Do you know how much it costs you to operate your business? If so, what is the relationship between how much you charge for your services and the cost associated with providing them? If your pricing doesn’t cover all costs of doing business, including those directly and indirectly related to performing a service, a lawn maintenance company, any lawn maintenance company, will eventually face adverse financial consequences.
The biggest cost item, of course, is labor. In truth, if you know your labor costs, you are well on your way to understanding your operating costs. But what are the other costs and how do all these expenses fit into an overall pricing strategy?
For lawn maintenance professionals who do not have a financial background or who have never taken a course in accounting, tracking costs and understanding their relationship to pricing is like understanding instructions for setting up a new stereo system.
There are direct costs to consider, as well as indirect costs and overhead costs. Direct costs are those that relate specifically to getting a job done, whereas, indirect and overhead costs are those that are “indirectly” related to the job. A typical direct cost would be the cost of labor or fuel to complete a job. Similarly, indirect costs can be anything from equipment replacement costs and vehicle insurance to what you may spend in the course of a year to repair your mowers and trimmers. Overhead costs are also referred to as “administrative” costs. They include expenditures for promotions and advertisements, equipment and vehicle depreciation, health, liability and workers compensation insurance, rent, utilities, and so forth.
There are several reasons to track costs, not the least of which is to be able to present accurate year-end figures to your accountant. Cost figures, of course, are a necessary part of any monthly profit/loss statement and they are invaluable when comparing your business’s current performance to that of previous years. In no instance, though, is an understanding of costs more important than helping to evaluate and determine a pricing strategy.
Big Picture
Michael Cecere, member president of Cecere Brothers Landscaping, LLC, in West Caldwell, New Jersey, fastidiously tracks all his operating costs using QuikBooks Pro. Expenses are categorized, and whenever he writes a check or otherwise pays a bill, the amount is captured by the accounting software. The program gives him instant data on his operating costs, and a click of the key can also provide him with a monthly profit/loss statement.
Cecere has been in business 20 years and a Walker user for 15 of those years. Even though he is a college graduate with a finance major, he says owners and operators need not have a special expertise with numbers to track and use costing information.
“We tried to separate out direct, indirect, and overhead expenses, but the process became way too complicated and was really unnecessary for our business,” he explains. “Instead, we consider all operating costs as ‘overhead.’ We track how much it costs to operate our 10 vehicles, including fuel and repair expenses. We track depreciation, rent, insurance, phone, repair costs and parts for maintenance equipment, and so forth.”
As Cecere further explains, adding the costs up at year-end tells him how much it costs to be in business. By dividing that figure (say the total comes to $100,000) by the total number of payroll hours for the year (say 5,000 hours), he comes up with an operating cost of $20 per hour. Note: The figures are hypothetical. The 5,000 hours represent direct labor costs and would be 90 percent of Cecere’s total payroll. He doesn’t factor in the other 10 percent that relates to time spent selling or performing administrative duties.
At this point, the owner is half way to determining his total cost of doing business. He then simply adds in his average labor costs per hour (say another $20, which include FICA, any benefits, and taxes), and bingo, he knows what he needs to make on a job to break even. In this case, if he wants to make $10/hour, then his hourly rate would be $50.
As Cecere points out, his labor rate varies according to the job and the degree of difficulty. Company revenue is divided among maintenance, irrigation installation and repair, and design/build. On a project that calls for special expertise, e.g., installing hardscape, the labor rate would be higher than a straightforward maintenance job. The cost of supplies, including plant material, mulch, lumber, and so forth, is essentially passed through to the customer, with a 10 to 35 percent markup.
Year-End Magic
Like most contractors, Cecere doesn’t have much time during the busy season to evaluate his operating costs. Instead, he waits until year-end to digest the information he has collected, and then uses it to determine what his pricing strategy will be for next year.
To ensure that something unusual such as a spike in fuel costs doesn’t overly bias pricing for the coming year, Cecere averages costs over the last three years. “We thought about adding on a fuel surcharge this year, but decided to wait and recoup a percentage of those costs next year with a price increase,” he relates. “The increase will not entirely offset this year’s higher costs, but it will help.”
He continues, “From my experience, contractors who get into trouble pricing either don’t know their costs, or they underestimate how much time it takes to complete a job. After 20 years in business, we know our costs and have a good handle on estimating. We have also pared down our maintenance business to include 80 accounts, many of whom have been with us for several years. Still, foremen fill out a timesheet after every job, and we use those figures to make sure our pricing is in line.”
For Cecere and other contractors who have been in business for years, there is a direct relationship between knowing the cost of doing business and pricing. As he puts it, knowing your costs and knowing how long a job takes removes the mystery from pricing. Like most everything else, though, the “devil is in the details.” The big costs are not difficult to identify and quantify; it’s the little “unaccounted for” expenses that add up over the year and work to steal away profit.
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