Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Walter had a full-service landscape company in Nebraska. Business was good, but he couldn’t figure out why his margins were as low as they were. He thought he should have more money in the bank as he ended the year and headed into winter.
He operated with two, three-man residential install crews and four, two-man residential mowing and maintenance crews. All crews worked a 45-hour week for approximately nine months. Install and maintenance crews would sometimes cross over a bit, but the amount of doing so was insignificant.
Walter calculated his labor rate at $55 per man-hour. He’d aim to bill $1,000 per day for his two-man maintenance crews and $1,500 per day for his three-man landscape install crews. The margin added to install materials, he thought, would bolster his bottom line. It was charging the same man-hour rate for both install and maintenance crews that caused a serious problem and eroded his bottom line.
The big mistake.
One of the most common mistakes that I see landscape entrepreneurs make is charging the same labor man-hour rate for their maintenance crews as for their landscape installation crews. In most cases, they are charging a reasonably accurate rate for maintenance, but they’re underpricing their installation rate. There are a number of reasons why this is often so and why a contractor should be charging $10 to $20 more per man-hour for the install crew.
Different crews and rates.
The first reason why an install crew is more expensive per man-hour is because install crew members usually are paid a couple dollars more per man-hour. The amount isn’t much, but it does account for some of the variance.
The second reason is because the general and administrative (G&A) overhead cost per man-hour for an installation crew member is significantly higher than it is for maintenance crew members. While the G&A overhead costs, as a percentage of sales, are usually the same for a maintenance division as they are for an installation one, it isn’t on a man-hour basis. Let me provide an illustration:
Two different companies – one exclusively maintenance and the other exclusively installation – do $1 million in revenue each. The G&A overhead costs for each run 25% of revenue or $250,000. (This equal amount of G&A overhead cost at 25% of sales is an accurate figure and is one I’ve seen in hundreds of companies.) It requires approximately eight full-time field crew members working roughly nine months at 45 man-hours per week to complete $1 million in installation work. It takes about 16 similar full-time field crew members to accomplish $1 million in maintenance work. The G&A overhead per man-hour (OPH) calculates as follows:Installation Company G&A Overhead per Man-hour
- $1 million x .25 = $250,000 G&A overhead costs
- 45.0 MHRs per week x 4.333 weeks per month x 9.0 months x 8.0 crew members = 14,039 man-hours
- $250,000 ÷ 14,039 = $17.81
Mowing and Maintenance Company G&A Overhead per Man-hour
- $1 million x .25 = $250,000 G&A overhead costs
- 45.0 MHRs per week x 4.333 weeks per month x 9.0 months x 16.0 crew members = 28,078 man-hours
- $250,000 ÷ 28,078 = $8.90
As you can see, the G&A OPH for installation work is much higher than it is for maintenance work.
Additionally, the installation man-hour rate should be higher than it is for maintenance because it commands a higher net profit margin. Commercial installation work usually warrants a 12-15% net profit margin. Residential installation work, especially in today’s robust economy, warrants a 20% net profit margin. The net profit margin applied to maintenance work usually ranges from 10-12%.
If you review the two MS Excel worksheets accompanying this article on the Lawn & Landscape website, you will see the $11.63 difference in the two labor rates.
Conclusion.
Walter’s average rate of $55 per man-hour was actually $3.64 high for his maintenance crews. However, since his customers were already paying it, there was no reason to change it. On the other hand, his installation rate was $7.99 too low ($62.99 - $55). He should increase it accordingly. Such an increase would add to his bottom line. It could add as much as $84,128 (10,529 man-hours x $7.99). I would encourage Walter to make such a change.
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