Cost Estimating: Profits or Pitfalls
When you first dreamed of starting your own landscape business, who knew you'd be spending so much of your time indoors, behind a desk, crunching numbers? But as profitable landscape professionals know, number crunching is one of the biggest parts of the job -- especially when those numbers have to do with cost estimating.
Cost estimating is one of the trickiest and most time consuming tasks of the landscape contractor. Unfortunately, it's also one of the most important. How skillfully you perform this task can very quickly determine whether your company will sink or swim. It's no wonder that so many books, classes, and software systems have been dedicated to this complicated issue.
The pitfalls of inaccurate estimating may seem obvious, but they can't be stated often enough. "The life of your company depends on accurate estimating," says Mike Leman, president of Singing Hills Landscaping, Inc., Aurora, Colorado. "A project that fails to cover all of your costs, including overhead, will likely result in a low bid. You may win the bid but lose money. A project in which you overestimate your costs will result in a high bid. You probably won't get that job. If this happens consistently over time, the company will fail."
There are, of course, times when it can be strategically valuable to overbid or underbid a particular job? for example, if you have a specific reason to want (or not want) a given client, or if you want to position yourself at a particular place in the market. But it's never strategic to estimate incorrectly. You simply can't strategize if you don't know your costs to begin with.
Sloppy estimating can have a far-reaching impact, not only on the project at hand but also on the way a company does business. "If you underbid, you end up looking for shortcuts,"? says Pete Schepis, vice president of The Greenwood Group, Chesterfield, Missouri. "You're probably not going to have the proper time allotted to do a good job, so you look for ways to save time and money. You can end up doing a terrible job, and turning the customer off."
Unskilled estimating can also seriously impact your ability to grow and attract competent employees. "If you don't know what it really takes to break even and just cover all your costs versus making a profit, you'll never be able to attract the people you need to build your team and pay them accordingly," says Sam Whitney, president of Samscaping, Inc., Mountain View, California. "If you can't build a team, you won't grow past a certain point."
The impact of flawed estimating and the inappropriate bidding that can result only grows over time.
"Consistently overbidding can lead customers to decide it isn't worth their while to even ask you to bid, ultimately damaging your reputation as a competent contractor," says Leman.
"You not only run the risk of your own customers not calling you again," adds Schepis. "They will also tell their friends not to bother with you."
"On the other hand," adds Leman, "consistently underbidding can harm other contractors in the market area by driving owners' price expectations lower."
If your estimating skills aren't what they should be, it pays to take time now to learn the numbers, before sloppy habits get out of control. "Learning your numbers on budgeting and estimating is essential if you ever want to start moving up to the higher levels available in this industry," says Whitney. "In my opinion, if you don't learn your numbers, you'll never grow and sustain it. You might grow out of dumb luck, but sooner or later, you'll crash and burn."
Look at all the angles
Accurate estimates require careful attention to detail and a comprehensive look at all expenses, especially 'hidden costs.' For Schepis, it starts with precise measurements. "The biggest mistake people make is not measuring correctly in the first place. Everyone is under the gun in this industry and people don't always take the time they should to take careful measurements. There are some guys around here who just drive by a property and throw a number at it. But if you measure the job completely, when you go back to the office you have it all there in front of you."
Among other things, accurate measurements lead to more controlled spending on every aspect of the job, says Schepis.
Schepis points out that for continuing customers, careful measuring not only saves time and money on current projects, it also lead to quick and accurate estimates on future projects. "We have a contract for a large university here in St. Louis. Two or three of our people spent two days taking measurements there. This may seem like a lot of time. But we refer back to those measurements at least every other month. When that client calls to request another service, we have all the information right there. Spending the time up front pays off."
For John Chiarella, Jr., president of Connecticut-based Ultimate Services Professional Grounds Management, attention to detail in estimating means uncovering hidden costs in every area. "A big mistake when estimating is not looking at all the angles of your overhead. Things like insurance, liability, staffing. Sometimes contractors forget about these in the zeal to get the job. Take labor, for example. You need to ask, what does your labor on a job really cost? You may pay your people $10 per hour, but how much are you really going to spend on labor? What about overtime? What about a contribution to a pension plan, what are the FICA and SDI costs to your company? What about their travel time? What about the time they'll spend loading and unloading the truck? Now how much are you spending for labor on that job?"
Leman agrees that knowing and charging for hidden costs is critical. "One of the most common mistakes I've seen is failing to allow for the cost to replace equipment in the future. Many contractors think that if equipment is paid for, they don't have to continue to charge for it. Unfortunately, at some point it will wear down and need to be replaced. If you charge enough to build up a cash reserve, when that machine breaks down, you can buy a new one."
Failing to account for difficult or demanding customers is another mistake, according to Leman. Difficult customers can add time to any job. Being aware of possible extra time demands will eliminate expensive surprises down the road and will help you take the time to keep even your most demanding customers satisfied.
Don't go it alone
Landscape management is first and foremost business management, but it's no surprise that business management isn't the first love for most landscape professionals. "Many, if not most, landscape contractors get into the business because of a love for the outdoors," says Leman. "Learning to manage a business is often secondary to a love for the craft of shaping the environment, and in many ways requires a different skill set. People who are most at home in a physical environment often have a hard time shifting gears into a world of people management, finance, accounting, and strategic planning."
Fortunately, help is available for those who are wise enough to seek it. "Don't think you have to discover the process on your own," says Leman. "Talk to experienced estimators. Attend seminars. Read books and magazine articles. Utilize technology. Hire people with the skills you don't have."
Relying on the expertise of others has been one of the secrets to Chiarella's success over the years. "I'm smart enough to know how stupid I am," he laughs. His success using this strategy has led to serious rewards. His thirty-five-year-old company grew from a one man/one mower operation to one that now specializes in grounds management for very high-end customers with a diverse array of service needs. The company provides everything from gardening services and snow and ice removal to vineyard and orchard management, putting green and tennis court installation, and outdoor event support. (He even offers an apiary department.)
This kind of success doesn't come by accident. "My clients require anything and everything," says Chiarella. "It's hard to put a number on it. When I don't know something, I'm the first one to say so and I'll hire an expert. My advice to others is to hire a good consultant. There are some very good ones throughout the country."
Quality software is another source of help that can be well worth the investment. Custom-designed software can lead you through the estimation process step-by-step reducing the room for costly errors and omissions. Many products are designed by landscape professionals who have a thorough understanding of the business. They've taken the guesswork out of the process which means you don't have to waste your time reinventing the wheel.
Sam Whitney uses services and software from J. R. Huston Enterprises, Inc., a management consulting company serving landscape and irrigation contractors and vendors. "I've been using Jim Huston's estimating software for about twelve years now and he visits me one or two times per year," says Whitney. "I've been in business for twenty-three years and I can honestly say that learning how to budget and estimate using his program is one of the most important things I've done to reach the level we're at."
"I know there are other excellent programs out there," says Whitney. "The important thing is for contractors to pick a good one and invest the time to learn it." Taking advantage of networking opportunities is another way to seek help. "I attended one of Jim's 'Brainstorming' meetings last October," says Whitney. "The overall effect of spending a few days with some really high-end landscape contractors in California has rejuvenated my enthusiasm for building a top-notch company."
"Asking questions, seeking knowledge, and knocking on the doors of people who know are the keys to learning the easy way,"says Leman. "Be humble enough to admit when you don't have all the answers."
The larger your business becomes, the more critical accurate estimating becomes. "If you don't want to grow past five or eight employees, then you may be able to make a decent living by just bidding from your gut," says Whitney. "Most people gain a pretty good ability to judge the 'ballpark' of what a job will cost after doing this type of work for a few years. But I don't think it is possible to grow past that without your systems and team in place."
Schepis agrees. "I've been in this business for thirty years. With the competition in this industry now, we have to take everything into account. I got into the business because I love working outside. But there are times where I don't get outside for a week. The landscape business is business management. The better business management you do, the better you'll succeed."