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.
I also explained how to format your bids and calculate your break-even point (BEP) and gross profit margin (GPM).
- Total Direct Costs + General & Administrative (G&A) Overhead Costs = BEP
- G&A overhead costs + Net Profit Margin = GPM
This month, I’ll explain how to price one of your services and the key benchmarks that you need to monitor to ensure that it is profitable.
Do the math.
In this scenario, we have a crew leader making $18 and a laborer making $14 an hour. They are paid for 10 man-hours each per day or 50 man-hours per week. We get a crew average wage of $19.20 when we add the 10 percent overtime factor and a 10 percent risk factor to the $16 average. Labor burden (payroll taxes, workers compensation and general liability insurance, paid time off, etc.) is 20 percent. Equipment and crew truck costs are as noted. G&A overhead cost (OPH) is $12 per man-hour. We’ll add a 10 percent net profit margin (NPM) to our break-even point. (See chart.)
This two-person maintenance crew needs to generate a minimum of $1,000 every day of the week, month and season. It has 10 man-hours per crew member to do so. It’s the job of the owner or manager to ensure that the total revenue generated by each route produces this daily goal. If it isn’t producing $1,000 per day, you have a problem and need to investigate why. The portal-to-portal man-hour rate is $50 ($1,000 ÷ 20). The curb-time man-hour rate is $62.50 ($1,000 ÷ 16).
Get the price right.
If you have the correct format for estimating the costs for your services and projects, you can take the mystery out of pricing them. In the model that we are using to do so, the labor burden (20 percent) and the G&A overhead cost per hour ($12) come from the annual budget that we create at the beginning of each year. The risk factor of 10 percent is added to the cost of labor in order to absorb some of the risk in daily operations. The truck, trailer and equipment costs are calculated by dividing the total costs (acquisition, maintenance and fuel) for each item by its lifetime billable hours.
I’ve seen hundreds of my clients dramatically improve their bottom line by using this simple approach. Every crew or technician that leaves your office in the morning should have a daily revenue goal to achieve. Managers should monitor daily production to ensure that everyone is on track and achieving these goals. If not, their job is to find out why not.
This approach will empower your managers and give them the tools and benchmarks that they need to ensure that every crew is a winner every day.
For an interactive worksheet, email email@example.com.