Pricing work by the unit (per square foot, per tree, per meter) is a pricing method as old as the landscape industry itself. Many contractors use this pricing system as their default method for pricing work. Other contractors are forced into this system by cities, architects or project managers who insist on getting bids in a unit price format. No matter why you’re doing it, recognize that unit pricing is hurting your company’s profits, not helping them.
One of the most significant problems with unit pricing is that it assumes a fixed amount of labor per item. This might be 1.5 hour per tree or .15 hours per square foot. But that labor is just an average, and while it might help you guesstimate the time it’s going to take to complete a job, it’s more than likely to hurt your profits when submitting a unit price bid.
Using unit prices is like forecasting the average weather. The average temperature might be 9°C/48°F but that doesn’t tell you how to dress each day. What if it rains? If you woke up and dressed for the average temperature every day, you’d rarely be dressed properly for the weather.
Allow us to explain
You have a job where you have to plant 20 trees. You’re going to send a 4 man crew and figure they can plant those trees in a 9 hour day. Your estimate might look like this:
|Other Materials||1||Lump Sum||$1,000||$1,250|
|Overhead Recovery||1||Lump Sum||$540||$600|
|Totals Per Tree||$353||$585|
In the above example, we calculate all the costs and prices of the job and divide by the number of trees to come up with a price per tree. For this job, we come up with $585 per tree.
Now we’re ‘OK’ here because we calculated the $585 based on the labor we calculated for this job. We’re as close to accurate as we can reasonably get. But watch what happens when the customer changes the bid…
Now let’s imagine the customer says: “Thank you for your price. We’re a little bit over budget, so we only want you to install 15 trees.” I’ll draw up a PO for 15 trees x $585 per tree, for a total of $8,775.
But the reality of this situation is that many of our costs don’t drop in proportion to the materials:
So let’s revisit our estimate, but this time with only 15 trees.
|Other Materials||1||Lump Sum||$800||$1,000|
|Overhead Recovery||1||Lump Sum||$540||$600|
|Totals Per Tree||$390||$647|
The original estimate of $585 per tree isn’t very good at 15 trees. The cost per tree increased from $353 per tree to $390 per tree, and our price is $585 when it should be $647 per tree. Now our company is eating $100 per tree in increased costs and lost revenue. We’re under-bidding this job by $1,500!
Let’s imagine we’re the low bidder at $585 a tree. They like our bid so much, they increase their budget from 20 trees to 30 trees.
But 30 trees is too many to get done in one day, so we’re going to have to send the crew back for a 2nd day to plant the extra 10 trees. And in reality we’re not going to get to a 2nd job that day. By the time we mobilize, install the trees and break for lunch, there’s not really enough time left in the day to start another job. So our bid looks like this:
|Other Materials||1||Lump Sum||$1,500||$1,850|
|Overhead Recovery||1||Lump Sum||$1,080||$1,200|
|Totals Per Tree||$374||$625|
Not quite as bad as the previous example, but our increased costs and decreased revenue means we’re eating $60 per tree. On an $18,750 job, we’re short $1,800.
There are scenarios where unit pricing can work in your favor. Not every change hurts the contractor, but changes are far more likely to be to the contractor’s detriment than to our benefit—especially when most of these contracts are awarded on a low bid basis. We’re doing everything we can to get to the leanest price so that we get the work but any changes are far more likely to hurt us than help us.
Average unit prices are rarely correct. They simply cannot factor for some very significant job variables.
If you are pricing your own work with unit pricing, it’s time to stop. You should always be cost-based estimating using actual labor, equipment, materials, sub and overhead recovery costs when arriving at your bid. Not only will you have a more accurate price, you’ll have a clear plan about how long a job should take, what equipment and material should be delivered, and what your true net profit is.
If you have a customer, or bid, that insists on this pricing method, you have little choice but to roll with the punches. But always consider the impact of potential changes. If possible, ask for the opportunity to re-price before you agree to any changes. And at the very least, take the opportunity to educate your customer. Every job is different but remember, and when it comes to pricing based on averages, the price is almost NEVER right.
Mark Bradley is the CEO of LMN. Dedicated to transforming talented landscapers into profitable business owners, LMN provides the business management software and training owners need to grow. To learn more about how you can start transforming your business, FREE, with the LMN software platform, visit www.golmn.com. Interested in attending an LMN workshop? Visit golmn.com/workshops/ to register for a workshop near you.