Cutting overtime costs, smoothing out cash flow

Q: Our production times for regular maintenance work are running over budget, but our production times for the cleanups, pruning and small projects are typically OK. Although we’ve had a wetter spring than normal, I can’t seem to get a handle on it. Part of the problem is I don’t have a good way of holding the crew accountable for the time. We have a very accurate way to measure the time on the project, but the times seem to keep running over without improving. Fortunately, we have very few quality problems. I know we are capable of reducing the overtime and overall labor costs but need to know how. What actions can I take?

A: You’re right; it has been a wetter, soppier spring in the Northwest than usual. This, of course, is bound to affect your production times negatively, a fact that those of us who live here just have to learn to accept. Our production standards are geared for the average year and sometimes Mother Nature deals us a bad hand.

Beyond the weather, however, I assume you are tracking labor performance on a job-by-job basis through your job costing system and that your job cost reporting tracks actual labor hours or dollars against budgeted labor hours or dollars. If not, you should be. We used to project labor budgets by week for each job and used this as our standard of job cost comparison, monitoring cumulative actual labor against budgeted cumulative labor as we went through the year. Crew leaders should be aware of their performance against budget on a monthly, if not weekly, basis. 

Once you can sort out individual contract performance, sit down and review this with the foreman/crew leaders for these jobs. Review the man-hour budget with them and the history of satisfactory performance and start asking questions:

• Is it the weather?
• Which operations on-site are taking more time than we estimated?
• Is there more pruning and edging on this job now than our estimate because things have grown in and matured?
• Are pre-emergents not working because the weather has been so wet?
• Why were we able to hit these times in the past and can’t do so now?
• What would you recommend to improve our performance on this site?
• Are there modifications or enhancements we can recommend to the customer that would help improve our performance?

Get them to buy into their role in the problem and to accept the individual job budgets as a realistic production standard. Let them know they are responsible for hitting the standards, and, if they don’t think the standards are right, they should address that with you for a common accountability standard. Their performance should become a subject of discussion and accountability at your regular performance reviews.

One number you might want to start tracking would be your “realized rate” – revenue billings divided by your direct labor production man-hours. This number can be very relevant if you are billing out maintenance jobs on a rate-of-actual-effort basis.

If you bill your accounts on an equal monthly billing against an annual contract amount (most common in commercial contracts), then you will need to establish an expected monthly “realized rate” pattern.

Next, look at is whether it is the individual job budgets you are not hitting, or is it the total crew time versus your budgets. Also, take a look at your indirect labor budgets. This is the great profit leak that many contractors miss. Here is where management and supervisory inefficiencies in managing crew time show up.

Your target for getting direct labor (excluding burden) under 30 percent is realistic. Your total direct labor plus leased labor is, by your own words, running 38-plus percent. This puts you about 4-6 percentage points over the medians for exterior maintenance contractors as reported in the 2008 PLANET Operating Cost Study for the Green Industry.

Rod L. Bailey, landscape industry certified manager, Alder Springs Enterprises, Duvall, Wash.

Q: We currently pay every two weeks and have for a couple of years now. At the time, we changed from twice monthly – the 5th and the 20th – because I thought it was better for the employees. However, I am strongly thinking of going back to twice monthly because it will help even out our cash flow and be more predictable. Also, I think it will more accurately cost the labor for the month, without having months run into each other.

A: I would be cautious about going back to the twice-per-month system, because your current frequency is more crew-friendly. Are you going to make this easier on yourself or on them? When you do your budgets, just make sure you allow for the actual number of payrolls in any given month. Some will have two and some will have three. This will put a little more burden on your cash flow budget planning, but you should be doing this anyway to avoid surprises.

If you have a line of credit relationship with a bank, this is what it is for: to smooth out your cash flow.

I have seen contractors use twice-per-month, everyother week, and weekly pay periods as we did. There are problems and benefits attached to each. Once you get your accounting, budgeting, and cash flow planning systems set up, you should have no problem tracking yourself, whichever system you use.

Rod L. Bailey, landscape industry certified manager, Alder Springs Enterprises, Duvall, Wash.