The Price of Profitability

How to establish a “Profit Builder Process” that will make you more competitive—without stripping all of your profits away.

For the past couple of years, landscape contractors report that “pricing pressure” is among their biggest challenges. There’s good news, though. The economy is getting better, and more homeowners and property managers are paying closer attention to quality and service. Now is the perfect time to re-evaluate your pricing models to make sure you’re still competitive, but not at the expense of your profitability or ability to provide great service.

Identify What YOUR Overhead Is

There’s been a good amount of frustration with the so called “low-baller” as of late. But the truth of the matter is that some of these low-ballers are nothing more than really crafty businesspeople who know exactly what their overhead is, have found ways to reduce that overhead, and understand how to charge customers for that overhead.

Here’s something else you need to keep in mind: A company’s overhead changes over time, and no two companies are alike.

You must figure out what your company’s overhead is. Are certain costs increasing? Can you lower certain costs? Once you get a handle on what your overhead is, you’re one step closer to overcoming all of those bid rejections that resulted over a measly couple hundred dollars.

Equipment Is a Direct Cost, Not Overhead

One big mistake I’ve seen many contractors make, often per the advice of their accountant, is to include equipment in their overhead. While this is a convenient way to manage equipment costs, it is not accurate—and can result in lost jobs.

Let’s say your company owns both a mini-excavator and a track loader. If you consider the costs for those two pieces of equipment as overhead, and then mark-up labor, materials and/or sub-contractors in order to recover that overhead, you’ll be charging customers for the mini-excavator and track loader when you aren’t even using it.

Equipment is directly related to performing work, and thus must be treated as a direct cost. You must charge for the use of your equipment on an hourly basis, just as you do for human labor. (Send an email to [email protected] for Tony’s formula on calculating the hourly cost of operating a piece of equipment. Please put “Equipment Cost Formula” in the subject line.)

Charging Overhead to Customers

There are many systems for recovering overhead that will be debated for years to come. One popular method is to forecast how many labor hours your company will bill in a year, and divide your total overhead for the year by that number. For example, if you have $55,000 in overhead and plan to bill 7,500 labor hours, you would add $7.33 to each labor hour.

There are two big drawbacks to this labor-only approach: 1) you may lose a lot of labor-intensive jobs, 2) you may be considerably less profitable on equipment-intensive and/or materials-intensive jobs. This is because you are forcing labor to recover all of your overhead. So, you charge too much on labor-intensive jobs, and don’t charge enough on equipment- and/or materials-intensive jobs.

On the other hand, when you use an overhead recovery system that taps into all direct costs (labor, materials, equipment and subcontractors), you are able to more precisely price each job. My advice is to mark-up each of these four areas of direct costs—in a manner in which the majority of the risk is placed on labor; not 100% of the risk, but the majority of it.

Estimating For Profit

As is the case with calculating hourly equipment costs and recovering overhead, estimating is a science. Furthermore, estimating is where accurate, competitive pricing starts.

Here’s a fact: One out of five landscaping jobs goes bad, meaning the company loses money in the end. The majority of the time, it is because the company didn’t spend enough time estimating up front.

First of all, get a good estimating wheel, or look into an online service such as Go iLawn. Second, you must establish a production rate-based estimating system.

Let’s say you are going to price a mowing job. You would obviously want to measure the square footage of the lawn you need to mow. But it’s not quite that simple. When it comes to mowing, it’s important to separately measure the areas where you can use a zero-turn rider, and the areas where you’ll need to use a 21-inch push mower, for example. That’s because you will have different production rates and hourly operating costs for each of those pieces of equipment.

You also want to measure the square footage of lawn you’ll need to string trim, in addition to the linear footage of the property you will need to edge. Measure the size of the beds you will need to weed and mulch, along with the square footage of hard surfaces you will need to blow off.

With a production rate-based estimating system, you also want to account for varying site conditions. For example, if part of your maintenance offering is shrub pruning, set up three classifications—small, medium and large—because you will allocate a different amount of time to pruning each type of shrub. It’s also a good idea to set up classifications such as easy, average and difficult for mowing. No two properties are alike. Some are wide open, some are hilly, and some have a lot of obstacles. It’s important to take these variables into consideration.

It Is Your Decision

Business conditions are improving, but it’s still very competitive out there. Whether or not you raise or lower your prices is up to you. After all, it’s your business and this is a free-market economy.  My suggestion: Consistently invest in your business education.

The strategies discussed in this article can help you become more price-competitive, and in many instances more profitable. They are based on accurate, scientific methods that worked for me when I was a contractor, and continue to work for the many contractor clients and customers I work with today. Implementing these strategies takes discipline and hard work—and again, it’s up to you to make them happen in your company. Good luck!