 per man-hour. Unfortunately, the contractor was only billing for onsite time, which averaged eight man-hours per technician per day.
I hear it all the time – billable versus non-billable man-hours. “The time that my crews spend on the jobsite is billable time but the drive, load/unload, training or tailgate meeting time is non-billable time.” That same thinking often applies to many of the other costs a company incurs. “If we charged for all the costs (marketing, equipment repairs, insurances, employee benefits, spouse’s time in business) that my business has, we wouldn’t get any work.”
This mentality is one of the biggest reasons so many green industry contractors don’t make the profits that they should. Every legitimate cost that you have in your business should be passed onto your customers with an appropriate margin applied to it.
What’s a legitimate cost?
A legitimate cost is what I call a fair-market value (FMV) one, and is reasonable for a business to incur. As such, it is also reasonable to expect to pass this cost onto a customer. If you pay your crews for 10 man-hours per day, it is fair and reasonable to charge your customers for 10 man-hours per day. If you pay your crews for drive time to and from a job, it’s reasonable to charge your clients for it. You should also build a reasonable salary for the time that you spend on the business into your pricing structure. A reasonable rent for your office and facilities should be built into your pricing structure too, along with the cost of all of your utilities, equipment expenses, and insurances.
Costs that are not reasonable or fair-market value may include non-business-related vacation expenses, a spouse’s automobile costs, an unrealistic salary for a spouse or excessive margins applied to materials. These costs should not be included in your pricing structure.
How it should work.
When I prepare an annual budget, it is comprised of reasonable costs.
I do essentially the same thing as the SEC. This allows me to calculate accurate man-hour and equipment rates that reflect all legitimate costs as well as market conditions.
The residential landscape installation contractor in the Midwest wasn’t charging for his trucks or his drive time. He started doing so and added about 8 percent to his bottom line. The California residential maintenance contractor adjusted his rates for new clients to reflect drive time. He also analyzed all of his routes to see how close they were to hitting the $700 daily revenue goal. He then gradually increased rates for existing customers. The irrigation service contractor focused on billing $800 per day ($80 x 10 man-hours) per technician for labor. To achieve this goal, he would bill a trip charge of $80 to the customer and give the customer up to thirty minutes on site. Time beyond the 30 minutes on site was billed at $20 per 15-minute increment or part thereof. Labor revenue per technician increased dramatically, anywhere from $80 to $160 per day.
Get paid what you’re worth.
Too many green industry contractors fall victim to the myth that they have man-hours and costs that are non-billable. This is absolutely false when it comes to legitimate and reasonable costs, but most contractors cannot distinguish between reasonable and unreasonable costs. This is why I teach my clients to prepare an annual budget that includes reasonable costs. This allows them to calculate labor and equipment rates that reflect market conditions and include all of their costs. Remember: Every legitimate cost you have in your business should be passed onto your customers with an appropriate margin applied to it. If you apply this business lesson to your company, it will add thousands of dollars to your bottom line. If you don’t, you’ll more than likely stay in the company of thousands of green industry contractors who are barely and unnecessarily scraping by.