In our previous articles we wrote about what needs to be done before the job starts. After looking back it is amazing how many things need to be completed in order for projects to flow smoothly.
Consider looking at on the job issues from the perspective of your Budget—Income Statement and Estimate.
Based on my experience, the two worst things that happen on job sites are time over-runs and defective work. The reason for this is that if you cannot hit your Sales targets which you set in your budget because you are behind schedule or busy fixing defects, it will be near impossible to achieve your profit target. The Opportunity Cost of being one day behind on a ten day job for example also means that you have one less day to make a profit. Based on this example, if you work 150 days of the year and are shooting for 10 percent profit, you will only have 15 days to make a profit. Now you are down to 14 days.
Defective workmanship will also erode your company’s ability to make a profit, plus you will incur additional labour, material and equipment costs & probably during prime production time.
Ratios are the most important business consideration if you are to make a profit. The goal is to have the highest PROFIT Ratio which means all the other ratios must be reduced or at the least lowered to within industry norms, e.g.:
- Field Labor to Sales Ratio
- Equipment to Sales Ratio
- Materials to Sales Ratio
- Subcontracting to Sales Ratio
- Overhead to Sales Ratio
Landscape Management Network’s online budgeting tool automatically calculates these ratios based on your numbers and makes it incredibly easy to monitor and optimize them. The decisions we make as owners and Supervisors on site can have enormous impacts on the bottom line, so we need to leverage the right tools, systems, and training to ensure our decisions will have the right results.
Managing and Planning Your Labor
Keep in mind that the largest variable in terms of making a profit is people. People who do not work enough hours become a huge problem for the following reason:
Set-up time or, “windshield time” is the same for an 8 hour day as it is for a 10 hour day. One must get the tools off the truck and on site ready for work every day while avoiding traffic. If all this consumes an hour each day (and that is conservative number), then the impact in terms of the ability to produce work is as follows:
A 3 person crew working 8 hour shifts will get 7 hours of production time per day. Multiplied by 150 production days per year, this equals 3150 annual production hours per crew.
A 3 person crew working 10 hour shifts will get 9 hours of production time per day. Multiplied by 150 production days per year, this equals 4050 annual production hours per crew.
Let’s assume each crew has an average cost of $20/hr (after labor burden). On average, you bill your customers $55/hr for your services.
The crew that works 8 hour shifts will likely only bill about $175,000 in work, for the cost of about $63,000 in wages.
vs.
The crew that works 10 hour shifts will be able to bill almost $225,000 in work and cost only $81,000 in wages.
The benefits are obvious:
- Working 10 hour shifts, your company will increase revenue by $50,000 per crew, while incurring only $18,000 in additional costs of labor.
- Your company’s overhead will not change as a result the extra hours. Your rent, advertising, accountant fees etc. stay exactly same whether your crews work 8 hour days or 10 hours days. As your company increases sales volumes without increasing overhead, your overhead recovery markups will decrease – meaning you can charge less per hour, without sacrificing profit. Better yet – you could hold rates the same and increase your profit margins, if your rates are competitive. Either situation is good for your company.
As a landscape contractor you are in the business of selling hours. If you do not sell enough hours, and factors such as windshield time as a ratio of productive hours starts to climb, it will become very difficult, if not impossible to price your work competitively and make a profit at the end of the year.
Estimating For Profit – Optimizing Labor Costs
If an estimate dictates that there are 100 hours to do a project and the crew does the work in 100 hours, it does not necessarily guarantee a profit! This is because the hours the work is completed in must be considered in the context of the total number of hours of production time required in one year.
Let’s look at the following scenario:
Company A estimates a project with one truck & one employee in 10 days. Company B estimates the same project with two trucks and 3 employees in 3 days.
Lets’ assume the trucks are worth $50K each. The company that uses more equipment with more people per truck doing the work in a shorter time frame will be more likely to produce a profit. In fact the average cost of the crew will probably be lower too.
You need to know all the costs of each job – your labour costs, your equipment costs, your material costs and your subcontracting costs in order to make the best decisions for profit. Knowing your costs will help you identify and target jobs with high profit margins, and help you identify the most profitable method of completing the work.
Great contractors decisions on the right numbers, systems and tools. A competent crew with good employees pushing the envelope on production to reduce the number of days it takes to do the work and leveraging the right equipment is the formula for profitability.
Landscape Management Network provides professional education, budgeting, estimating and production systems for landscape contractors across North America. For more information on LMN, visit their website at www.landscapemanagementnetwork.com.
