Know your labor hour variance

Over the last several years, I have spent extensive time talking with landscape industry leaders, networking at conferences and attending educational events. I have discovered there is one metric that every highly profitable company tracks, and that’s labor hour variance. Payroll, and direct production payroll, is the number one expense on most of our P&Ls, (with the exception of some subcontractor-heavy companies). Labor variance is critical; it's going to tell you how well you're doing or how poorly you're operating.

Before we jump in, let’s make sure we are speaking the same language. “Labor variance” is the comparison of your actual hours against your estimated hours. For example, if you estimated 100 hours to complete a project and it took the team 90 hours to complete, then your variance would be 90% and that’s very good. If the same job took the team 110 hours to complete your labor variance would be 110% and that would not be as good. Maintenance companies can track this metric by providing actual against estimated hours per property visit.

In late 2020, we were an average-profit company hovering between 3-5% net profit. As we turned over for 2021, we implemented our new software, (a huge feat of its own) and actually started tracking our labor hour variance. As the numbers came in, I was blown away, and not in a good way. Most of our jobs and crews were reporting between 120 to 130% of our estimated hours, meaning we were using 20-30% more hours and money than we had estimated. We always wondered why we were going over on schedule and falling behind, spending more on materials and not achieving our budgeted goals. That's when it all clicked.

As we collected more data and educated the team throughout 2021 on what labor variance meant, we decided to go all out in 2022. Every employee's bonus was based off labor variance, from entry level production all the way up to account managers and even senior leadership members. Believe it or not, our sales teams even had labor hour variance-related bonuses because it was so important that they got it right when estimating.

What happened next was unexpected and almost magical. As we continued to put awareness towards this top key performance indicator, our teams started to perform to goal. Our monthly numbers were coming in at 105%, 99%, 98%, 93% and we saw a major improvement from 2021 to 2022. We even had foremen and crew members calling in to let us know when they felt there was too many bodies on a jobsite, to which our project managers would gladly help relocate. In the past, their thinking was, “the more help, the better,” but when their bonuses became tied-back hours, they didn't want extra team members on the jobsite who weren't going to be efficient.

As we ventured through 2022, we kept score of our labor variance on a large board in our yard and communicated it to the entire team weekly and monthly during meetings, really rallying around this number. The amazing part is, as we started to get back within our goal for labor hours, our direct costs started to come in under budget and gross profit increased.

What's more, our overhead started to fall in line because we were completing more projects in less time and driving revenue with the same amount of trucks, equipment and people. When you're producing to what you estimated from a labor hour standpoint, everything else tends to follow suit, all the way down the P&L to the very end, the net profit.

From 2021 to 2022, we went from 40% gross profit, up to 50%. This type of performance was incredible. We also ended 2022 with the same number of employees as 2021 but increased our revenue by 24%. If those numbers don’t get you excited about tracking this, then I don’t know what will.

In 2023, we're doubling down on labor variance and once again making it our main focus. This year, our team is shooting for a company wide 95% or better. I want to encourage all of you to take labor management seriously. If you have a software that enables you to track this, make sure that your estimates are operating in this fashion and your jobs and crews are clocking in.

No matter how much work it is to get this process going, it is worth it for 10 points of gross profit. Plus, your team has a unified goal to rally around. If you don't have a landscape management software, regardless the size of your company, take this as your sign to make it a priority for 2023 so you can increase your gross margin by 10% in 2024. Good luck and go raise the bar!

Raise the bar is a monthly column by Justin White, CEO of K&D Landscaping, written to help improve professionalism in the green industry.