Iron rich and cash poor

Perhaps one of the best illustrations of how equipment effectively employed can reduce time and costs is the first transcontinental railroad. It was completed on May 10, 1869, at Promontory Point, Utah, and connected a 1,900 mile stretch of rail owned by the Central Pacific and Union Pacific Railroads. In doing so, it reduced travel time from six months to six days — a 3,000% improvement.

Kevin McSherry and his son, Ryan, partners in From the Ground Up Landscapes in central Illinois, invested in a tiltrotator a couple of years ago. It allows the bucket on an excavator to rotate 360° at various angles. Once they mastered its use, they saw their productivity almost double, saving them many man-hours and the related costs for labor and equipment.

Wes Nichols, owner of Pro-Tree Outdoor Services in Excelsior, Minn., has been working with Michael Hornung of the Valley Green Companies in nearby Sartell, Minn., for over five years. Michael has shown Wes how to do a cost-benefit analysis regarding his equipment purchases. Wes recently purchased a $750,000 articulated grapple-saw crane (AGC) mounted on a truck. It was a huge purchase for Wes and his team. However, he did his homework and calculated that it would do the work of a four-person crew and replace it with the AGC and one operator.

Truck and equipment costs for a green industry company usually run 12% of revenue +/- 2%. They normally break down as follows:

Fuel 2% to 4%

Repairs, parts and mechanics 2% to 4%

Insurance (truck / auto & inland marine), registrations, interest 1%

Depreciation, straight-line 2% to 4%

Total 12% +/- 2%

Field truck and equipment expenses usually total 10% of this total. General and administrative (G&A) overhead vehicles for owners, managers and sales personnel usually account for 1.5% to 2% of the total.

How it works

In Lincoln, Nebraska, I started working with Scott and Heidi Haynes, owners of Dreamscapes, a company that specializes in hardscape installation. Scott and Heidi do not desire to become a huge company.

Rather, they only employ two to three people to assist them. Scott runs and works in the field while Heidi does the sales and runs the office. You could say that Dreamscapes is a high-end boutique hardscape specialty company. However, their net profit margin was around 10% — too low for such a high-end specialty company.

Dreamscapes was a highly productive operation.ii Scott had lots of field equipment and he not only knew how to use it all, but he also maintained it in tip-top condition. Upon examining his financials and estimating system, the reason for the low profit margins became clear. They were not charging each job for the field equipment that was required to do the project. As a result, the net profit margin on their financials was 10% to 15% too low.

A common problem

I see it all the time. Green industry contractors simply do not know how to charge for their trucks and field equipment and to include all of these costs in their projects and services. These costs end up coming out of the owner’s pocket and profits are too low.

The pricing error happens in a couple of ways. First, some pricing systems have you include all of your costs for automobiles, trucks and field equipment in G&A overhead. If these costs are 12% of revenue, every project and service gets charged the same amount — 12%. But not all services require the same number or kind of trucks and field equipment.

Some projects only require pickup trucks and wheelbarrows while others require skid-steers, mini-excavators and more. As a result, you overprice some projects and underprice others. In a competitive market, guess which jobs you get — the ones that you underprice. Second, some contractors assume that their truck and field equipment costs are included in their markups on material, field labor and subcontractor costsiii. That may be the case if you include these costs in these markups to begin with. However, if you don’t, they won’t.

This was the original problem at Dreamscapes. Fortunately, Scott and Heidi fixed their pricing problem and over the next three years saw their net profit margin increase accordingly.

Conclusion

Today’s trucks and field equipment can dramatically increase your company’s productivity in the field. I’ve seen companies improve their productivity 30%, 60% and even 100% once their crews have the right equipment and are properly trained in how to use it. However, it can be all for naught if you don’t pass these costs on to your customers in your pricing. Be smart like the contractors mentioned earlier and learn how to include these costs in your pricing. You and your bottom line will be better for it.