April 15, 2010
Working on an equipment budget
By Mark Bradley
In our previous article, Dan and Bill discussed Dan’s field labour budget and planning realistic wage expenses to achieve his sales targets, dividing billable and non-billable time between his field labour and overhead budgets, and calculating labour burden percentage. In this month’s article, Dan and Bill discuss the next key component of his operating budget: the equipment budget.
“If you don’t have an equipment budget, I guarantee you’re not pricing your work accurately,” said Bill.
“But my rates are good,” replied Dan. “For example, my excavator rates are the exact same as Dig Bros., and they’re the biggest excavation contractor within 50 miles of here!”
“And how much profit did they make last year, Dan?”
“I don’t know.”
“And how many excavators do they have? What’s the average size of their excavator? What’s their average job size?” continued Bill.
“How should I know?”
“Pricing your work the same as Dig Bros. doesn’t mean much because Dig Bros. and Danscaping have completely different costs. I don’t know what your definition of accurate pricing is Dan, but my definition is that your prices recover Danscaping’s costs along with some profit left over for Dan,” said Bill.
“Sure but...” said Dan.
“You cannot possibly price anything accurately until you understand all of your expenses. Now I need you to fax me your equipment financing contracts. If you own vehicles and equipment, include those as well, and send the purchase agreements. Separate all the equipment you own into two categories: Billable and Overhead. The former should include all the equipment specified on bids and the latter should include all the equipment not specified on bids. I also need you to give me a good estimate on how much you spend each year on small tools and equipment. I already have your Profit and Loss statement, so I’ll review your fuel, insurance, and repair/maintenance costs in the meantime,” said Bill.
Dan faxed everything to Bill early in the evening, and Bill called him back shortly after.
“I have a few questions for you Dan. To start, it looks like you’re missing a few trucks.”
“Yeah, I own those ones outright. Bought and paid for,” said Dan.
“Well,” said Dan “I have an hourly rate for my crews, and it includes the trucks and trailers. I just don’t really know how much I’m allowing.”
“If you don’t know how much, chances are it’s not enough. Truck and equipment costs are a big reason many contractors’ profits don’t meet expectations. Do you also bill your personal truck to your projects?” asked Bill.
“I add project management hours to most of my design, plus build work. I charge $50 an hour, which covers my time and my truck.”
“You told me earlier that you spend way more time managing projects and solving site problems than you bid. Is it fair to say you spend about double the time that you bid managing projects and solving problems?” asked Bill.
“Probably more,” said Dan. “I only add a few hours of my own time to each bid, so as not to jack my prices too high.”
“I bid five hours, but I spent at least three half-days on site and some more time managing work from my truck, home and office,” said Dan.
“Let’s keep this figure at 15 hours to be conservative. Is that reasonable?” asked Bill. “I want to show where your profits are going.”
“That’s definitely conservative,” muttered Dan.
“Now let’s assume you pay yourself $35 per hour. Add 18 per cent labour burden ($6.30) and the cost of your labour is $41.30 per hour, but you still need to recover some overhead costs and add some profit. Right now you have $8.70 left to cover those two ($41.30 subtracted from $50). Worse, you’ve bid five hours and you actually spent 15 hours:
“As you can see, you’re way off the mark, and you haven’t recovered any overhead costs and your profit was consumed by your extra hours! But let’s not forget where we started—your truck.”
“It gets worse?” asked Dan.
“You don’t bill your truck specifically, so it does. A typical crew truck costs about $13 per hour to operate. That includes fuel and maintenance, but not overhead and profit,” said Bill. “So your total cost of managing that project was closer to $814.50 ($619.50 + $195), you didn’t recover any overhead, and you worked at least 10 hours for free.”
“That was a bad project,” grumbled Dan.
“It’s not just the project that was bad, Dan—it’s your system,” said Bill.
“Dan, with your rates you’re not even covering the cost of your wages and the truck, much less your overhead expenses or your profit—even on bids where your hours are accurate. If you ever want Danscaping to be profitable, you need to start budgeting for such expenses. For example, begin to budget a Return on Investment for your personal truck and for any other equipment you personally own. The point is that if you budget it, as if you were paying for that equipment like you do for the rest of your company’s equipment, your prices will make sure you’re recovering those costs and your forecast profits will reflect the costs of that truck as if you were paying for it. This ensures all your costs are covered in your equipment budget, so that you can make more accurate and realistic bids. This is how I disciplined myself to save for, and now own my entire fleet, and you can do the same Dan,” said Bill.
Wish you knew a Bill to help steer your company in the right direction? Join LMN and Landscape Ontario for their 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 go to www.landscapemanagementnetwork.com, email workshop@landscapemanagementnetwork.com, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.
In our previous article, Dan and Bill discussed Dan’s field labour budget and planning realistic wage expenses to achieve his sales targets, dividing billable and non-billable time between his field labour and overhead budgets, and calculating labour burden percentage. In this month’s article, Dan and Bill discuss the next key component of his operating budget: the equipment budget.“If you don’t have an equipment budget, I guarantee you’re not pricing your work accurately,” said Bill.
“But my rates are good,” replied Dan. “For example, my excavator rates are the exact same as Dig Bros., and they’re the biggest excavation contractor within 50 miles of here!”
“And how much profit did they make last year, Dan?”
“I don’t know.”
“And how many excavators do they have? What’s the average size of their excavator? What’s their average job size?” continued Bill.
“How should I know?”
“Pricing your work the same as Dig Bros. doesn’t mean much because Dig Bros. and Danscaping have completely different costs. I don’t know what your definition of accurate pricing is Dan, but my definition is that your prices recover Danscaping’s costs along with some profit left over for Dan,” said Bill.
“Sure but...” said Dan.
“You cannot possibly price anything accurately until you understand all of your expenses. Now I need you to fax me your equipment financing contracts. If you own vehicles and equipment, include those as well, and send the purchase agreements. Separate all the equipment you own into two categories: Billable and Overhead. The former should include all the equipment specified on bids and the latter should include all the equipment not specified on bids. I also need you to give me a good estimate on how much you spend each year on small tools and equipment. I already have your Profit and Loss statement, so I’ll review your fuel, insurance, and repair/maintenance costs in the meantime,” said Bill.
Dan faxed everything to Bill early in the evening, and Bill called him back shortly after.
“I have a few questions for you Dan. To start, it looks like you’re missing a few trucks.”
“Yeah, I own those ones outright. Bought and paid for,” said Dan.
Buying new equipment
“But they need to be included!” said Bill. “Even if they are paid for, you’re wearing them out. One day, you’re going to need to replace them. If your customers aren’t paying for it, then your profits are. Why would you give your equipment away for free, just because it’s paid for? How are going to afford to replace it? I see you’ve listed your financed crew trucks in your Equipment budget. Do you bid your trucks in your work prices? How about your trailers and small equipment on the trailers?”“Well,” said Dan “I have an hourly rate for my crews, and it includes the trucks and trailers. I just don’t really know how much I’m allowing.”
“If you don’t know how much, chances are it’s not enough. Truck and equipment costs are a big reason many contractors’ profits don’t meet expectations. Do you also bill your personal truck to your projects?” asked Bill.
“I add project management hours to most of my design, plus build work. I charge $50 an hour, which covers my time and my truck.”
“You told me earlier that you spend way more time managing projects and solving site problems than you bid. Is it fair to say you spend about double the time that you bid managing projects and solving problems?” asked Bill.
“Probably more,” said Dan. “I only add a few hours of my own time to each bid, so as not to jack my prices too high.”
Bidding management hours
“How many management hours did you bid on the last project you completed, and how many did you actually spend?” asked Bill.“I bid five hours, but I spent at least three half-days on site and some more time managing work from my truck, home and office,” said Dan.
“Let’s keep this figure at 15 hours to be conservative. Is that reasonable?” asked Bill. “I want to show where your profits are going.”
“That’s definitely conservative,” muttered Dan.
“Now let’s assume you pay yourself $35 per hour. Add 18 per cent labour burden ($6.30) and the cost of your labour is $41.30 per hour, but you still need to recover some overhead costs and add some profit. Right now you have $8.70 left to cover those two ($41.30 subtracted from $50). Worse, you’ve bid five hours and you actually spent 15 hours:
“As you can see, you’re way off the mark, and you haven’t recovered any overhead costs and your profit was consumed by your extra hours! But let’s not forget where we started—your truck.”
“It gets worse?” asked Dan.
“You don’t bill your truck specifically, so it does. A typical crew truck costs about $13 per hour to operate. That includes fuel and maintenance, but not overhead and profit,” said Bill. “So your total cost of managing that project was closer to $814.50 ($619.50 + $195), you didn’t recover any overhead, and you worked at least 10 hours for free.”
“That was a bad project,” grumbled Dan.
“It’s not just the project that was bad, Dan—it’s your system,” said Bill.
“Dan, with your rates you’re not even covering the cost of your wages and the truck, much less your overhead expenses or your profit—even on bids where your hours are accurate. If you ever want Danscaping to be profitable, you need to start budgeting for such expenses. For example, begin to budget a Return on Investment for your personal truck and for any other equipment you personally own. The point is that if you budget it, as if you were paying for that equipment like you do for the rest of your company’s equipment, your prices will make sure you’re recovering those costs and your forecast profits will reflect the costs of that truck as if you were paying for it. This ensures all your costs are covered in your equipment budget, so that you can make more accurate and realistic bids. This is how I disciplined myself to save for, and now own my entire fleet, and you can do the same Dan,” said Bill.
Wish you knew a Bill to help steer your company in the right direction? Join LMN and Landscape Ontario for their 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 go to www.landscapemanagementnetwork.com, email workshop@landscapemanagementnetwork.com, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.