Pricing Yourself Correctly to Remain Profitable

By Richard Lahren

Legendary Green Bay Packers’ head coach Vince Lombardi once said, “I never went into a game without a plan.” This is true in any business; preparing an annual business plan and budget is essential in the game of landscape contracting. We continue to see winners and losers in this industry every year. There is a vast majority of landscape contractors out there who don’t know their costs. Preparing a yearly budget will help you to price yourself correctly and stay profitable.

I am one of the fortunate northern Midwest landscape contractors who work an average of 34 weeks a year installing hardscapes and softscapes. We are lucky to start mid April and finish by mid November, which means we have limited time to recover our overhead costs in each season — therefore, we must plan accordingly. You can’t always depend on pennies from the sky (snow removal) to make your year. Think of snow removal as a bonus; if it snows, let’s go to work and make some additional revenue for the year. I focus on recovering my yearly overhead costs in the season of landscape construction. Preparing an annual business plan and budget will help do this.

Every year, when our season has ended, I spend a week or two going through the past years’ costs, and compare them with what we had budgeted for the previous year. I do this periodically throughout the season to adjust variable business costs, such as fuel. I always have my budget completed by January in order to set my labor rates so that I can start bidding projects as the season starts. I use a Microsoft Excel spreadsheet to do this every year. First, I budget overhead; it’s a fixed cost that does not go away whether you’re working or not. Figure 1 shows a typical </= $1 million revenue landscape company’s overhead costs.

2013 OVERHEAD PROJECTIONS

EXPENSE BREAKDOWN:

2012

2012

2013

Code:

Type:

Budget

Actual

Difference

Budget

Office Salaries

$39,000.00

$39,500.00

$500.00

$39,800.00

Sales or Owners Salaries

$89,000.00

$92,000.00

$3,000.00

$94,000.00

Payroll taxes

$17,356.80

$17,831.40

$474.60

$18,143.28

Advertising

$2,500.00

$2,800.00

$300.00

$2,800.00

Dues & Subscriptions

$100.00

$0.00

-$100.00

$100.00

Employee Benefits

$11,212.80

$11,519.40

$306.60

$11,720.88

Entertainment & Meals

$800.00

$791.95

-$8.05

$1,000.00

Insurance

$15,000.00

$16,800.00

$1,800.00

$17,000.00

Licenses and taxes

$1,215.00

$1,100.00

-$115.00

$1,200.00

Property Taxes

$2,500.00

$2,565.00

$65.00

$2,580.00

Office Supplies / Computers

$2,000.00

$6,314.20

$4,314.20

$5,000.00

Audit & Accounting Fees

$1,400.00

$1,642.10

$242.10

$1,600.00

Rent or Building Depreciation

$28,000.00

$28,000.00

$0.00

$28,000.00

Telephones

$4,500.00

$4,650.00

$150.00

$4,700.00

Lodging

$500.00

$243.90

-$256.10

$400.00

Utilities

$1,000.00

$4,497.64

$3,497.64

$4,500.00

Small Tools & Equipment

$5,000.00

$5,250.00

$250.00

$6,000.00

$221,084.60

$235,505.59

$14,420.99

$238,544.16

To calculate these costs, I start by taking the total overhead cost for the year and divide it by estimated days worked to come up with a daily overhead cost. For example, my company works 32 to 34 weeks a year. However, I need to account for non-working days (poor weather, holidays, etc.). Therefore, I typically budget a total of 30 weeks of actual billable labor for the calendar year. Total overhead cost for the year in Figure 1 is $238,544.00 divided by 30 weeks equals $7,951.46 per week (five day) or $1,590.29 per day. From here, I break it down further to find our operating cost per hour. I have four three-man crews, giving me 12 men total. Twelve men at 9 billable hours per day equals 108 hours. I take my daily operating cost of $1,590.29 divided by 108 hours, which equals $14.72. If my average cost per hour for each employee is $18.00 (base pay, FICA, Work Comp, insurances, and benefits), I then can total both operating cost per hour and employee cost per hour together for a total cost of $32.72 per hour. Don’t forget, you also need to figure in non-billable hours, shop time, and equipment breakdowns. I try to achieve billing 80 percent of each day’s labor to my client. My crews work 10 to 11 hour days, meaning I want to bill 8 to 9 hours a day to a client in the 30 weeks we work. I use another spreadsheet to figure out my labor utilization rate. I attended a Kevin Kehoe seminar a long time ago, got this spreadsheet model from his website, and have modified it to my business. In the spreadsheet, I am allocating 80 percent of my overhead to labor (see Figure 2).

2012 Calculated Labor Realization Rate:

Price Factor

Cost

Average Wage per hour

$13.86

$13.86

Payroll Taxes / Benefits

25%

Payroll Wage per hour

$3.46

Hours

Weeks

$3.46

FTE Hours Annually

1200

40

30

Utilization Rate

80%

Billable Hours Annually

960

Non Billable Hours

240

Utilization Cost

$3,326.27

Utilization Cost Per hour

$2.77

Hours

Weeks

$2.77

Overtime Hours

140

5

28

Overtime Cost

$6.93

Payroll taxes / Benefits

25%

Overtime Cost per hour

$1.73

$1.73

Direct Labor cost per hour:

$21.83

Overhead Allocated to labor

$190,835.20

Men

Total hours

Labor hours billed out:

11520

12

960

Cost Recovery per hour

$16.57

$16.57

Breakeven cost per hour:

$38.39

You may not want to cover all your overhead costs in labor only; it may price you out of the market. There are many types of overhead recovery systems out there, I use a modified dual overhead recovery system with which I apply a high percentage to the labor and a smaller to materials then I add my desired profit to them. These are four overhead recovery systems used in our industry:

• Single overhead recovery systems (SORS)
• Percent added to cost of project
• Dual Overhead recovery systems (DORS)
• Percent of overhead recovered by materials
• Percent of overhead recovered by labor
• Multiple Overhead recovery systems (MORS)
• Percent materials
• Percent labor
• Percent equipment
• Percent subcontractors
• Time Based Overhead recovery systems
• Overhead markup per hour (OPH)
  • – Overhead markup per man hour
• Overhead markup per crew (OPC)
  • – Overhead markup per crew day

I have studied them all, and they all can work depending on what type of contractor you are and how disciplined your operation is in implementing them. Overhead recovery is key to a keeping a business profitable, knowing your costs and controlling throughout the season can make all the difference in a winning or losing season.

I take time at the end of the season to work on a marketing plan for the next year. Ask yourself this question: “Where do my leads come from?” I track mine yearly, and I know what works in my region, and what doesn’t. I have trained my office staff and salespeople to ask the prospective customers how they heard about us. We have it broken down into five categories of response; home shows, Yellow Pages, websites, referrals, and media. Some contractors also use social media such as Facebook or LinkedIn. If you can track where the majority of your leads come from, you will know where to spend your time and money attracting new customers.

Preparing a business plan can be challenging, but as a business owner you need to do this. You don’t need to be an accountant — you can hire an accountant to do all the necessary stuff you don’t have the time or patience to do — but you do need to understand how to budget and control costs. Take some time and attend your state landscape association events or GIE+EXPO/Hardscape North America in Louisville, Ky. There are a lot of great seminars and sessions that can help you succeed.

Richard Lahren is the Landscape Division manager for Hebron Brick & Block Fargo N.D. He is also past president of the North Dakota Nursery and Greenhouse Association, an MNLA Certified Professional, and an industry speaker. He can be reached via e-mail at richl@hebronbrick.com.