lbtcadmin
12-30-2006, 06:39 PM
The Cost of Doing Business
By Phil Nilsson, Green Industry Consultant
Determining job cost is the starting point to intelligent lawn bidding and estimating. And, mastering the skills of estimating is the best defense to help ensure that the work is not over or underbid. Plenty of jobs are lost because of high bids where an acceptable profits could have been made with a lower price tag if the contractor had only known at the time. By the same token, plenty of lawn jobs are won based on low price, too low in fact, making it a miserable experience having done the work. Priced just right is where you want to be but of course this doesn't guarantee you the lawn work, just that if you do get it, there's a chance at profits.
Hit or miss lawn bidding is out of the question because virtually every customer looks for, and usually takes, the absolute lowest price. There less room for error in setting a price that not only covers cost, but also provides an adequate profit. Easier said than done because the entire process must take into account numerous variables of cost in an industry where "time is money" is an understatement.
Of course the lazy way out is to totally ignore the cost of doing business, and focus instead on price. The reasoning is that if the price is right, you'll be awarded the job inspite of your costs. This is the same as saying that you have very little control over price and that price is decided in the market place. That may be true but the real reason you want to know cost is not so much that price is solely determined from costs but that cost is your "command center" of control. If you don't know cost you have no reference point of control. Without cost knowledge you actually give up control and don't know for certain on any completed lawn project what the profit was, and in some cases may be uncertain if indeed costs were covered.
With job cost knowledge you can know if you have efficient costs (can't be done cheaper or faster) and that's about as good as it gets. Using your efficient costs as a starting point you can then develop lawn care prices. You might want to come up with three price levels for the very same job.* Base Price, Realistic Price, and Premium Price. For any one bidding event do the mental "gymnastics" of trying them on for size price wise to see which you'd like to go with. Sometimes a contractor may find himself "hungy" for work and at other times booked so far in advance that a lower price is not needed to generate work. Nevertheless, bidding and pricing is the single most important thing you'll do because it is the "future" of where your business is going. Today's bids are tomorrows' customers and the real "make up" of your company. Your company is the customers, you, employees, and assets necessary to deliver your services.
WHERE DO YOU START WITH JOB COST?
Most contractors incur three kinds of cost -
Direct costs
Indirect costs
Overhead costs.
Direct costs are those expenses that happen because labor was applied, equipment and vehicles were put into action, materials were used and work was done. Direct costs are usually easy to predict when you know how much time a lawn project will take and what equipment and materials will be needed.
Indirect costs follow or "tag along" with direct labor, such as payroll taxes, employee benefits, insurance, fuel consumption, depreciation, repairs and other on-the-job costs. Although payroll taxes, benefits and insurance can be easily estimated, the indirect costs related to lawn equipment are tougher to predict. Depreciation of equipment is a given, but fuel consumption can vary greatly and repairs are often unexpected.
Overhead costs include any expenses that support the operation of a lawn care business. Good examples are: rent for facilities, utilities, advertising, property taxes, storage, insurance on buildings, office expenses and other "behind the scenes" costs that in some cases take place simply because time went by. The overhead expenses, for the most part, take place even when no work was done. Rent and insurance are the most common examples. As with some indirect costs, certain overhead costs in lawn care operations are easily estimated - rent, utilities, taxes and insurance - while others - advertising and office expenses - are more difficult to estimate.
The difference between direct costs, indirect costs and overhead expenses can be understood by visualizing what happens in your lawn business on any given workday. Direct costs happen when work is done and labor is applied. The workers come in to work, and as soon as they turn the key in the ignition, direct costs and indirect costs follow them and stay with them all day. Overhead, or "back at the shop expenses," are just that. These costs are "left behind" items of expense that support the operation.
ANALYZING AND USING JOB COSTS.
Labor and indirect costs represent the bulk of expense for most lawn contractors and dwarf true overhead costs by comparison. The questions to answer about these costs can be reduced to what I call "time costs."
How much does time cost my company?
How much time will the job take?
What are my hourly or time profit goals?
What are my hourly direct costs?
What are my hourly indirect costs?
What is my overhead rate per hour?
To answer these questions is to formulate a bidding system.
You can easily relate to a financial statement and assign time costs to each expense category by simply dividing each cost category by the total number of production hours your company applied over the course of your season. Doing that gives you a capsule of actual costs, and it can be used to compare to estimated costs that were used at the job bidding stage. The variations between estimated job costs and actual costs are then used to find cost variations. In other words, job costs were supposed to be, or bid at, a certain price, and the actual costs were different.
WHAT DO YOU NEED TO BID THE WORK BASED ON COST?
A good understanding of work required, along with good labor time hour standards. This is the crucial step to the entire job estimating process. If you don't know within perhaps 10% of labor time required, your lawn care job bids are destined to be inaccurate. Labor is a big factor, the biggest single expense you have, and costs are highly dependent on job time knowledge. You thought a job would take 1,000 hours and it took 1,200.
A knowledge for job specifications and job time standards, or experienced times for each phase of the work.
An hourly cost factor for the three areas of cost, including direct costs, indirect costs and overhead costs.
A realistic attitude about profit per hour that can be added to costs in arriving at a total price that the customer can afford, which will stand the test of competitiveness and will turn a profit. Keep in mind that if your company does not operate efficiently that this is not the lawn customer's problem and the competition may not allow adding profits on top of inefficent costs just because you happen to need to earn a living. Production time and methods needs to be "as good as it gets" then add a realistic profit to it and this will also tell you your "walkaway price" as well.
MAKING JOB COSTS HAPPEN...
Once you have a handle on hourly job costs and can assign these costs to job functions that will take place at the job site, you need to make them happen by adhering to labor time budgets. This is where the labor hours and costs on paper are proven at the job site with good control over expected, or anticipated, costs and actual costs.
Can you get the lawn job done within the estimated time? Profits go up and costs go down when the job is done faster; profits go down and costs go up when the job takes longer than expected. Having said that, job costs are truly estimated costs since many variables are at play in the process of actually doing the work. Since labor is the single biggest expense, controlling labor and informing the employees of job time goals are important parts of cost control and profit achievement.
ELEMENTS OF COST...
Direct costs such as payroll expenses, are an easily calculable figure ... payroll hourly rates multiplied by realistic labor times required to do the work.
Indirect costs follow direct costs and are closely related to hourly payroll rates. Payroll taxes, benefits, depreciation on vehicles and equipment - in fact the entire cost lineup that supports labor activity in the field - can be lumped together to develop an hourly rate based on the time, by the hour, of actually using the support equipment or "expense group." The only shortcoming you may have is that to assign an indirect cost per hour, you'll have to estimate the total production hours predicted in the current season.
Overhead costs have a less impact and represent a far lower total expense group than direct or indirect expenses. The best you can hope for in terms of developing an hourly overhead rate to apply to total labor hours projected for any given job is to lump the entire year’s overhead expense and estimate the total number of labor hours expected for the year. That overhead total is then divided by the hours to arrive at the overhead per hour rate. As the backlog of lawn work increases, hourly overhead rates go down; and as the backlog drops, hourly overhead rates rise. This doesn't mean, however, that increases in overhead can be passed on to the customer for the company that doesn’t have enough work to carry overhead at a conservative rate. Unreasonably high lucrative overhead expense schedules make a company far less competitive from a cost point of view.
Last but not least is the addition of profit to the cost group to arrive at a price to assign to the work. Sometimes a final price can be higher; sometimes it needs to be lower in view of current market and economic conditions. But here too, you should arrive at an hourly profit add on that justifies a reasonable profit.
Of course the higher the profit expectation, the lower the chance of being awarded the work. Profit after and beyond cost is the true "mystery" number that's locked up and somewhat a "secret" in virtually every job bid submitted. Some contractors will use industry averages for profits. Others will charge what they think the "traffic will bear," while still others will test their price levels, including profits, by going with a higher and higher price for the same work until they find the price ceiling. Another view is to ask yourself what amount of money is being the boss worth? Is it $50,000, $100,000, $200,000 a year? If you were to replace yourself with a hired manager what would it cost? What's it worth "being you"? Part of your compensation is salary as a management cost to the business, and the other part profit that you earn for invested capital at risk in plant and equipment.
Base Price - is the lowest price you must charge to cover your business costs, salary and profit.
Realistic Price - is higher than Base Price. Top of the quality range in your field but still competitive.
Premium Price - is even higher where you price for the client who wants and can afford the best.
Copyright Nilsson Associates 2003
Other
resources:
Sales Boosters (http://nilssonbooks.com/sales_booster_package.htm)
Job Estimating Package (http://nilssonbooks.com/job_estimating_package.htm)
FREE Job Pricing Guidelines (http://nilssonbooks.com/free_job_guidelines.htm)
New Business Startup Package (http://nilssonbooks.com/just_getting_started.htm)
Complete Operations management System (http://nilssonbooks.com/coms_package.htm)
Nilsson's Job Estimating System (http://nilssonbooks.com/job_estimating_package.htm) has everything you need to evaluate job site specifications & work required, figure costs, how to price ~ lawns, grounds maintenance, landscape installs. You'll get step - by - step instructions, bid proposal outlines & customer contracts, labor hours job times. You'll get job price guides to compare your prices with the going rates, overhead costs, materials, profit ratios. You'll set realistic prices, and job labor hours goals based on field tested, proven, time studied labor hours for every job you bid. You'll know how to evaluate every job for total work hours required, the price to charge for the job, the profit you'll make, best crew size, job costs. You'll also get add-on service check lists to help you maximize sales by upselling customers on additional property improvements.
Nilsson's FREE Job Pricing Guidelines
When it comes to pricing lawn and landscape jobsnobody has more landscape industry pricing information than Nilsson Associates, Green Industry Consultants. Nilsson's Job Price Guides covers lawn care bids, job bidding & estimating for tree care, irrigation installation & service, pavement sweeping & maintenance, snow plowing operations, landscaping and hardscaping job bids for both commercial & residential customers as well as real estate management, parks & recreation departments, municipalities, college and univeristy grounds. The prices cover; estimates & bids for grounds services, landscaping pricing estimates , estimating & bid the price seasonal work, year around commercial estimate contracts, price per square foot, best grounds maintenance & landscaping job to bid & pricing, price of lawn care, lawn mowing price, aeration pricing, lawns, commercial landscape job bid estimates, most all outdoor maintenance estimating & pricing, mulching prices, pricing chemicals, weeding & aerating pricing, fertilizer prices, prices for organic fertilizer, pricing weeds in beds, pricing pruning & trimming trees & shrubs, pricing commercial & residential snow plowing, hardscape pricing, pricing hydroseeding, irrigation service estimates for commercial & residential, pricing seeding lawns, pricing lawn sod, prices for slit seeding lawns, pricing edging lawn beds, spring cleanup prices, pricing fall cleanups, hourly price of pressure washing walks & patios, pricing trees, stump grinding prices, price for gutter cleaning, lawn dethatching price, price for shoveling snow, pricing salting, price for sanding.
For more information: Click Here for FREE Job Pricing Guidelines (http://nilssonbooks.com/free_job_guidelines.htm)
http://nilssonbooks.com/guarantee.gifNilsson Associates has the information you need to operate your business (http://nilssonbooks.com/)and make it a success. We offer one of the Largest Resources available in the Green Industry on the internet. Everything from how to sharpen a mower blade to how to manage a small or large, simple or complex business doing millions in sales! You can keep your buisness small or grow it each year. It's up to you how far you go.
http://hispaniclawnforum.com/banners/jobestpakbanpn.gif (http://nilssonbooks.com/job_estimating_package.htm)
By Phil Nilsson, Green Industry Consultant
Determining job cost is the starting point to intelligent lawn bidding and estimating. And, mastering the skills of estimating is the best defense to help ensure that the work is not over or underbid. Plenty of jobs are lost because of high bids where an acceptable profits could have been made with a lower price tag if the contractor had only known at the time. By the same token, plenty of lawn jobs are won based on low price, too low in fact, making it a miserable experience having done the work. Priced just right is where you want to be but of course this doesn't guarantee you the lawn work, just that if you do get it, there's a chance at profits.
Hit or miss lawn bidding is out of the question because virtually every customer looks for, and usually takes, the absolute lowest price. There less room for error in setting a price that not only covers cost, but also provides an adequate profit. Easier said than done because the entire process must take into account numerous variables of cost in an industry where "time is money" is an understatement.
Of course the lazy way out is to totally ignore the cost of doing business, and focus instead on price. The reasoning is that if the price is right, you'll be awarded the job inspite of your costs. This is the same as saying that you have very little control over price and that price is decided in the market place. That may be true but the real reason you want to know cost is not so much that price is solely determined from costs but that cost is your "command center" of control. If you don't know cost you have no reference point of control. Without cost knowledge you actually give up control and don't know for certain on any completed lawn project what the profit was, and in some cases may be uncertain if indeed costs were covered.
With job cost knowledge you can know if you have efficient costs (can't be done cheaper or faster) and that's about as good as it gets. Using your efficient costs as a starting point you can then develop lawn care prices. You might want to come up with three price levels for the very same job.* Base Price, Realistic Price, and Premium Price. For any one bidding event do the mental "gymnastics" of trying them on for size price wise to see which you'd like to go with. Sometimes a contractor may find himself "hungy" for work and at other times booked so far in advance that a lower price is not needed to generate work. Nevertheless, bidding and pricing is the single most important thing you'll do because it is the "future" of where your business is going. Today's bids are tomorrows' customers and the real "make up" of your company. Your company is the customers, you, employees, and assets necessary to deliver your services.
WHERE DO YOU START WITH JOB COST?
Most contractors incur three kinds of cost -
Direct costs
Indirect costs
Overhead costs.
Direct costs are those expenses that happen because labor was applied, equipment and vehicles were put into action, materials were used and work was done. Direct costs are usually easy to predict when you know how much time a lawn project will take and what equipment and materials will be needed.
Indirect costs follow or "tag along" with direct labor, such as payroll taxes, employee benefits, insurance, fuel consumption, depreciation, repairs and other on-the-job costs. Although payroll taxes, benefits and insurance can be easily estimated, the indirect costs related to lawn equipment are tougher to predict. Depreciation of equipment is a given, but fuel consumption can vary greatly and repairs are often unexpected.
Overhead costs include any expenses that support the operation of a lawn care business. Good examples are: rent for facilities, utilities, advertising, property taxes, storage, insurance on buildings, office expenses and other "behind the scenes" costs that in some cases take place simply because time went by. The overhead expenses, for the most part, take place even when no work was done. Rent and insurance are the most common examples. As with some indirect costs, certain overhead costs in lawn care operations are easily estimated - rent, utilities, taxes and insurance - while others - advertising and office expenses - are more difficult to estimate.
The difference between direct costs, indirect costs and overhead expenses can be understood by visualizing what happens in your lawn business on any given workday. Direct costs happen when work is done and labor is applied. The workers come in to work, and as soon as they turn the key in the ignition, direct costs and indirect costs follow them and stay with them all day. Overhead, or "back at the shop expenses," are just that. These costs are "left behind" items of expense that support the operation.
ANALYZING AND USING JOB COSTS.
Labor and indirect costs represent the bulk of expense for most lawn contractors and dwarf true overhead costs by comparison. The questions to answer about these costs can be reduced to what I call "time costs."
How much does time cost my company?
How much time will the job take?
What are my hourly or time profit goals?
What are my hourly direct costs?
What are my hourly indirect costs?
What is my overhead rate per hour?
To answer these questions is to formulate a bidding system.
You can easily relate to a financial statement and assign time costs to each expense category by simply dividing each cost category by the total number of production hours your company applied over the course of your season. Doing that gives you a capsule of actual costs, and it can be used to compare to estimated costs that were used at the job bidding stage. The variations between estimated job costs and actual costs are then used to find cost variations. In other words, job costs were supposed to be, or bid at, a certain price, and the actual costs were different.
WHAT DO YOU NEED TO BID THE WORK BASED ON COST?
A good understanding of work required, along with good labor time hour standards. This is the crucial step to the entire job estimating process. If you don't know within perhaps 10% of labor time required, your lawn care job bids are destined to be inaccurate. Labor is a big factor, the biggest single expense you have, and costs are highly dependent on job time knowledge. You thought a job would take 1,000 hours and it took 1,200.
A knowledge for job specifications and job time standards, or experienced times for each phase of the work.
An hourly cost factor for the three areas of cost, including direct costs, indirect costs and overhead costs.
A realistic attitude about profit per hour that can be added to costs in arriving at a total price that the customer can afford, which will stand the test of competitiveness and will turn a profit. Keep in mind that if your company does not operate efficiently that this is not the lawn customer's problem and the competition may not allow adding profits on top of inefficent costs just because you happen to need to earn a living. Production time and methods needs to be "as good as it gets" then add a realistic profit to it and this will also tell you your "walkaway price" as well.
MAKING JOB COSTS HAPPEN...
Once you have a handle on hourly job costs and can assign these costs to job functions that will take place at the job site, you need to make them happen by adhering to labor time budgets. This is where the labor hours and costs on paper are proven at the job site with good control over expected, or anticipated, costs and actual costs.
Can you get the lawn job done within the estimated time? Profits go up and costs go down when the job is done faster; profits go down and costs go up when the job takes longer than expected. Having said that, job costs are truly estimated costs since many variables are at play in the process of actually doing the work. Since labor is the single biggest expense, controlling labor and informing the employees of job time goals are important parts of cost control and profit achievement.
ELEMENTS OF COST...
Direct costs such as payroll expenses, are an easily calculable figure ... payroll hourly rates multiplied by realistic labor times required to do the work.
Indirect costs follow direct costs and are closely related to hourly payroll rates. Payroll taxes, benefits, depreciation on vehicles and equipment - in fact the entire cost lineup that supports labor activity in the field - can be lumped together to develop an hourly rate based on the time, by the hour, of actually using the support equipment or "expense group." The only shortcoming you may have is that to assign an indirect cost per hour, you'll have to estimate the total production hours predicted in the current season.
Overhead costs have a less impact and represent a far lower total expense group than direct or indirect expenses. The best you can hope for in terms of developing an hourly overhead rate to apply to total labor hours projected for any given job is to lump the entire year’s overhead expense and estimate the total number of labor hours expected for the year. That overhead total is then divided by the hours to arrive at the overhead per hour rate. As the backlog of lawn work increases, hourly overhead rates go down; and as the backlog drops, hourly overhead rates rise. This doesn't mean, however, that increases in overhead can be passed on to the customer for the company that doesn’t have enough work to carry overhead at a conservative rate. Unreasonably high lucrative overhead expense schedules make a company far less competitive from a cost point of view.
Last but not least is the addition of profit to the cost group to arrive at a price to assign to the work. Sometimes a final price can be higher; sometimes it needs to be lower in view of current market and economic conditions. But here too, you should arrive at an hourly profit add on that justifies a reasonable profit.
Of course the higher the profit expectation, the lower the chance of being awarded the work. Profit after and beyond cost is the true "mystery" number that's locked up and somewhat a "secret" in virtually every job bid submitted. Some contractors will use industry averages for profits. Others will charge what they think the "traffic will bear," while still others will test their price levels, including profits, by going with a higher and higher price for the same work until they find the price ceiling. Another view is to ask yourself what amount of money is being the boss worth? Is it $50,000, $100,000, $200,000 a year? If you were to replace yourself with a hired manager what would it cost? What's it worth "being you"? Part of your compensation is salary as a management cost to the business, and the other part profit that you earn for invested capital at risk in plant and equipment.
Base Price - is the lowest price you must charge to cover your business costs, salary and profit.
Realistic Price - is higher than Base Price. Top of the quality range in your field but still competitive.
Premium Price - is even higher where you price for the client who wants and can afford the best.
Copyright Nilsson Associates 2003
Other
resources:
Sales Boosters (http://nilssonbooks.com/sales_booster_package.htm)
Job Estimating Package (http://nilssonbooks.com/job_estimating_package.htm)
FREE Job Pricing Guidelines (http://nilssonbooks.com/free_job_guidelines.htm)
New Business Startup Package (http://nilssonbooks.com/just_getting_started.htm)
Complete Operations management System (http://nilssonbooks.com/coms_package.htm)
Nilsson's Job Estimating System (http://nilssonbooks.com/job_estimating_package.htm) has everything you need to evaluate job site specifications & work required, figure costs, how to price ~ lawns, grounds maintenance, landscape installs. You'll get step - by - step instructions, bid proposal outlines & customer contracts, labor hours job times. You'll get job price guides to compare your prices with the going rates, overhead costs, materials, profit ratios. You'll set realistic prices, and job labor hours goals based on field tested, proven, time studied labor hours for every job you bid. You'll know how to evaluate every job for total work hours required, the price to charge for the job, the profit you'll make, best crew size, job costs. You'll also get add-on service check lists to help you maximize sales by upselling customers on additional property improvements.
Nilsson's FREE Job Pricing Guidelines
When it comes to pricing lawn and landscape jobsnobody has more landscape industry pricing information than Nilsson Associates, Green Industry Consultants. Nilsson's Job Price Guides covers lawn care bids, job bidding & estimating for tree care, irrigation installation & service, pavement sweeping & maintenance, snow plowing operations, landscaping and hardscaping job bids for both commercial & residential customers as well as real estate management, parks & recreation departments, municipalities, college and univeristy grounds. The prices cover; estimates & bids for grounds services, landscaping pricing estimates , estimating & bid the price seasonal work, year around commercial estimate contracts, price per square foot, best grounds maintenance & landscaping job to bid & pricing, price of lawn care, lawn mowing price, aeration pricing, lawns, commercial landscape job bid estimates, most all outdoor maintenance estimating & pricing, mulching prices, pricing chemicals, weeding & aerating pricing, fertilizer prices, prices for organic fertilizer, pricing weeds in beds, pricing pruning & trimming trees & shrubs, pricing commercial & residential snow plowing, hardscape pricing, pricing hydroseeding, irrigation service estimates for commercial & residential, pricing seeding lawns, pricing lawn sod, prices for slit seeding lawns, pricing edging lawn beds, spring cleanup prices, pricing fall cleanups, hourly price of pressure washing walks & patios, pricing trees, stump grinding prices, price for gutter cleaning, lawn dethatching price, price for shoveling snow, pricing salting, price for sanding.
For more information: Click Here for FREE Job Pricing Guidelines (http://nilssonbooks.com/free_job_guidelines.htm)
http://nilssonbooks.com/guarantee.gifNilsson Associates has the information you need to operate your business (http://nilssonbooks.com/)and make it a success. We offer one of the Largest Resources available in the Green Industry on the internet. Everything from how to sharpen a mower blade to how to manage a small or large, simple or complex business doing millions in sales! You can keep your buisness small or grow it each year. It's up to you how far you go.
http://hispaniclawnforum.com/banners/jobestpakbanpn.gif (http://nilssonbooks.com/job_estimating_package.htm)