In landscape contracting, 20% (or more) of your total sales is typically eaten up by numerous overhead costs, such as advertising, office supplies and insurance. Scrupulously managing these costs can be the difference between a healthy net profit and a not-so-healthy one.
To contain overhead creep, the first thing you need to do is put a detailed budget together. Then monitor it on a continual basis. Think in percentages, like contractor Joe Chiera of Impact Grounds Maintenance in Norton, OH, does.
"As our company has gotten larger, I've quickly learned that you have to stay on top of the numbers," Chiera relates. "Aside from making sure we recover our direct costs, I now watch every overhead line item in our budget. As we grow, I want to make sure each expense stays the same as a percent of sales. Then we'll be OK."
Along with establishing a budget you continuously monitor, long-time industry consultant Charles Vander Kooi says it's also important to recognize that assets such as trucks and equipment shouldn't be considered overhead. You should know what it costs to operate each truck and piece of equipment you own, and recover those costs separately on each job, just as you do with materials and labor.
That said, what are some of the more notorious overhead costs that have a tendency to creep out of control?
Managerial and administrative salaries
Green industry consultant Kevin Kehoe says overhead creep can certainly be a problem for contractors, but a larger problem is revenue lag. "Most of the time, a landscaper takes on additional overhead costs with good planning and good intentions," Kehoe says. "But the revenue doesn't keep up with the added overhead, and it's usually a matter of poor sales efforts."
Nonetheless, certain overhead costs start to creep out of control (as a percent of sales) when revenue lags during an anticipated growth cycle. By paying close attention to one of the bigger overhead costs, managerial and administrative salaries, you can suppress the creep and address the revenue lag at the same time.
"When you add a supervisor, he's not billable—he's overhead," Kehoe explains. "He may be ineffective for a number of reasons, primarily because you don't have a good job description for him and you don't give him what he needs to succeed. You hired this guy to manage, but you don't give him basic information like job cost numbers. He becomes a glorified babysitter who's just chasing his tail until you finally fire him. Adding supervisors can cost 2-3% of sales, easily. If you don't have a plan for them to succeed, it's wasted money."
The same can be said for administrative staff. Haphazard hiring is not a good practice; thinking that a new office manager will be the cure. Ask yourself: How much more volume will we need to do to recover the additional costs, and what we will do differently to add value and actually grow?
"Typically, as a percent of sales, overhead labor runs 11-15%," says Dickran Babigian, an industry consultant and president of Navix Software. "When a growing contractor adds one or two people, that can quickly jump another 20-50% in a single year. Without any corresponding growth, it just eats at the bottom line. Very often I see contractors add an administrative person because there is one problem to address; perhaps billing and collections. But there has to be more than that, or it's not worth it."
To make it worth the additional overhead cost, your new administrative person should not only help you administrate, but also grow the business. On the administrative side, they can get prices on materials and help you put proposals together. They should be tracking materials and subcontractors, which can be done in QuickBooks, to make sure you're recovering these costs on each job. They can also start tracking hours to job, not just tracking payroll as a big block of time.