You Must Know Your Costs and Your Company

Dan passed over a few estimates.  Bill scanned Dan’s new budget, and his overhead factors, and started re-pricing the first estimate.  “You can’t hope to be consistently profitable if you don’t know your costs.” emphasized Bill.  “Start with the costs of doing the job, and then add your overhead markup and profit margin that were calculated by your budget.  The markups make sure your pricing covers all your planned expenses and wages – your salary, your equipment, your advertising – every cost we worked through in the budget is factored in these markups.  Use these markups to price your work, hit your sales goals, and keep your spending on your track.  This is how your plan for profit becomes reality.”  

Bill and Dan began working through the first bid:

Labour Costs

Dan and Bill calculated labour costs starting with the average wage of Dan’s crew(s).  Then they added factors for overtime pay, downtime, and labour burden.  After that, they added Dan’s newly established overhead labour markup to cover Dan’s overhead costs, and finished by adding his profit margin.  

Bill pointed at the final number: “Here’s the billable rate you need to charge for this crew, per hour.  This rate includes everything: the cost of the direct wages, payroll contributions, downtime, overhead costs, and profit.  Doesn’t it feel better to look at that rate and know that your costs and desired profit are covered?” 

“Yes it does, and it doesn’t look too different from my rates now,” nodded Dan.  “I think I can sell that.”

Equipment Costs

Dan and Bill then calculated the hourly cost of operating his vehicles and equipment.  Equipment costs included the purchase or lease costs, insurance, fuel, licensing, and repairs.  For every vehicle and equipment, they calculated the cost, added Dan’s equipment overhead markup factor, and profit to establish daily and hourly prices for Dan’s trucks and equipment.

Material and Subcontracting Costs

Bill then showed Dan how to take his vendor’s costs and add factors for shipping, warranty, tax.  After that, they added Dan’s material overhead markup factor to cover a share of Danscaping’s overhead bill.  Finally, they added a profit margin.  Again, Dan found he could follow a simple method to take the costs of his materials and subcontractors and calculate exactly what he needed to charge for them to deliver the right bottom line results.

Bill could hardly contain Dan from pulling out more old estimates.  He was a little high on some, a little low on others, and was dead on with some. 

“Hold on for a second,” said Dan.  “I’m starting to see a pattern here… According to my system, I’ve underpriced every one of these paver jobs.”

 “Good eye.” said Bill, barely looking up.  “Don’t make that mistake again.”

 “I’m not sure it was a mistake,” Dan continued.  “I re-priced them because I didn’t think I would have won the jobs at the prices my system is telling me to charge.  They’re too high for this market.” 

“That’s the beauty of a system that helps you budget and price your work.” confirmed Bill.  “Your pricing and estimating system is going to show you the jobs that are right for your company and the ones that are not.  Your markups will accurately price your bids so you can see which jobs will help you reach your goals, and which ones will get in your way.”
“You mean it’s better to just walk away from all the jobs that are not right?” asked Dan. 

“Maybe, maybe not.” said Bill.  “I said your system will show you the jobs that are right for your company, not make the decision for you.  Just because you might lose a job on price doesn’t change the cost of the work – the job costs what it costs!  If your gut tells you you’re going to come in high on a bid, then you have three choices: 

1. Do the work more efficiently – Start by reviewing your estimate.  Can you use different tools and equipment to maximize productivity?  How can you value engineer the work to get the same production and quality in less time?  Improving productivity will lower your costs, and therefore your prices.  When you’re confident you’ve determined the most efficient way to produce the work, move to step two.
2. Educate your customer – You know exactly how and why you need to price the work, but your customer won’t necessarily share your understanding. Now it’s up to you to teach your customer why your price is more expensive, e.g. your services and products are of higher quality, your equipment is superior, or any other competitive advantages your company provides. Your need to explain how these factors will benefit the project and your customer.  You have to confront these facts head on – don’t expect your customer to read between the lines.  If that fails, then move to step three. 
3. Let someone else do the job – Sometimes the most profitable decision you’ll make is to walk from a job.  If you aren’t going to make any money doing it, simply leave it for someone who will… or at least someone who thinks they will.  This way you won’t waste your time and you’ll be able to sleep better knowing that job wasn’t right for your company. 

 Bill continued.  “Unless I absolutely need the sales to keep my head above water during a tough stretch, I’d rather do less work than work on jobs that don’t turn a profit.  What’s the purpose in running around like crazy?  You’ll end up underperforming on jobs that are delivering you a profit, just to stay busy on jobs that don’t.  So I’d rather work less and focus my time on selling and winning the jobs that fit my company and my profit goals.  Looking back, the most profitable lesson I ever learned in this business is that it’s OK to say ‘No’ to jobs that aren’t suitable for your company.” 

Dan’s new budget had answered so many of the questions that kept him up at night, plagued his weekends, and made him feel in over his head over and over again.  “One more question, Bill… Why didn’t we have this talk twelve years ago?” 

Wish you knew exactly how to price your work?  Landscape Management Network offers contractors both the tools and the training they need to budget, price, and estimate their work.  For more information, visit www.landscapemanagementnetwork.com.