Price competition. The “race to the bottom”. Uneducated customers. From one truck operations to the multi-national franchises, landscape contractors everywhere struggle to sell work at a price that makes a fair profit. There are many examples of companies who have positioned themselves in a particular niche or segment where they compete less, but even there, there are few examples of companies who consistently meet or exceed their own expectations for profit.
In my experiences teaching landscape estimating and business management to contractors across North America, it’s clear that successful companies have earned better profit margins using some basic tools and knowledge that are not well understood by the majority. n this series of articles, we’ll break down some of these profit-growing concepts and use real-world case studies to illustrate how they get applied in the daily operations of a landscape company.
Let’s start with “Dan”, from a fictional landscape company Danscaping (this example purely fictional and does not represent any companies or owners sharing the same name). Dan tries to get $45 per man hr to maintain his clients’ properties. Dan’s got an educated pricing system, and the chart below illustrates how Dan came up with his chargeout rate:
Dan’s company financials are sound, with a healthy 10% profit on his bottom line. A simplified version of his chart of accounts is shown below:
The season is already underway when Dan gets approached by a good client to do some additional mowing work on a few properties close to Dan’s existing sites. There are no materials, just labor and equipment. It‘s about 4 hours/week of work for a 3 man crew, or 432 man-hours for the season. Dan has the equipment needed to do the work, and adding a few hours to his crews’ weekly schedules is no problem either. The client, however, won’t switch to Danscaping unless Dan will match than their current contractor’s rate of $38/man hour.
Dan knows his hourly rate of $45/hr and how much profit is built in ($5/hr). He declines the job. At $38/hr, Dan figures he’s losing money.
Was he right? If you just looked at this job, yes. It didn’t seem profitable. But what if Dan pulled back to 25,000 ft and looked beyond job profit and instead focused on his company’s profits? Here’s what he would have seen….
Looking strictly at the numbers (there are other variables… too many to discuss here), Dan’s decision was wrong. His company’s net profit would have jumped over $6,000 – enough to pay his LMN membership for the next 5 years just on this one job. Surprisingly, he’d take this job at a “loss”, yet Danscaping’s net profit margin actually increased by almost a full percentage point. Dan’s company would see better profit if he’d taken that job at $38/hr.
Dan’s confused. He started with a net profit of 10%, took a job at a loss, but increases his overall profit margin?! Instinct and experience tells us that if you had a 10% profit margin and you take a job at a -5%, your overall profit margin would drop. But Dan’s numbers show an entirely different story. What’s happening?
[biginfopane color="#395d54" textcolor="#ffffff" title="Better Profit Concept I"]Maximizing your profit on every job and maximizing company profits are not the same thing.[/biginfopane]
Consider for a minute your goals for your company – are you trying to maximize profit on every job or are you trying to make better profit as a company? While those objectives appear to be the same, but they’re not. Successful companies, in every industry, understand this concept and leverage it to maximize their production capacity and their bottom line.
Profitability at 25,000ft, or at your company level, is often missed by owners and estimators when consumed with the day-to-day details. After all, it’s easy to assume that the way to maximize company profit is by maximizing each job’s profit. What the “big guys” know, and use to their advantage, is that only about 50% (on average – this varies by job) of a landscape job’s costs are “real” and the rest are assumed. To understand exactly what that means, look at Dan’s example again.
When Dan turned down that contract because it didn’t meet his “break even” price, what expenses did he save?
- He saved 432 hours of extra wages for his field staff
- He saved fuel expenses
But nothing else actually changed. Dan’s equipment or insurance payments don’t decrease because he turned down the job. His rent, accountant fees, office salaries, advertising, cell phone bills, computer expenses, aren’t affected whether or not he wins this work. The only ‘real’ costs of this job opportunity were the cost of wages for the extra hours worked (including drive time) and the costs of the fuel to get that work done. Dan doesn’t “save” any overhead costs whether he takes this job or not.
[pullquote style="border-left"]Are you telling me to ignore overhead costs when bidding work?[/pullquote]
To be crystal clear – absolutely not.
What we are saying is that there are opportunities where you can aggressively price work and improve your bottom line and being aware of these opportunities will build your net profit.
Have you ever bid against a larger, professional, successful landscape company and they bid the work with rates that seem impossible? Maybe they underestimated the costs of the work, maybe they made a mistake, maybe the job is a “lost leader” for them…
But also recognize that they probably got where they are by understanding that, in some cases, a “loss” on a job still improves company profit. If the company has untapped capacity to do the work, and their selling price can cover job costs with some left over, net profit improves. And as an added bonus, they’re first in line to get higher margin enhancements and extras.
It’s up to you to use common sense. There’s a time and place for bidding this way. You cannot ignore overhead recovery – you will be out of business in weeks. And if Dan felt he had an opportunity to turn down that job, but still sell those hours at his normal rate of $45/hr to someone else, he should execute that option instead.
A few examples where this strategy can be effective can include:
- Adding a site or two to the end of a snow or maintenance route when there are available hours
- Adding one or two more construction jobs late in the year
- Filling idle crew time in your schedule
- Utilizing equipment that’s parked at the yard
- Large contracts or projects that will add significant revenue w/o adding overhead
The key to Dan’s example is that Dan’s company had unused capacity to take on the extra work. He didn’t need new equipment or to hire an extra supervisor, or to expand his shop to take this job. Focusing on the true objective, maximizing company profit, can allow you to see situations differently, and is an essential skill for improving your bottom line.
Landscape Management Network (www.golmn.com) is landscape estimating software and business management tools built for landscape contractors. Visit our website to see how easy it is to put the power of a budget at work for your company.