Landscape and Irrigation is read by decision makers throughout the landscape and irrigation markets — including contractors, landscape architects, professional grounds managers, and irrigation and water mgmt companies and reaches the entire spetrum.
Issue link: https://read.dmtmag.com/i/96774
Overhead recovery is key to a keeping a business profitable, knowing your costs and controlling them throughout the season, which can make all the difference in a winning or losing season. To calculate these costs, I start by taking the total overhead cost for the year and divide it by estimated days worked to come up with a daily overhead cost. For example, my company works 32 to 34 weeks a year. However, I need to account for non-working days (poor weather, holidays, etc.). Therefore, I typically budget a total of 30 weeks of actual billable labor for the calendar year. Total overhead cost for the year in Figure 1 is $238,544.16 divided by 30 weeks equals $7,951.47 per week (five day) or $1,590.29 per day. From here, I break it down further to find our operating cost per hour. I have four three-man crews, giving me 12 men total. Twelve men at 9 billable hours per day equals 108 hours. I take my daily operating cost of $1,590.29 divided by 108 hours, which equals $14.72. If my average cost per hour for each employee is $18.00 (base pay, FICA, Work Comp, insurances, and benefits), I then can total both operating cost per hour and employee cost per hour together for a total cost of $32.72 per hour. Don't forget, you also need to figure in non-billable hours, shop time, and equipment breakdowns. I try to achieve billing 80 percent of each day's labor to my client. My crews work 10 to 11 hour days, meaning I want to bill 8 to 9 hours a day to a client in the 30 weeks we work. I use another spreadsheet to figure out my labor utilization rate. I attended a Kevin Kehoe seminar a long time ago, got this spreadsheet model from his website, and have modified it to my business. In the spreadsheet, I am allocating 80 percent of my overhead to labor (see Figure 2). You may not want to cover all your overhead costs in labor only; it may price you out of the market. There are many types of overhead recovery systems out there, I use a modified dual overhead recovery system with which I apply a high www.landscapeirrigation.com Figure 2 percentage to the labor and a smaller percentage to materials, then I add my desired profit to them. These are four overhead recovery systems used in our industry: • Single overhead recovery systems (SORS) Percent added to cost of project • Dual Overhead recovery systems (DORS) Percent of overhead recovered by materials Percent of overhead recovered by labor • Multiple Overhead recovery systems (MORS) Percent materials Percent labor Percent equipment Percent subcontractors • Time Based Overhead recovery systems Overhead markup per hour (OPH) - Overhead markup per man hour Overhead markup per crew (OPC) - Overhead markup per crew day I have studied them all, and they all can work depending on what type of contractor you are and how disciplined your operation is in implementing them. Overhead recovery is key to a keeping a business profitable, knowing your costs and controlling them throughout the season, which can make all the difference in a winning or losing season. I take time at the end of the season to work on a marketing plan for the next year. Ask yourself this question:"Where do my leads come from?" I track mine yearly, and I know what works in my region, and what doesn't. I have trained my office staff and salespeople to ask the prospective customers how they heard about us.We have it broken down into five categories of response; home shows,Yellow Pages, websites, referrals, and media. Some contractors also use social media such as Facebook or LinkedIn. If you can track where the majority of your leads come from, you will know where to spend your time and money attracting new customers. Preparing a business plan can be challenging, but as a business owner you need to do this.You don't need to be an accountant — you can hire an accountant to do all the necessary stuff you don't have the time or patience to do — but you do need to understand how to budget and control costs. Take some time and attend your state landscape association events or GIE+EXPO /Hardscape North America in Louisville, Ky. There are a lot of great seminars and sessions that can help you succeed. LI Richard Lahren is the Landscape Division manager for Hebron Brick & Block Fargo N.D. He is also past president of the North Dakota Nursery and Greenhouse Association, an MNLA Certified Professional, and an industry speaker. He can be reached via e-mail at richl@hebronbrick.com. Landscape and Irrigation 9