By Harold Fox
Recently, I began working with a client to help them switch their irrigation service billing from time and materials to flat-rate billing. Flat-rate methods can lead to higher sales and net income, an easier-to-run service business, and higher customer satisfaction.
My client had a seven-figure sales number and looked profitable in tax returns and their P&L. I reformatted their general ledger and P&L to calculate production versus overhead costs. Labor hours from payroll were used to evaluate sales and profit performance. We found that irrigation installation lost them many tens of thousands of dollars every year. Though sales revenue and payroll hours were known, no one calculated what labor, equipment and overhead actually cost per hour. Installs were sold and priced by the zone, with no knowledge of how long a job should take or what the cost really was to deliver what the salesman sold.
In examining businesses and talking to contractors, several money-losing job-costing and service-pricing strategies stand out as profit-denting business practices.
The following are six profit dents, and how to fix them:
1. Perform labor and time analysis
No matter whether it is mowing, mulching, landscape or irrigation installs, or any other service, you must compare estimated production hours to actual payroll hours. If you estimate the total time to do daily equipment prep, travel and mow each of your 75 lawns each week to be 120 hours, but your crew is paid for 135 hours, your profit is bleeding. You have to refine your estimating methods, and check the efficiency of your crew. Do you actually use production time to price a job? If not, you must. Does your crews goof off and use equipment ineffectively, or do they do job tasks in an effective order, use the quickest routes, etc.? Perform time and motion studies on every phase of every service you provide to accurately estimate production time for each job. That means time to hand-edge beds and tree wells by the foot, string trim sidewalks and beds, mow 5,000-square-foot and larger multiples, dig a hole and install a head or valve for a new irrigation system, excavate and prep 100 square feet for paving, layout and plant a 3-gallong shrub or 2.5-inch-caliper tree, etc. It is the attention to detail that builds profits.
2. Learn your production costs
Your production costs for labor, equipment and overhead per hour are not to be guesstimated, miscalculated or unknown, because they need to be comprehensively calculated to be profitable. Always, always, always know all the numbers you need to be profitable. Never, never, never guess or use other people’s pricing, because they may know less than you.
3. Organize your accounting
QuickBooks or other accounting programs’ general ledgers are often used as they came out of the box. That means there is no proper organization of the company’s general ledger to easily track or calculate production costs versus overhead costs. Though the data exists, and tax returns can be done, your data is not organized to provide powerful reports and calculations necessary to profitably price services.
Learn what really constitutes production expenses, and what is really overhead.
Insurance and depreciation on your work trucks is a production expense, not overhead. That is because those work trucks can be liquidated in an economic downturn, or you may buy more trucks when growing. The expenses are directly tied to the fact you have work and the amount of work you have.
4. Labor tracking — code your payroll
One huge mistake is paying your employees and not identifying what work they performed, because without knowing what payroll hours you purchased, you can never calculate costs for a job or a company. You are just trusting luck and guesswork. Your company needs to code payroll hours and track employee time by job task, such as irrigation service, irrigation winterization, round-one fertilization, aeration, mowing, mulching, construction, etc. This information is critical to being able to calculate costs of production, sales per hour and profit for any given service. At the very least, you can divide sales of a service by the hours needed to produce it, and compare sales per hour for your different services. This may point out good and bad areas in your service pricing. In its best form, landscape labor hour payroll coding allows you to calculate costs of production beyond merely labor, but costs per hour for equipment and overhead. With this knowledge you can fine tune your service pricing and bids for optimum profitability, ensuring all jobs and services pay their way.
5. Recover your overhead
Overhead must be properly defined and calculated per hour, never assigned as a percent value to production cost. An overhead recovery method is essential to establish profitable landscape and irrigation industry pricing. Beware, some items traditionally regarded as overhead are really production expenses. Overhead must be properly defined and calculated per hour. Never assign overhead as a percent value of some other number when determining production cost.
6. Ditch old-school pricing
Landscape industry pricing is loaded with methods or amounts that have zero accountability behind them. Absolutely avoid pricing landscape irrigation system installs by arbitrary things such as per head, zone, cubic yard, piece, square foot, three times the cost of whatever, rather than the complete cost of production labor, equipment, subs, equipment rental and overhead per man hour, plus job materials. Then add profit as a line item at the end, once all costs are known.
All segments of the green industry suffer from these mistakes. Only the top 15 to 20 percent of companies pay close attention to cost accounting, and that is why they are at the top of the green industry food chain. The smallest of companies can utilize and profit from correcting their method of cost calculation. By doing so, a small company will develop the financial skills to get bigger, safely and profitably.
Despite my client’s hefty irrigation installation revenue, they would have made more money without install sales and all the costs associated with running that part of the business. Each major revenue center needs to have a cost and profit analysis done and be able to stand on it’s own. Sure, it seems painful — almost foolish — to give up a hefty sales volume, but if you can scale back the company to profitable core services, you can be way ahead.
On the other hand, a new bidding and estimating system could be used to profitably price installation. In this scenario, adding the real cost per hour and profit margin would raise sales prices for a system by many hundreds to over one thousand dollars, potential posing problems for the commission-based salesperson who liked to be the low bidder all the time. And what about all those clients you wouldn’t add to your list? They would be the clients needing almost no service work for the next five to 10 years, beyond the basic spring visit and winterization, right?
I experienced this same scenario when I learned overhead recovery in the 1980s.
Before I learned how to define my production cost and overhead, my average residential sprinkler system was selling for a little less than $2,000. After I did all six things I have described above, my irrigation installs sold for nearly $3,200. I hadn’t raised prices — I learned all of my costs and times, then added my profit.
My profit was designed in, not left over. As a result of my newfound knowledge, I was now more competitive in a different segment of the marketplace. I made money because I planned for profit. So, while my former competitors were out there fighting for money-losing scraps, I was rumbling with a new group of competitors and beating their old pricing methods that had no merit.
It’s better to scale and focus your business for the items you can profit from than fit in with what’s popular in the industry. Profitable contracting is not for fragile egos or those needing to impress others. This is not the news many owners want to hear from their business consultant, but such was the news I gave to my client. As a result, we have made many changes that will drive profits forever into their future.
Harold Fox was a lawn care and irrigation contractor servicing residential and commercial clients in southern New Jersey for 43 years. He is a past president of the Irrigation Association of New Jersey. Fox sold his company and retired in 2015. He can be reached at firstname.lastname@example.org.