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One of the biggest mistakes a hardscape contractor can make is pulling a percentage or a dollar figure out of thin air and saying, “This is what we’ll charge.” Without referencing project costs, overhead costs, profit margins and the list goes on, it’s impossible to run a healthy, efficient company. Still, that method for pricing is common.
We spoke to three industry consultants for advice on how to best price jobs and create an estimating process.
Jeff Harkness, partner, Three Point Group
There are three foundation pieces contractors must get their arms around as they’re preparing for a new season: Quantify your bottom line, understand what the marketplace is bearing and know your capacity, Harkness says.
“You definitely want to start with quantifying your bottom line,” he says. “A lot of contractors get tied up with percentages, ‘The benchmark is 6 percent or 8 percent or 10 percent.’ Really, the correct approach, because it varies by company, is to quantify in hard dollars what your net income needs to be. The way you do that is you have to start with your balance sheet obligations.”
Things to take into account when quantifying your bottom line: the principal payments on existing debt, capital expenditures throughout the year, the amount of distributions or draws from the business and, lastly, any reserves or bonus dollars.
Adding all of that together, “I know the dollar amount I need to drop in my net income to be successful in business,” Harkness says. “It’s not about a percentage, it’s about looking at your company and specifically quantifying how much bottom line do I need to show this year or net income do I need to make this year. That is step one in our starting point.”
Next, budget for the company’s administrative costs, equipment and fleet costs and indirect expenses.
“Calculate your net income and then move into your normal budget process to identify how much gross profit dollars my business has to produce in order to reach cash flow,” Harkness says. “If you take your net profit, plus your administrative costs, plus your equipment and fleet, plus your indirect expenses and you add those all together, it will give you gross profit dollars that your business needs to generate.”
Basically, you need to quantify what your total costs are to determine your pricing requirements.
The second thing you need to do to accurately price a job is have a good understanding of the marketplace: What is the gross profit margin jobs are being sold at? How much does labor cost? For your region, does labor cost $30 an hour, $22 an hour?
“A good understanding of what’s going on in the marketplace and being able to quantify and compare your costs and the price that jobs seem to be moving in your marketplace, there is a tie-in between the two,” Harkness says.
To understand the marketplace better, ask questions of the prospects that end up not choosing your company in the bidding process: Was your pricing was too high? By how much? Industry consultants and associations also have a plethora of information on particular marketplaces.
The third fundamental principle is understanding capacity, meaning the amount of production hours available on an annual, quarterly, monthly and weekly basis to sell prospects and recover overhead costs.
“If you’re an owner operator, you have to be able to sit down and say to yourself, ‘How is my company built with my costs, and my financial data,” Harkness says. “If I’m benchmarking my company against some competitors or others in the industry in my local market, am I high profit, am I low profit? Knowledge is power with understanding how you’re built and how you benchmark compared to the competition.”
Just because the busy season has started doesn’t mean you can stop looking at the numbers.
Harkness says you need to track gross profit dollars, production hours and revenue per hour to track progress during the year. Say you have to make $500,000 gross profit. As each job is sold, you need to quantify how much closer that job gets you toward your gross profit – is it $50,000 closer, $10,000 closer? A recommendation by Harkness is to break job sizes into various buckets. How many jobs do we need to complete and put in bucket A – say the $5,000 to $10,000 range – in order to reach our target?
“The key point that I want to stress is people get tied up with gross profit dollars by pulling percentages or pulling a gross profit dollar amount of their company out of the air,” he says. “We take it a step further with the various jobs we’re projecting we need to go out there and sell, and we’re able to link the gross profit dollar requirements with our sales plan and with our job plan, so that we know we need to go out and create and sell enough jobs and produce enough jobs to get us to that gross profit dollar amount.”
The moving target of gross profit is something you need to chase and analyze all year.
“As you get toward the end of the year, you’re basically fine tuning your job costing data for the fourth quarter and you’re really beginning to plan for the next upcoming season,” Harkness says. “You’re getting your tax projections from your CPA. You’re looking at projecting what your close out is going to look like. Usually in November of a particular year, you’re starting to plan for the upcoming year.”
Jim Huston, president, J.R. Huston Consulting
Before the season starts there are two things you must have in place, Huston says. First, a budget that calculates pricing for general administrative overhead, as well as labor burden and equipment. Second, an estimating methodology that reflects your companies cost structure.
What goes into that methodology?
“They need to have a means for recovering their general administrative overhead,” Huston says. “They need to be able to include the cost of their trucks, field equipment, skid-steers. … There also needs to be a place in there where they need to capture their labor burden, their payroll taxes, their workers comp insurance, their general liability insurance. And their methodology needs to produce unit prices, maybe a square-foot price or a base-foot price for walls. It also needs to tell what their gross profit margin is on these jobs. I would also include net profit margin as well.”
Your methodology needs to include all prices including cost structure. By compiling this information and creating a budget, you can create a sales goal for the year.
“It’s going to give (contractors) a couple of different things,” Huston says. “One is look for the volume they need to have. Do they need to sell $200,000 worth of hardscape or $500,000 or $1 million to cover all of their costs? They really need to understand what sort of volume they need to retain and that will help them set some goals throughout the year.
“As far as pricing is concerned, they’re going to have their product pretty well identified, and they should run some scenarios to see what a typical unit price is for a given product. That doesn’t mean that they’re just going to use that unit price throughout the year, but it’s going to set a benchmark for them so they’re going to know roughly what they need to charge per square foot, per base foot and so forth.”
What it all comes down to is understanding what you need to charge in order to be profitable. You can’t throw around a unit price of say $14 per square foot for pavers and use that number to estimate costs for every job. Jobs need to be priced separately to ensure you’re making a profit and recovering overhead, he says.
As the season begins and continues, the primary element one should be focused on is volume.
“They need to be thinking about meeting the sales goal for the year,” Huston says. “No. 1 is price it right; No. 2 is product it right; No. 3 is produce enough of it.”
If your goal is to produce $400,000 worth of hardscape, you need to know every day how close the company is to meeting or surpassing that goal. And you need to know your breakeven point. At what point toward meeting your goal have you recovered all of the overhead costs.
“Part of that is do we have enough sales people to meet that goal, so we need to be thinking about processing all of this data,” Huston says. “Who is going to produce the prices? How are they going to produce the prices? Are there any checks and balances in that system?”
But it’s not only sales. Your pricing is directly related to labor and equipment costs just to name two. Job by job, you need to know how many hours are bid into each job and how many hours it takes to do each job.
“That is all about producing it right and making sure the crews are producing the jobs the way they’re bid,” Huston says.
There are many items to keep a pulse on to make sure you’re pricing jobs correctly. And that never stops.
“After the season, you want to do a postmortem,” Huston says. “Say what went right, what went wrong and what do we need to change for the upcoming year. Once you do that, then bingo you’re off to the races. Every year you should be perfecting this system, this methodology and getting better and better.
Matt Caruso, founder and president, Decra-Scape
When Matt Caruso sits down to form his pricing structure, one of the first things he does is create a labor forecast.
“It entails who we’re going to have on board,” says Caruso, who started Decra-Scape more than two decades ago. “We go as far as projecting how many hours we think they’ll be putting in for the season, both how it directly relates to a project and how it indirectly relates to a project. Then we also project if we’re going to need any new or additional team members. We’re trying to get a handle of cost structure as it relates to labor, as that is our driving force for bidding.”
Labor is the biggest component as to how you recover overhead. You need to make sure you have the right employees doing the job and that you’ve budgeted the right amount of hours it’s going to take to complete any given project.
“Basically, before the year starts, I have generated the amount of production hours my team needs to sell in order to project our revenue,” Caruso says.
To project the number of labor hours needed, you can look at your current backlog, projected sales and past experience. But you also have to factor in the indirect costs, as well, Caruso says. It’s not just about the elements budgeted into a bid, such as travel and completing the job.
“Indirect (costs) to us is if you’re working on warranty type stuff, something goes wrong on one of your projects and we have to go back out and repair it,” Caruso says. “That is not directly related to a job. That is a responsibility of our company to stand behind our warranty, so it’s indirect.”
The biggest mistakes Caruso says he sees contractors make is they don’t budget and they throw caution to the wind and pick an arbitrary number for how much to charge per square foot without factoring in the important budgeting elements.
“They have no rhyme or reason why they’re charging that number, and it’s very important that they get an understanding of why they’re charging the number,” Caruso says. “How you understand that is through the creation of a budget: What are my costs to operate my business? What does the labor cost me? What are my materials as they relate to revenue?”
Another area when it comes to budgeting and pricing that contractors forget about is equipment. Just because equipment is paid off doesn’t mean it’s not a factor in your business. You still have repairs, licenses, insurance, etc.
Lastly, when you’re working on pricing or estimating, you need to understand industry trends, your specific market segment and how you might approach selling projects for the year.
“The best way to do things is getting involved,” Caruso says. “We’re involved in our community, we’re involved in the chamber of commerce, we’re involved in industry associations. We partake in seminars, trying to get every resource and tool that we can get our hands on to help us in those areas. We don’t spend an exorbitant amount of time looking over our shoulder at the competition; however, we do look over our shoulder because it’s important to know who is where and what is what.”
During the season, tracking the variables you’ve set becomes important.
“The only way to truly understand what a win looks like is to track and measure what you’re installing,” Caruso says. “Our teams know when they go out on a job they get specific plans, construction drawings, they get hour tracking sheets. So they know for each particular task on that job how much time is allotted to get that part of the job done.”
In order to give specifics, you have to have the proper tools, resources and research. Caruso spent years doing time studies. He took a stop watch and timed how long it took him or a crew member to do certain jobs. That information is now used for estimating how long it should take a crew to do the work.
At the end of the year, Caruso recommends having a debriefing session. Analyze the season, your labor efficiency and any indicators that might show whether pricing was on or off.
The biggest thing is to make sure that you track information and that you learn from the numbers. Otherwise, the time spent tracking is useless, he says.
The author is an associate editor at Lawn & Landscape. She can be reached at clawell@gie.net.
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