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.
On the business growth side, your new administrative person should be following up with customers to confirm appointments, or even to simply make sure your customers are happy. They should also be answering the phone to enhance customer service, and more importantly, track leads.
Wasted advertising expenditures are another culprit of overhead creep. "I've seen a lot of contractors with boxes of flyers they've never distributed," Babigian says. "I met a guy who had a Yellow Page ad with the wrong phone number."
Tracking leads and making the most of them can help you cut back on other advertising investments. "Spend more money on making more money with the leads you're already getting," Kehoe advises. "If you've been in business five years, your phone is likely ringing enough for you to make good money. Set up a lead tracking system, which can be done in Excel. You should still look for new business, but it's even more important to manage the leads that are already coming in."
Chiera has wrestled with this for the past few years as his company has gone through a growth spurt. He's spending 0.6% on advertising, down from 1.1% last year. That's mainly because his business, like so many others, is built on referrals.
"I would still like to start investing a little more in advertising as we look to grow further," Chiera says. "Advertising can definitely help you get your foot in the door in other areas. We have a nice website (impactirrigation.com) and a small Yellow Pages ad. I wouldn't mind doing more, maybe spending up to 2% on advertising, as long as I can cut overhead in other areas so our overall profitability isn't hurt."
Equipment maintenance and downtime
Currently, Chiera is looking to cut his ballooning repair and maintenance costs, which have grown to a level of nearly 5% this year. As his company has expanded, he's added a full-time mechanic to service 17 trucks, an assortment of trailers and a sizeable fleet of equipment. That mechanic's salary is a big contributor to the creep, but other factors also play a role, and Chiera wants to get a better handle on them.
"We can help our mechanic control shop costs," Chiera says. "We put a limit of $1,000 on his credit card, or he'd probably spend more. When that card starts nearing the limit one month, I take a look at what's being purchased." There's not much you can do about needed parts. But other shop expenses, such as hand tools and consumable supplies, can skyrocket if controls like this aren't put in place.
"Another thing you should do is set up a repair order system, which can also be done on an Excel spreadsheet," Kehoe says. "Mechanics in this business are notoriously unaccountable. But they should have time cards just like your employees in the field do. In fact, a mechanic's time should not be applied to anything if it's not applied to a piece of equipment and crew. Then it's easy to track down any offenders."
Controls should also be put in place to encourage employees to take better care of trucks and equipment. Kehoe says that once you hire a mechanic, operators and foremen have a tendency to get a little reckless because "someone's there to fix it if it breaks, anyway." Training is the key.
"Aside from operating equipment efficiently and safely, a lot of operators don't know how to load and store equipment on trailers properly," Kehoe points out. "Sometimes, equipment takes its worst beating up and down the highway."
Coming up with ways to encourage employees to take better care of trucks and equipment is an ongoing process for Chiera. Two years ago there was an emerging problem with trucks leaking fluids. One employee blew out an engine because it didn't have any oil. Now, the morning routine includes filling out a checklist and turning it into the mechanic.
There are also incentives if an employee does a good job of keeping equipment in good order. On the other hand, if he doesn't, he's going to be held accountable. "Every one of our employees has a point sheet," Chiera explains. "At 12 points an employee might get in some trouble; probably a written warning. Maybe he forgot to strap a blower down on the trailer, and it falls off and breaks on the highway. That's six points."
Chiera is also trying to figure out when to get rid of older trucks and equipment so there's less service that needs to be done. "It's a fine balance, because we don't want our monthly payments to get out of hand, either," he relates. "For instance, our truck payments are already 6%. We've been trying to keep half of our truck fleet as new and under warranty, while the other half is older that we're trying to squeeze more life out of. But when you consider the growing repair costs and associated downtime with our older vehicles, it might make more sense to buy new."
Babigian says worn-down equipment and the associated repairs is a distraction most growing contractors do not need—period. "You're in the business of selling hours," he reminds. "Chasing around for the best deals on equipment, or buying used equipment and trying to fix it up, is not where you make your money. It's a distraction that keeps you from doing what you really should be doing to grow your business."
In other words, buy good equipment that helps you do the job better and faster, and bid correctly so you can recover their costs. Sell effectively. And put a budget together so you can keep a close eye on overhead and recover those costs, too.
"Overhead is not a one size fits all," Vander Kooi points out. "I have found that some expenses must be spent for one contractor, but are not necessary for another." Knowing what works for your company, thinking in percentages, and catching creep before it's out of control can help you stay profitable while you're growing.
OTHER KEY AREAS WHERE CREEP CAN OCCUR
Vander Kooi says the five most dangerous areas of overhead creep are salaries, rent, advertising, small tools and cell phones. On paper, some of these expenses don't look like much. But they can add up quickly, and do some serious damage to your bottom line.
Insurance is another one. "We shop the heck out of insurance," Chiera says. "We've probably switched vendors three times in five years. Who can give us the best policy? Are there certain features we don't really need that will lower our premiums?"
Worker's comp is one area in particular you should watch. One on-the-job injury can cause your worker's comp insurance to skyrocket. "For example, a contractor may go from an experience modification rate of 0.92 (basically an 8% discount) to a 1.30 (a 30% increase) with an added ARAP rating of 1.4 (another 40% increase), bringing his total cost increase to about 78%," says Babigian.
What can you do about it? Seriously focus on safety, of course. Provide ongoing training for your employees and have safety meetings. Many equipment manufacturers also provide safety lessons online or via DVD.
In the event that you do have an injury-free workplace, you should still keep an eye on worker's comp. Work with your agent to make sure your business and payroll are classified correctly, for example, so your premiums aren't higher than they should be.
Babigian points to several other areas of overhead creep you should keep a watchful eye on:
- Rent – As you're growing you might think you need a new facility. Carefully weigh the added cost vs. the necessary sales volume increase to cover it.
- Gasoline – In today's world of record-high gas prices, you really need to keep an eye on this. You must track gas usage by vehicle. Have the driver of the truck or the operator of a piece of equipment fill out a slip. This can be time-consuming to monitor, but could be a great job for that new office manager you may have hired.
- Uniforms – Babigian says he likes uniforms, but not uniform companies. Forgetting to return uniforms, logo charges, etc. can be costly. "Unless you're a large company with someone who can manage the process, working with a uniform company can be a huge profit leak," Babigian says.
- Leasing – Babigian is not a big fan of leasing. "It's almost never worth it," he says. "The only thing I'd lease is a copy machine, because they are so unreliable."