The cost of equipment

The first day I consulted with a young, somewhat arrogant, installation client, he told me that he wasn’t sure if he needed my services. He’d work for his high-end customers, present them with a bill and they’d pay him whatever he charged. “I have no competition,” he bragged. I replied that if I could not help him, he wouldn’t have to pay me for my time that day.

Later that morning, he said he thought his sales for the previous year were $70,000 to $80,000 below what they should have been. He thought that he should have billed his customers about $575,000 but he seemed to be missing $70,000 to 80,000 in revenue.

Equipment and Vehicle Costs.

You have to calculate equipment and vehicle costs in your pricing. I use 8 to 14 percent of sales as a benchmark that includes all equipment and vehicle costs (fuel, depreciation, insurances, repairs, parts, mechanics, etc.) for a typical landscape installation or maintenance company. A $1 million company would have roughly $100,000 in such costs. But, how do you include that cost in your pricing and pass it on to your clients?

One theory, as taught in the dual overhead recovery system estimating method, is to include all of your equipment costs in your general and administrative overhead costs and include them in your markup percentages for labor and materials. A second theory is to divide all such budgeted costs for the year by the number of billable man-hours budgeted for the same period. It looks like the box below.

Two different bids, both of which include 1,000 man-hours in each for a three-man crew, would calculate the costs for equipment the same or $10,000 (1,000 man-hours x $10 EQCPH = $10,000). Let’s assume, for arguments sake, that one job requires a pickup truck, skid-steer and mini-excavator, and the $10,000 just happens to be a correct amount.

However, if the second job only requires a pickup truck and nothing more, the $10,000 equipment cost is far too high and should be around $4 per man-hour. I calculate the $4 as follows: (((Acquisition cost + lifetime maintenance cost + lifetime fuel cost) ÷ lifetime billable hours) ÷ 3 men) or (($45,000 + 35,000 + 40,000) ÷ 10,000) ÷ 3) = $4.

Instead of $10,000 for equipment costs in the bid, the second job should only have $4,000 in estimated equipment costs. The estimated costs in this bid are $6,000 too high. This figure gets even worse when you add general and administrative overhead and net profit to it.

What’s the beef?

Both of these estimating systems make a false mathematical assumption that can be (and often is) fatal to contractors. The error occurs when you average an annual direct cost in your pricing, in this case equipment costs, instead of including it in a bid as it is needed. If a job requires pickup trucks, skid-steers, mini-excavators and loaders, then you should include those costs in a bid. If, on the other hand, you only need a pickup truck, you should only include the cost for such a truck in your bid. Otherwise, you will overstate your equipment costs on labor-intense jobs and be far less competitive.

If a job requires pickup trucks, skid-steers, mini-excavators and loaders, then you should include those costs in a bid.

The marketplace ain’t stupid.

If you overprice your costs and therefore your bids, chances are you won’t win many bids. But, if you underprice your costs and bids, you’ll get lots of work.

Imagine if you advertised that you would landscape (planting only) any property for just $1 per square foot of planting area. Regardless of the plant or plant size, customers would pay an average price of just $1 per square foot. They’d get the biggest bang for their buck that they could get. In almost all cases, averaging a direct cost simply doesn’t work.

Conclusion.

My new landscaper client had a reasonable labor rate. He also marked up his materials and subcontractor costs accurately. However, when I asked him how he charged his clients for the $60,000 in equipment and vehicle expenses on his profit and loss statement, he just stared at me. We found the missing $75,000. He should have marked up his equipment costs and charged his clients $575,000 (and they would have gladly paid it) but in his ignorance, he charged them just $500,000.

Later that day, he paid me for my time and 25 years later, this man has a business doing $5 to $6 million in sales annually. I think that he learned a lesson that day. Sometimes your biggest competitor is the one you see in the mirror.