Know your numbers

The mid-December drive from Logan, Utah, through Lincoln, Nebraska and St. Louis on my way to Indianapolis was going to be a rough one. Early winter snowstorms ripped through the Midwest as I drove across Wyoming and Nebraska on I-80. Fortunately, I carried a shovel and a Bubba Rope (an elastic tow rope that’s great for getting you unstuck) in my trunk.

How it works in the real world.

Bill’s revenue was just under $1 million a year and he enjoyed an unparalleled reputation for installing hardscapes in his market. Going into 2020, he had some big jobs ahead of him and he wanted to ensure that his “numbers” accurately reflected his cost structure.

To price his work, Bill had a day-rate for his three-man crew. He would then add a 20-30% markup to his material costs. If a project required subcontractors, he’d mark up those costs 10-20%. The markups on material and subcontractor costs were fine. However, the day-rate that he was using was too low because it did not include his truck and equipment costs. This happened for the following reasons.

First, Bill thought that his field truck and equipment costs were covered by and included in his crew day-rate and the markups on the materials and subcontractor costs. The assumption was that field truck and equipment costs were below the gross profit margin (GPM) line and included in his general and administrative (G&A) overhead costs. Second, almost all of his field trucks and equipment were paid for and 100% depreciated. As a result, cash flow was fine and the depreciation for these items did not show up on his financial statements in his G&A overhead costs.

Add all of this up and Bill’s pricing was about 10% too low. Interestingly, my benchmark for all of a green industry contractor’s truck and equipment costs total about 12% +/-2%. Two percent of this total accounts for G&A overhead vehicles. The cost breakdown for such items for a typical green industry company is in the chart below.

To begin with, Bill’s costs for field trucks and equipment were understated since they were 100% depreciated in his financials. In addition, because they were in his G&A overhead costs, they weren’t addressed as a line item in his bidding process. Jobs that required a lot of equipment were bid too low. Ones that required just pickup trucks and wheel barrows were bid too high.

Analysis.

Putting a cost in your G&A overhead and adding it to your pricing by means of your direct cost (materials, field labor, labor burden, trucks & equipment, and subcontractors) markups essentially averages these costs in your pricing. Bill averaged his field truck and equipment costs in his pricing. Some jobs he priced too high. Others he either priced correctly or too low.

Many green industry contractors have been taught to include their field truck and equipment costs below the line and in their G&A overhead costs. They then supposedly include them in their pricing by means of their markups on the direct costs in a bid.

Over the years, this caused Bill to underprice his work by about 10%. Due to his excellent reputation, I believe he could have raised his prices 5-10% without losing any work. Multiply his average annual revenue over 30 years by 10% and you get the following:

• $700,000 avg. annual revenue x 30 years in business x 10% =
• $21,000,000 x .1 = $2,100,000 in lost revenue

If his underpricing was only 5%, he still would have under-priced his work by over $1 million.

Conclusion.

Putting your field truck and equipment costs in your G&A overhead on your P&L statement is bad enough. What’s worse is assuming that when you price your work using direct cost markups, such costs are covered by these markups. The solution is to have specific line items in your bidding process for your field trucks and equipment.

Fortunately, I didn’t have to use my shovel and Bubba Rope to dig myself out of a snowy hole along I-80. Unfortunately, too many green industry contractors dig themselves into a financial hole because they don’t understand how to bid their equipment in their projects. Too often they end up digging a great big hole that shows up on their bottom line.

Contact Jim Huston at jhuston@giemedia.com