Equipment equation

Mike had a $5 million landscape installation company but was barely breaking even. He told me that he never made more than 2-3% net profit on his bottom line. He also told me that the more sales he had, the less money he made. He was missing about $550,000 (10%) in net profit. How’d you like to do $5 million in business and barely break even?

Mike’s primary problem was the way that he estimated his T&E costs in his bids. He’d divide the $800,000 T&E costs on his P&L by his projected 80,000 billable field-labor hours and obtain $10 ($800,000 ÷ 80,000 = $10). If a job contained 1,000 billable field-labor hours, he’d include $10,000 ($10 x 1,000) of T&E costs in his bid. Theoretically, if he sold 80,000 billable field-labor hours, he’d recover all $800,000 of T&E costs or so it seemed.

The total of T&E costs for the majority of Green Industry companies falls between 10 to 14% of sales. General and administrative (G&A) overhead vehicles for owners, project and account managers, etc. account for 2 of the 12%. Your totals may vary slightly from mine, but my figures should provide an accurate starting point.

Contractors who keep their trucks and equipment until they rust to death, will see their depreciation percent decline while the mechanics, parts and repairs percent will increase. Comparing your T&E costs to my benchmarks over a three- or five-year period will often shed a lot of light on your truck and equipment practices and purchases. It will also help you conduct a cost-benefit analysis when it comes to purchasing trucks and equipment.

Back to Mike. Exactly $257,000 of the $800,000 T&E costs were included in bids and paid by clients. I’m a little slow at these things but it seems to me that if your costs are $800,000 and your clients pay $257,000 of it, you have $543,000 in T&E costs that you have to eat. Add a 10 % net profit margin to this and we have found $600,000 of missing revenue.

Mike had a fatal mathematical error in his bidding methods. Let’s analyze two bids each containing 1,000 billable field-labor hours. Job A requires crew trucks, skid-steers, mini-excavators, trenchers, etc. It’s T&E cost per hour (EqCPH) is approximately $20 per man-hour. Job B only requires pickup trucks and wheelbarrows. Its EqCPH is roughly $4 per man-hour (chart below).

Mike’s cost estimating method for trucks and equipment seemed logical. You add $10 for every billable field-labor hour in a bid to pass your $800,000 T&E costs on to your customers. However, it contained an error. Assuming Jobs A & B would each be approximately $100,000, Job A was priced $12,000 or 12% too low. Job B was priced $7,200 or 7% too high. Mike constantly won bids that he bid too low. The more work that he won, the more money he lost. He’d win equipment-intense jobs because he under-priced them. He wouldn’t win labor-intense jobs because he over-priced them.

The good news was that we found the missing $600,000. Mike’s revenue for the work that he did should have been $5,600,000 not $5,000,000. This would have given him about a 10% net profit margin. Unfortunately, for Mike it was too late and he lost his company. Next time, we’ll talk more about the truck and equipment costs in your business and how to ensure that you pass these costs on to your customers.

Contact Jim Huston at jhuston@giemedia.com