IRRIGATION: Lessons in Pricing

Want to know the key to pricing residential irrigation installation? Repeat this: “I must know my costs. I must know my costs.” It may sound simple, but that one sentence is the foundation to effective pricing.

To ensure a profit at the end of the day, contractors must know the cost of materials, labor, profit, overhead and the variables that affect each. The best way to gain that knowledge is to learn from previous jobs.

“If I had one tip, I would say become a really good student of the jobs you’ve already done,” says Scott Fay, president, Treasure Coast Irrigation, Hobe Sound, Fla. “Know where you made money and where you didn’t because the better you are at job costing, the better you’ll be at estimating.”
 
PRICING METHODS. In a system of checks and balances similar to the U.S. Government’s three branches of power, Fay prices jobs three ways. First, he estimates a square footage price based on the size of the lot. While he doesn’t bid jobs based on square footage alone, it serves as a point of reference and gives him a rough idea of the price.

After the design is laid out and he knows the material specifications, Fay uses a unit pricing method. “As we watch our job costing, we know in general what we should be at for every spray head,” he says. This gives him a quick estimate, but it doesn’t take into account site conditions, travel time and other variables, Fay says, which is why contractors shouldn’t price on unit alone.

Finally, Fay fine-tunes the price by adding labor and materials, factoring in overhead, and then adding a percentage for profit. This last method is the best one, he says, but he still combines all three on every job as a way to check his price.

Most of the time, contractors understand material and labor costs. The tricky part can be adding in profit and overhead. For residential irrigation installation work, industry consultant Jim Huston recommends contractors strive for a minimum net profit margin of 20 percent and gross profit margin of 35 to 40 percent.

Hydro-Tech Irrigation Co., Chantilly, Va., adds a profit based on a net profit they’re trying to achieve. Vice President Steve Battiston says the number fluctuates based on certain variables, such as what is going on in the market, the workload at the time and where the job is located.

Three different pieces factor into Grapids Irrigation’s pricing: materials, labor and subcontractors. There is a markup on each component, and then a total markup on top of that, says the Grand Rapids, Mich.-based company Owner Aaron Katerberg. “It’s usually 5 to 20 percent gross depending on which category it’s for,” he explains. “Material would be on the higher end for us, and subcontractors would be on the lower end.”

Katerberg also points out that the profit will vary depending on how much work they have. “There are times when we’re looking for work, and we’ll adjust the markup down,” he says. “When we’re busy, we’ll increase the markup.”

Katerberg says they like to be able to schedule installation jobs three to four weeks out. Anything less than that is viewed as a slow time, and they would be looking for work. Anything more is considered a busy period.

Overhead is another critical component of pricing. “The biggest thing is understanding what your overhead is and making sure you put profit on your overhead, as well as your labor and materials,” Battiston says. His estimating spreadsheet has overhead built into the manhour cost. Every winter, his company figures out a budget that determines what the overhead per manhour is, which then gets plugged into the spreadsheet.

When all the costs are calculated, Battiston says the average price he sees is $600 to $650 per zone. “I know after we run everything and put in the profit we want to see, it runs about that,” he says, adding that the zone price is based on the average home having 15 gpm available.

FACTOR IN VARIABLES. No matter how well contractors know their material and labor costs, it’s important to realize that every job is different. Site conditions, travel time and customers themselves differ from job to job, and they can quickly add on labor costs.

“The biggest variable is labor,” Katerberg says. “If I had to enforce one thing, it’s to know your labor costs. If you don’t and you’re not good at incorporating these variables, you’re never going to be able to run a business that can keep going.”

Typically, Battiston estimates one man per zone per 10-hour day. “If it’s a six-zone job, then we would send six guys and they would work 7 a.m. to 5 p.m.,” he says, adding that the average residential installation job is six to eight zones. But not all jobs fit nicely into the equation.

That’s why all the variables need to be considered in order to bid properly. One of the biggest variables that could affect labor time is the soil type. Katerberg says soil conditions can vary, even within a service area. “Within 10 miles, you can have very soft, nice soil to rock hard soil,” he says.

For Katherine Gavzy, design/build division manager, Del Conte’s Landscaping, Fremont, Calif., her part of the country tends to have clay soil. “So trenching time is doubled from your usual standard benchmarking production rates,” she says.

But there are also certain sections of their service area where the soil is different. “Some residential areas are built on landfills, so they have mainly sand, which we can cut through easily,” Gavzy says.

Katerberg warns that contractors who don’t know how the plumbing will come off a building can also incur costs. “If you don’t notice the water pressure is too low, you could incur the cost of having an electrician and a booster pump,” he says.

Another aspect to site conditions is the type of trees on the property, which Katerberg says is often overlooked. For example, if he sees a locust trees on a site, he knows labor costs will be high because of the intricate and troublesome root systems.

Knowing the customer also plays into pricing, says Fay. Ideally, his crew would finish a job within a day. But with some general contractors, his crews have to leave and come back a few times and no change orders are allowed. In those cases, Fay has to charge more money to cover the costs of the extra time involved. On the other hand, when general contractors understand the value of scheduling, Fay knows he can afford to give them a better price because they manage their jobs well.

MISTAKES TO AVOID. Despite the best advice, mistakes in pricing are almost guaranteed. “We’ve made mistakes,” Katerberg says. “Everybody makes mistakes on bidding. But you have to learn from those.”

One mistake Katerberg has seen contractors make is charging a flat fee for installation jobs. For instance, contractors new to the business and looking for work may offer to do every house in a development for a flat $2,000 rate, he says. But that pricing doesn’t take into consideration all the variables of a job, and contractors can end up losing money.

Other times, contractors will make the mistake of saying they’ll beat any price by 10 percent. The problem with this is that contractor’s are relying on other people’s bidding process, which may not be reliable or may be purposely low for competitive reasons. “A lot of contractors just starting out are so desperate for work, they work themselves right out of the business,” Katerberg says.

Fay points out how valuable it is to have a comprehensive proposal – one that includes verbiage on what the job entails and what happens if there are any changes to the design. Oftentimes, in an effort to provide good customer service, contractors can rush through the proposal process to get working on the job. “But if we’re not careful, we actually create more problems,” Fay says.

One of the biggest mistakes to avoid is getting involved in a bidding war with low-ball competitors. There always has been, and always will be, low-ball competitors. But contractors who worry about them or try to match them, will end up only hurting themselves. “It’s my strong belief that we’re our own worst competition,” Fay says. “I don’t waste my time worrying about those other guys.”

Contractors should also avoid lowering their prices to satisfy hard-to-please customers. Battiston explains to customers that his company’s price comes with expertise and high quality. Given that 95 percent of the company’s work comes from referrals, it seems to be a good sales tool.

But if customers are shopping solely on price, Battiston doesn’t lower his prices to make the sale. “We’re definitely not the cheapest guy on the block, nor do we want to be,” Battiston says. “If you’re looking for the lowest priced guy on the block then I’m not your guy, and that’s OK. There is plenty of market for that, but it’s not what we’re looking for.”

To help customers, Battiston will sometimes offer off-season discounts. “We give 7 to 10 percent off of the contract if a customer is willing to wait until January or February for us to install the system,” he says.

In the end, closing a sale and offering deals goes back to knowing your costs. “The No.1 thing is to know your costs because then you know what you can give up if you have to,” Gavzy says.

And remember: Once an agreement with a customer is made, the contract is put away. “The customer doesn’t want to, and should never, hear that we made a mistake and need to charge them more money,” Fay says. “We don’t do that. It’s our job to get it right the first time.”

This makes pricing all the more critical. “Our biggest mistakes have come from being sloppy on the estimating side,” Fay says. “If there is ever a time to be slow and deliberate, it’s when you’re pricing.”