In order to make your business and its processes more quantifiable and measurable, you need to break it down into three components. Successfully addressing these aspects will make you profitable. They are:
- Price it right. You have to price your services and projects accurately.
- Produce it right. You have to deliver your services and projects as you price them or you have to price them as you produce them.
- Produce enough of it. You have to have enough revenue to cover all of your costs.
If you do these three things, you will make money. If you aren’t making enough money, you can trace the problem to one of these.
In this article, I want to address the first of these three elements: pricing services and projects accurately. We’ll use what I call the Bid Recap Report to help us benchmark our pricing.
The bid recap report.
I use this report to recap and review bids. It helps me ensure that my pricing is in line with the appropriate green industry benchmarks. We’ll use a five-day residential landscape installation project to illustrate this report. Editor’s note: View the report on lawnandlandscape.com by searching “bid recaps.”
The cost for the materials on this project includes sales tax, delivery fees and a 5 percent warranty, total $6,439. The 160 labor-hours for the job, including overtime and a 25 percent labor burden, cost $24 each for a total of $3,840.
The equipment costs a total of $1,370. The total direct cost (TDC) for this project is $11,649. We then add $18 per labor-hour (160 x $18 = $2,880) for general and administrative overhead to the TDC and obtain a break-even point (BEP) of $14,529.
A price of $18,161 is calculated when we add a 20 percent net profit margin (or a 25 percent markup) to the BEP. Once we calculate these figures, we can then apply green industry benchmarks to this bid.
This bid appears fairly normal except for the material intensity of the job. This means the cost of the materials is somewhat higher than the average landscape installation job.
This higher cost is probably driven by expensive trees, specimen plants or both being used on the project. It shows up in two other important areas.
First, the GPM is low. It should be near 40 percent. I’d probably add three to five additional points to the 20 percent NPM in the bid. It also blows away the theory that you can multiply your material costs in a job by a factor of 2 to arrive at a good price for it. Here we have to multiply the material costs by minimum factor of three.
A Bid Recap Report provides us with the ability to compare our pricing for an individual bid to all of our bids. However, you must remember that industry benchmarks will vary due to the type of work.
Also, remember that benchmarks are mere starting points. You need to calculate your own company benchmarks to make them accurate. Next time we will discuss job costing.