June 15, 2010
By Mark Bradley

Mark BradleyIn our previous article, Dan, a struggling landscape contractor, and Bill, his long-time friend and mentor, discussed how Dan and his company could recover overhead costs. With the budget completed and overhead recovery factors set, Dan learns how to price his work for profit.

“You’ve just about done it, Dan; you’re over the hump. Your budget is complete, and your overhead markups are calculated. You have all the information you need to price your jobs, knowing your costs and expected profit,” said Bill.

“It seems so simple now,” replied Dan.  “Now that we’re this far, it’s just common sense. But you said I could use this to properly price my work?”

“Yes, you have everything you need,” answered Bill. “Do you have that estimate you put together last month?”

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 pricing covers all your planned expenses and wages, such as your salary, equipment, and advertising. Every cost we worked through in the budget is factored in these markups. Use these markups to price your work, hit 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 crews. 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 to the final number: “Here’s the billable rate you need to charge for this crew, per hour. This rate includes everything, including cost of the direct wages, payroll contributions, downtime, overhead 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, 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.

Bill showed Dan how to take his vendor 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 to deliver the right bottom line results.

“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 win the jobs at the prices my system told me to charge.  They’re too high for this market.”

“That’s the beauty of the system,” confirmed Bill. “The 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 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 the jobs that are not right?” asked Dan.

“Maybe, maybe not.” said Bill. “I said your system will show you jobs that are right for your company. It won’t 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. 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: your services and products are of higher quality, your equipment is superior, or any other competitive advantages your company provides. You need to explain how these factors will benefit the project and your customer. Confront these facts head on, and 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 away from a job. If you aren’t going to make any money doing it, simply leave it for someone who will, or at least who thinks he 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.”

Dan’s new budget answered so many of the questions that kept him up at night, plagued his weekends, and continually made him feel in over his head. “One more question, Bill. Why didn’t we have this talk 12 years ago?”

Wish you knew exactly how to price your work?  Join LMN and Landscape Ontario for the Seize Control:  Your Operating Budget workshop series. Bring your company’s numbers and leave with an operating budget and pricing system built specifically for your company. For more information, email workshop@landscapemanagementnetwork.com, or call -888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.