Pricing work can parallel computing a complicated algebra equation. Contractors figure in constants, plug in variables and hope their Xs and Ys equal a profitable solution.
Covering overhead, deducting direct costs, estimating labor and predicting work hours - all this number jumble leaves little room for error, noted Frank Ross, president, Ross-Payne & Associates, Chicago, Ill.
“It seems like pricing ought to be an easy thing for us to do, and it really isn’t that difficult,” he reasoned. “But, honestly, there’s a lot of subjectivity that’s associated with pricing. ”
There isn’t a magic number or secret code that deciphers pricing mysteries, and there isn’t a cookie-cutter format to shape the perfect profit-earning pricing system. There certainly isn’t a guarantee that one contractor’s method will be another’s recipe for success. Perhaps this is why so many contractors rely on blind guesstimates, Ross suggested.
Whether a company is a one-man operation or a multi-branch corporation, establishing a pricing system to recoup overhead costs will separate a business-minded company from one that relies on random estimates, stressed Tom Wood, president, Wood Landscaping Services, Hilliard, Ohio, adding that despite his company’s growth throughout the past 10 years, his pricing process shifted minimally.
“There are a lot of people out there losing money,” he commented. “You need to know your costs and your overhead, and price accordingly to recover that.”
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Contractors build various price-buffers into estimates to ensure their income will outweigh their expenditures. Therefore, contractors will know their price is right when their income leaves a leftover profit. First, however, a company must develop a pricing system that recoups its costs. One method of itemizing a company's direct costs is through the income statement, pointed out Frank Ross, president, Ross-Payne & Associates, Chicago, Ill. Essentially, a company's income statement should be formatted to identify sales, direct costs, overhead and profit, he explained. The costs in the profit and loss statement also identify which items to account for in the quantity take-off portion of a customer quote. These expenses comprise a contractor's direct costs, he noted. "The income statement shows how much revenue you generate from your work," Ross defined. "The reason people have trouble pricing their work is because they cannot use their internal financial system to help support the way they estimate work. What happens is they guess or price the job as to what the market will bear, which is shooting blindly." Ross stressed that company size is not an issue when creating a pricing system. "For smaller and larger companies, the process is identical," he said. Besides reviewing the budget, contractors build other cushions into their pricing system to avoid suffering losses. Design fees, pricing minimums, multiple service benefits and sliding labor rate scales are some methods of profit protection contractors use to buffer their bottom line. Ron Tatton, owner, Erickson Landscaping, Salt Lake City, Utah, bills 20 to 30 percent more per hour for residential jobs that typically "require more overhead, more time to work the customers and more time to estimate the project." Ninety percent of his accounts are commercial, but those that are residential traditionally demand more labor intensive, detailed work that often is performed under a customer's watchful eye, he noted. He protects his profit margin by planning for these considerations. Tom Wood, president, Wood Landscaping Services, Hilliard, Ohio, is adopting a "divide and conquer" approach to balancing costs by separating his company into four divisions - planting, construction, maintenance and lawn care - and developing a pricing structure for each model that compensates for the service's overhead and direct costs. He also applies a design fee to cover costs for the time spent on the design, which is part of the company's expenditures whether or not the customer decides to accept the installation services, Wood noted. He deducts the fee from the price of the installation if the client signs the construction contract. A minimum price boosts efficiency and eliminates profit-eating jobs like mowing, Wood added. "There's a certain inherent cost to sending people in a truck even to the end of our gate, and we have to recoup those costs," he explained. To recover costs, he tries to sell as many services as possible to customers when estimating a job, he explained. When a crew, tools and equipment are already on a site, performing the work is less expensive, so Wood offers price cuts to customers who accept multiple services. "I'll give them the pricing structure for the planting, irrigation and construction separately, and then I'll give them a more aggressive price if we do it all together," he described. His customers realize a price advantage, and his company recognizes the cost cut. |
PRICING PIECES. The reason low-ballers pitch rock-bottom prices is the same reason some novice contractors underestimate sales prices: lack of knowledge.
A firm understanding of a company’s expenditures -equipment, materials, labor and hidden costs - is the first step to creating a successful pricing strategy, and contractors cannot be too informed, stressed Ron Tatton, owner, Erickson Landscaping, Salt Lake City, Utah.
“There are so many ideas about pricing that many don’t realize that they aren’t recovering their overhead,” he pointed out. “They’ve heard of a magic multiplier, but they don’t have a sound strategy. I can’t say enough that the estimate is what drives the company - everything comes from that estimate.”
However, reaching an estimate requires more than sketching a rough number. Contractors should follow a series of steps when pricing jobs, beginning with a detailed tally of necessary materials and labor hours. This figure then can be translated into the company’s raw costs. For example, if a contractor pays an employee $10 per hour, the raw cost for 100 hours on a job is $1,000, Ross explained. Similarly, if a contractor purchased an oak tree from a nursery for $210, the raw cost would be $210.
Underestimating even a few jobs will affect year-end finances, he stressed. Or, as Tatton said: “Costs are costs.”
The actual pricing portion of the process takes place when contractors mark up their raw costs to recover overhead, Ross noted.
“Pricing is very independent depending on the contractor,” he explained. “When you develop the strategy for pricing, you have to determine your lifestyle and how you spend money so that every job that goes out the door has a share of that.”
MULTIPLE METHODS. Expenses span a myriad of cost levels depending on the company. Some businesses are more financially experienced, some require more capital and some simply spend more.
With a system of measures, Jim Baxter, owner, Baxter Landscape Contracting, Exton, Pa., estimates prices by the acre, or square foot if the work is labor intensive. He aims for an 18 to 25 percent gross profit margin and knows which numbers will achieve this goal, he said.
“I’ve already done the math to arrive at my square foot prices,” he noted. After rounding the digits, he recognizes that the $45 hourly rate he tacks on for every acre on a mowing job or herbicide treatment will add a bonus to his bottom line.
Baxter charges extra for additional labor on certain challenging projects, he said. His fine-tuned system of measurement is a common industry method, so customers easily can compare contractors’ estimates, he explained.
“I’ve been driven this way,” he added. “People like to know that they can compare two estimates.”
Comparison serves as a key motivation for landscape companies who shoot low estimates at customers to win accounts. While contractors must nail down a pricing structure to balance out budget deductions, they also fight those who cut prices and risk losses, Baxter noted.
“Earlier this year, someone said they could get a company to spread topsoil and cultivate their lawn for $600,” he remembered. “In my quote, there was $600 worth of topsoil. They were not charging for labor or anything.”
These low-ball quotes reflect inexperience, Baxter translated.
Ross identified three key trends influencing pricing. First, contractors are more knowledgeable and efficient in their work, and second, they are educating their consumers. Both of these factors are raising prices. On the down side, the industry is an “easy entry” for entrepreneurs with or without landscape experience to launch a business, he said, which pushes pricing down.
“Costs are going up, and prices are going down,” Ross observed. “If you turn back the clock 25 years, when contractors started selling work to consumers, competition was low and the perceived value was very high. There wasn’t any downward pressure to put the price at the lowest possible rate. This has changed, and today, prices are lower than they were 25 years ago.
“In an economy that’s strong, I’m seeing guys bidding like we’re in the hardest times ever,” he added. As such, the skimpy 4 percent profit margin most contractors clear at the end of the day leaves little leeway for loss, Ross figured.
ALLOTTING FOR LABOR. An efficient, profit-bearing pricing system for one business might not suit another. Companies must pinpoint financial strains so their pricing system can be adjusted to recover these expenditures, Wood noted.
Of the various essentials necessary to complete a job, labor costs create tricky digits for contractors, Wood continued. Determining materials prices is simple, and “if you can’t do a quantity take-off to find out what your materials cost, you ought not to be in the business,” he added. “The equipment is a little more difficult, and the toughest is labor.”
To fully recover labor expenses, Wood considers the cost from the time a worker clocks in and includes travel time to the job in his estimate. Wood adjusts fees based on the service the employee performs. “People don’t want to pay $35 an hour if you have someone pulling weeds,” he asserted. “Correspondingly, if we have a highly-trained foreman doing technical work, we need to charge a higher labor rate.”
Sam Creekmore, owner, Creekmore Landscape, Ltd., Albany, Miss., carefully estimates man-hours for each job to measure profits.
“We know our materials costs and we know what we want to make on materials -usually a 10 percent profit - and we can add other expenses into the hourly rate,” he explained.
“There is no exact science and we’re always changing and tweaking our system here and there,” he added.
Details such as managing a job, acquiring materials on time and loading trucks before a crew arrives can pinch costs, he remarked.
Streamlining labor and increasing job efficiency saves money, noted Tatton, whose company reached the $3-million revenue mark in a 10-year period.
“We do more with equipment and less with people, and have just become smarter on how we install landscapes,” Tatton said.
Wood added that companies also must be smart with their finances. “If you’re going to be a guesser in this game, you better be awfully, awfully lucky or you will price a job at a loss and not even know it.”
The author is Assistant Editor of Lawn & Landscape magazine. For more information on pricing, see the exclusive online only sidebar above.
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