The Business End of Business
|By Igin Staff|
Operating a successful business in this day and age is a major task. Running a landscape contracting business and making a
profit is even more difficult.
A landscape contractor crosses many disciplines. Unlike a plumbing contractor, whose knowledge is limited only to plumbing, or an electrical contractor, who only know about electric, a landscape contractor has to have a working knowledge of electrical wiring, a knowledge of plumbing for irrigation. In addition, he needs to know about grading, hardscapes, trees and plant material, nightlighting and certainly irrigation. He should know about maintaining the landscape, and have some knowledge of diseases and insect problems. His scope of technical knowledge is broader than most other contractors in the building trades.
I marvel at the skills landscape contractors possess. However, technical skills alone are not enough to make a landscape contractor successful. Through the years I have known many landscape contractors who were technically skilled at their trade, yet failed in running their own business. Upon investigation, the reason was quite simple. They knew nothing about the "business end of the business".
There was a time when you could get by without a business background. That was a long time ago. Jobs were plentiful and there were fewer experienced landscape contractors out there. But times have changed. Today there is more competition and the difference between success and failure is knowing how to run your business.
You need to know exactly what your costs of running a business are. How much does it cost for rent? How much does it cost for telephones, office equipment, business insurance, paper, envelopes, paper clips, etc. How much is your office help? In other words, What are your total general and administrative expenses? Once you have that number, I'll show you how to use it.
You now have a hard number of what it costs to keep your office open. Whether you are operating a landscape contracting business or any other kind of business, the cost of keeping an office open becomes fixed. I am assuming that you are running a tight ship.
When figuring a job estimate, if you are running a job, you have to factor in the cost of your truck and your labor. You must make sure that when you determine that it will take four men (not including yourself) eight days to complete a particular job, the work will be completed in that time frame. If you do not get the productivity of your people, or if for some other reason you go over the time frame to complete the job, your costs begin to soar, and invariable you will lose money. That seems to be a major factor in the failure of most landscape contracting businesses.
Another important factor is what is commonly called the "labor burden". When bidding on a job, many contractors do not take this cost into consideration. The labor burden is simply those other costs attributable to having people working for you. For example, you pay workmen's compensation insurance based on your payroll. This has to be figured into your cost. For each employee you have, your company pays an equal amount for Social Security benefits (FICA). This too has to be figured in. What about vacation pay? When your employees go on vacation for a week or two and you pay them for the time, they are not productive for that period. That too has to be figured in your costs.
To make a profit in any business, especially the contracting business, you must make sure all your costs are figured in.
For example, let's say you bid on a landscape job. You are the successful bidder and were awarded the project. You bid the job at $15,000. You estimate you can do this job with four men each earning $9.00 an hour. You are going to run the job yourself and figure you can complete the job in four days.
The cost of materials is $4,500. The labor cost (including yourself at $15.00 per hour) amounts to $1,632. You now have to include your company's portion of FICA, Workmen's Compensation, a pro rata of vacation pay. You have to charge to the job four days use of your company's vehicles and gasoline. Pro-rate the insurance and repairs and add that to the costs. Now add in four days of your office overhead, including office staff's Workmen's Comp and FICA. Add in a pro-rated number for business insurance and your Workmen's Comp and FICA. Don't forget to include the time it took you to walk the project and the office staff?s time to write up the bid. And finally add in a profit for your company.
When you total all this up, you will see that it works. Should you, for one reason or another have to put more time on the job than you figured, this will eat into your profit on the job. Remember, you don?t have that much margin for error. If it takes eight days instead of the four you estimated, you just gave up all your profit. Anything longer than that and you will end up losing money on the project.
Remember, to make this project successful you must keep an accurate record of time spent on the project and total cost of materials. Most importantly, make sure you get the job done in the allocated time frame.
The business end of the business is what separates the haves from the have-nots.