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The Finer Points of Staying In The Black

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Why not?
Well, it appears that the primary reason stems from the fact that there is no set formula to determine such a figure. Sure, geographically, all things need to be taken into consideration, among them: distance from the job, weather and terrain conditions. But the question remains, what is it that makes two or more contractors come up with different estimates for the exact same job? We?re not talking about landscape maintenance here. It?s not a matter of having a crew show up at a location on a weekly basis to mow, trim and move on to the next client. We?re talking about an installation or construction project that must be done to the customer?s satisfaction, and within a specified period of time.
What?s the formula, and how long will it take to get the estimate to the customer in a timely manner? Often, contracts will go out to bid, while other times they are negotiated. Contracts that are negotiated are generally done between the contractor and a client who have worked together on prior projects. During the three years that Rich Angelo, president of Stay Green, Inc., in Valencia, California, ventured into residential landscape construction, he found there was no one specific cost-estimating formula, regardless of how many times the same ?type? of job was done.
We would basically design the job, do a take-off sheet, determine the cost of labor, add materials, then tack on a 25 to 30 percent mark-up to achieve our estimate,? says Angelo. ?But there are so many variables, it?s hard to say where one can go wrong and come up short, thus making you the low bidder and winner of a very unprofitable job, or be way too high and lose out altogether.? Angelo?s $10 million-a-year, 33-year-old company dropped the construction business after three years in favor of putting their efforts and energy into the area where they?ve always been most successful: maintenance.
On the other end of that spectrum, Chapel Valley Landscape Company, in Woodbine, Maryland, has been in both commercial and residential landscape construction, as well as maintenance and irrigation, since its inception in 1968. When it comes to estimating a job, the company uses a commercial estimating software package. In addition, they include their own historical database of job costs to maximize the package?s efficiency. Sherri Bartin, Chapel Valley?s director of marketing, says, ?We?ve accumulated decades of data to ensure that we know what our true costs are and what must be done to cover them, while providing the best value for the customer?s dollar.? Obviously, keeping detailed accounts of each job, those that were profitable as well as those that weren?t, is essential to the long-term success of your business. The more data that can lead you in the right direction, the better your chances of getting that next job, and growing your company, profitably.
Whats your monthly number?
Each day, before you put the key in your office door, you have expenses that need to be covered and recovered, such as, but certainly not limited to: the cost of that office you just opened the door to; the cost of the vehicles that carry your workers and equipment; the cost of the equipment on those vehicles, along with their maintenance; telephone and utility bills; advertising; and your annual membership fees to various associations.
These are all part of the ?cost of doing business,? and the list can easily be expanded. You must know, on a monthly basis, how much these things cost you. Then there are the office personnel expenses: hourly and salaried wages, Worker?s Comp and health benefits, insurance on the employees, the vehicles and the office. Each of these, if not figured into your cost of doing business, along with a plethora of additional figures that we will touch on, will bring your business crashing to the ground.
Often, a new player to the industry will look for that one big customer to help get their landscape construction business off the ground, but it frequently backfires. Finding that potential customer takes time . . . time that should be used to generate immediate business that has a better chance of staying on your books for a longer period of time. Once the landscape company is stable and has a constant flow of business, that?s when finding the bigger accounts can pay off. ?When starting out,? says Bartin, ?it?s more challenging to find the larger accounts, but it may be wiser to begin with the smaller ones and build up over time.
There?s less of a strain, both financial and mental, to deal with the equipment and manpower required. And you can build a reputation of good quality and service, instead of risking your image by biting off more than you can chew. We, on the other hand, have been in business so long that it?s to our advantage and our success to have very large accounts.
Dont look at one month?s expenses and divide
So now you?ve determined what it costs to operate for the month. But when you work on your estimate, you can?t simply use that amount as your ?Monthly Expense Rate? and divide it by the number of hours or days on the job. If reality has taught us anything, it is that things tomorrow will most likely not be the same as they are today. Did you go over last year?s records to see how many times you needed to rent a van or a piece of equipment at the last minute because yours was in the shop? That means you still had to pay the loan on your vehicle or equipment, along with paying for the repair and the rental. Let?s not even talk about the insurance on the rental. That?s three expenses when you only budgeted for one.
Remember when the computer with all of your company?s records and customers crashed, and you needed to call in that technician? Remember how much it cost for him to be there for three hours before he said you needed a new CPU? Surely, there were a couple of sizable and unexpected expenses.
How about having to call in that temp when your salaried secretary/receptionist/assistant went on a two-week honeymoon to Jamaica? That?s two salaries that needed to be paid during the same time period, not one. And what about that unemployment case that?s still pending? You may have to kick in some money for that, too. Insurance premiums have a habit of increasing without much notice. And a year ago, who would have thought that fuel would be at the $2-per-gallon mark again? What about those two days it rained so hard that your men couldn?t work at the site, but you still had to pay them anyway? Or when one of them misread the plans and ran the lights along the wrong walkway?
Did you build a ?fudge-factor? into your estimate? Then there?s always the possibility of winning the bid for the job, but due to the customer?s inability to get financing approved, or any of a handful of other reasons, the job is postponed. Marky Moore, client services director for AAA Landscape in Phoenix and Tucson, Arizona, says, ?In all bid proposals, we sight the length of time the deal must be closed by.
Should we need to hold onto a bid for a year or more, we add a factor of potential increase of costs. Pipe increases, and the cost of palm trees, for example, are difficult to calculate, and our contract states that the prices are only good for a certain length of time.
Possible formulas
So after you look at last year?s expenses and try to foretell the future by predicting what your expenses will be for next year, divide that number by 12, unless your work is more seasonal. If that?s the case, divide by the number of months your company is able to do business. You then need to determine the direct costs ? labor, fuel, additional equipment and materials ? for the specific job. And what about you? Have you figured in your salary? Your time? Your expertise? And then there?s that bottom line ? the profit. How much can you add on? Is twenty-five percent or more too much? Is ten percent too little? Now do you see why no two landscape contractors can come up with the same construction estimate? Often, the same contractor may not come up with the same figure twice for the same job. Of course, when you think you have the formula that works best for you, there are other things to take into consideration. As mentioned earlier, there are options to your costs, such as discounts, sales, specials, rebates and so on. And in order to be competitive, you need to stay up on all of them, and take advantage of them whenever possible. Consider this job formula: Take your anticipated monthly expenses, and divide it by twenty (the number of working days per month). This gives you a daily figure. For instance, if your monthly expenses are $30,000, divide by twenty, and you get $1500, which is what it cost you per day to keep afloat. Determine the hours or days the job will take; include an extra day, or a section thereof, as a fudge-factor, in case of bad weather or installation errors. To continue with our example, if you anticipate that a job will take five days, at $1500 a day, multiply this figure by six (allowing an extra day for possible problems), giving you $9,000. Now add the direct costs necessary to complete the job ? labor, labor burden, materials, equipment rentals, fuel. Deduct any savings you may be able to pass along to the customer. Then add a comfort-level profit for your company. This should determine the estimate you present to a customer. What?s the best way to provide optimum performance and customer satisfaction, while obtaining the most comfortable profit margin? AAA?s Moore says, ?Keep the books in order. Efficient and sound administration of your projects will help you meet the needs of your clients.? As always, look for ways to cut your costs while providing the best service possible. Richard Angelo recommends, ?Utilize equipment and not your people to cut down on labor costs. It makes sense to rent some equipment, like Toro?s Dingo, a small tractor with an auger and the ability to handle other necessary attachments. These types of equipment can make life easier and more cost efficient for the business owner and the customer. We all know it makes sense to rent equipment from time to time. Rent it, use it and see if it works for you, your company and your requirements, then consider purchasing the piece if it?s useful for future business. If not, just rent it whenever it?s needed, saving long-term money on maintenance and insurance premiums.? Regardless of how you come up with your number for the bottom line of your estimates, make sure you have a consistent formula that works for you. And remember, what is equally important to your work and your future is providing good service. Chapel Valley?s Bartin emphasizes, ?There are a lot of companies out there providing the same services. So for us, the differentiating factor has to be the quality of plant material, construction, and most of all, customer service. The job has to be done right the first time, and you have to make sure the customer knows you?re going to take care of his needs today, tomorrow and ten years from now. Because weve been in business so long, our clients know who we are and the quality of service that we provide.


October 2003

 
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