Landscape Business - 101
Updated: Mar 25, 2022
ESTABLISHING A COMPANY BUDGET
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This article is intended to offer some insight and advice to landscape contractors, especially those just starting out. Since this article will be public, I invite consumers to read and understand what I am presenting to help establish a better understanding of how this industry works and, hopefully, appreciate the hard work and professionalism displayed by most in our industry.
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Greetings, fellow landscapers!
As a 25+ year veteran of the landscape industry I hear the words, "Man, I'm Good at what I do, but I just can't seem to make any money at it!", far too often.
Fear not and don't beat yourself up over this! It is a fairly common state of affairs in the landscape industry. Many of us have spent years in the trenches, developing our and honing our skills in an effort to provide the finest services and products to our customers. And with this confidence and pride in our abilities we set out on our own to provide that high quality service to our customers that we just know that we can provide!
Then reality hits!
There is payroll to be made, and payments on equipment, and taxes, insurance, licensing fees, overhead costs, not to mention constantly fluctuating material costs!
It can be overwhelming!
Let's simplify things a bit. What it comes down to, basically, is that you are willing to trade your time, skill, effort, talent materials, and equipment to provide a service and/or product that is of value to your customer. They are paying you for your expertise to accomplish what they desire and you know that you can do it. But there seem to be so many obstacles to achieving success and financial stability. You ask yourself, "What am I doing wrong"!?
Here is the rub; assuming that your skills are solid, are you charging enough to keep your new business not only viable but growing? Do you find yourself so desperate for work that you are always the low bidder? Do you find yourself in a downward spiral of over-promising and under-delivering? If so, you may survive for a short time. But, you will never become the solid company that you want to be and you will let your customers, employees, and ultimately yourself, down.
The question that you must ask is, "Are you charging enough for your services?" Dr. Ralf Speth, the CEO of Jaguar has said, "If you think good design is expensive, you should look at the cost of bad design." If you are to be considered great at what you do then you must not only be great at what you do but also charge appropriately.
Far too many Landscape Companies do not charge realistically!
Unfortunately this results in unrealistic expectations from customers. They begin to see 'landscapers' as unprofessional grifters rather than the highly educated and trained professionals they are. Operating your business in a professional manner is key to dispelling this prejudice, for yourself and the industry as a whole. And the way that you present yourself has everything to do with how you are perceived. Nothing is more important to this than how you charge for your services and present your estimate. Submitting a thoroughly thought out and detailed proposal to your customer shows your concern, skill, thoroughness and attention to detail. Not only in estimating, but more importantly, in how you operate your company. So how do you realistically estimate and charge for your services?
Let's jump right into it!
The simple answer is ACCOUNTING!
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Okay! Don't freak out!
Start by establishing a simple company budget. A budget is crucial to understanding your business and how it works. Your budget should be a full accounting of all things financial. it must include all costs, both direct and indirect as well as profit.
Start by adding up ALL labor, equipment, materials and overhead expenses for your business over the past year to establish your COSTS. Then, subtract that from your total revenue, or what you billed over the past year. The difference is your company's PROFIT.
Rule of Thumb: Direct costs + Indirect costs + Profit = Company Budget
Example:
Direct Cost Labor 2,000hrs @124.80/hr avg $249.600 ±25%
Direct Cost Equipment 2,000hrs @100.00/hr avg $200.000 ±20%
Direct Cost Materials Total $250,000 ±25%
Indirect Cost Overhead Total $252,516 ±25%
Total Costs $952,116
Total Revenue $1,000,000
Profit $47.884 ±4.8%
After paying all of your costs your company realized a 4.8% profit
Design/Build Landscape Firms should average 12%-17% profit or more.
(For sake of comparison, bottled water sees a %50-%200 profit!)
This budget is what you will use to determine the financial health of your company and act as a baseline to build upon. If you are not currently tracking all of these numbers, start doing so! There is no better way to understand where you are or diagnose problems. You also cannot possibly plan for where you want to go if you do not know where you begin.
If what you came up with is similar to the example above then you are probably not in a good place! If your costs of doing business (Direct Costs + Indirect Costs = Breakeven) is greater than the amount that you charged for it (Revenue) then this money had to come from somewhere. Most likely it came from profit or your own pay. In the worst case scenario it came from materials or labor leaving you with debt and unhappy employees and customers!
WARNING!: The best way to insure that you will never be successful is to charge 2x materials and assume this will work! Or charging per unit; i.e. $500/ irrigation zone, $12/ SF pavers.
Estimating this way is a formula for failure, poverty and very unhappy customers!
This is fine for "Ballpark Numbers" but is unrealistic when it comes to running a business!
This is what I call "Comparative Pricing", see my post about that.
REMEMBER THIS...If you look, act, and work professionally and provide outstanding service at a fair price....you will have happy customers and a successful business! If you charge a fair price and the customer feels it is too much, don't be desperate,... walk away and allow them to work with the unsuccessful companies. You will not do anyone any favors by being cheap! If you do the customer will be unhappy and you will be broke!
So now, Let's break this down...starting with the basics.
Important Concept to Understand!
Direct Costs vs Indirect Costs
DIRECT COSTS are the costs of the labor, equipment, materials, sub-contractors and anything else that is DIRECTLY a part of accomplishing the job.
INDIRECT COSTS are the the unseen costs of doing business that are NOT DIRECTLY a part of the project. These include costs of your office space, utilities, insurance, licensing, marketing, office staff, salespersons, designers, and anything else not directly a part of the job.
Let's break this down!
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DIRECT COSTS
FIELD LABOR
Field Labor is a primary DIRECT COST of any project. This applies to all labor that is directly engaged in doing the work on any particular project. It does not include Overhead Labor (like office staff, designers, estimators or sales staff).
This is a big one. Labor cost is NOT what you are paying the person performing the work, Labor is the cost of that person to the company.
It has to take into account:
Unproductive time: i.e. preparing for the days work, time in the truck, break time, bathroom time, phone text with girlfriend time... you understand. So how much is productive time? 75% maybe? But you are paying that person for, say 8 hours a day. so maybe they are productive for six of those hours. Ideally unproductive time is less than 20%.
Payroll taxes: If payroll tax is 15% and it is shared by the employer (you) add 7.5% to that persons cost.
Workman's Compensation Insurance: Depending on your policy that could add another 2-10%. so you're now up another 7%, maybe?
Benefits and Bonuses: If you offer any paid time off, bonuses, medical or retirement benefits. Add that to cost.
Contingency: I also like to add a 10% CONTINGENCY. This can cover any uncertainties or un-foreseen costs. There are ALWAYS unforeseen costs! If you are lucky enough to anticipate everything then you can use any extra contingency to offer better service to your customers! This is a BIG plus for them and a safety net for you!
These additional costs are often called Labor Burdon.
See how this can add up? That $20/hour employee is costing you easily $30/hr if not more. And that is before OVERHEAD RECOVERY! So you need to charge that one employee out at a minimum of $30/hour. And that is very low. Now, hang on, there's more.
YOUR PAY
Let's say that you are paying yourself $100k/year. But only half of that is spent in the field working on projects with your crew. The other half of your time is spent in the office managing the business, doing sales work, marketing, etc. That 50% on the job site is a direct cost. It should be considered field labor. 50 % of $100k per year works out to 50k per year. Divide that by 1000 hours (half of an anticipated 2000 hours per year), this works out to $50/hr that should be charged as a direct cost of the job. The other 50k of your salary is an indirect cost and will be covered by overhead.
In many cases if you are a sole-proprietor/llc you will pay taxes on profits or your pay. If your company is a corporation you might be paid a salary through the company. You need to check with a CPA about this. Also, you, as owner/operator may be exempt from workman's compensation insurance. If the company is providing benefits like insurance it should be considered overhead. Check on this.
EXAMPLE
RULE OF THUMB: A 40 hour work week x 50 weeks per year = 2000 hours. This allows for two weeks off, unpaid, per year for holidays etc.
This is assuming that there will be no weather days or seasonal work stoppage! Adjust accordingly!
So, to recap, to keep two crewmen, plus one foreman, plus yourself in the field for 50 weeks out of the year (2,000 hours) with no overtime is costing the company +/-$250,000/ year BEFORE overhead Recovery!
Remember, that is COST! Labor is typically subject to a markup to cover overhead.
Note: Overtime typically costs and is charged out at 1.5 times, or time-and-a-half. Try to avoid this. An overworked crew costs more, is less efficient, makes mistakes and is more susceptible to costly accidents.
EQUIPMENT
Equipment, in most cases is a DIRECT COST of the job. Any mechanical equipment, power tools, hand tools or other implements that are used to perform the work on a project should be considered Equipment. For example, a crew truck, a skid-steer, even a shovel, a tiller, or a chop-saw are all considered equipment. Your computer, your cell phone or your business cards are NOT considered equipment. They are office supplies or office equipment, a part of overhead, an indirect cost.
Like labor, equipment must be accounted for carefully to determine actual cost. Consider the financing (if any), maintenance, fuel, insurance, warranty, maintenance, etc.
EXAMPLE
Let's examine a crew truck. You bought it new at say $50k at a 5% interest rate and put $1000 down. So you financed $49k at a 5% interest rate = $51,450 or more depending on the financing. Total cost of the truck is now $52,450. You plan on using that truck for five years. If you wish you can account for the ±10k return upon selling the truck after 5 years. for this example I have not.
You are now making payments of $51,450 over five years. Your cost: $857.50 per month under warranty. Add in the down payment and you are at $874.17/ month or $174.80 per week. Add to that about $200/week in fuel and maintenance and now you are at $374.80/week. Add 10% Contingency... ±$37.48/wk and divide that total by 40 hours. So you are now at $10.31/hr on that truck. Over a 2,000 hr work year that truck will pay for itself by bringing in $20,620/ year. I would recommend charging more. If you track the usage, you will begin to see how many hours per year that truck is used and can adjust the math accordingly.
See how this works?
Same goes for all equipment even tools. Lets say you spend $2,500/ year on tools (shovels, rakes, wheelbarrows, etc.). break that cost down to the day and/or hour. $2,500 divided by 2000 hours = $1.25/hr or $10.00/8 hr day. And add that contingency! How many tools seem to walk off the job site? Charge for that! It is a cost!
Note: Equipment is not usually used as a markup to cover overhead.
MATERIALS
In almost every case, materials are a DIRECT COST. Materials include all of the products that you purchase to accomplish a particular task or job. plants, soil, mulch, gravel, pavers, stone, concrete,.... whatever. These should not be confused with equipment. Saw blades, sand paper, drill bits or other disposable equipment items should be considered as part of equipment maintenance costs.
Material costs are affected by a couple of factors:
Cost: The actual cost of the material from the distributor, grower or supplier.
Freight or Shipping: The added cost of transportation from the manufacturer to the supplier.
Delivery: The cost of delivering the material from the supplier to the job site.
All of this must be accounted for!
EXAMPLE
For a Single Job
Materials are the actual products; plant material, soils, aggregate, brick, block, wood, or other things that are necessary to build the project. These can include sub-contractors like concrete providers etc. but Subs can be considered separately. Sub-Contractors are another Direct Cost but I will not get into that here.
Material costs should include not only the cost of the material but also the freight or shipping and the delivery fees of getting it to the job site. It is nearly impossible to anticipate hard material costs or budget for them as costs of freight, shipping and delivery fluctuate depending on the item over a period of time; think inflation.
WARRANTY! You should probably charge a warranty factor for some materials like plants. If you offer warranty or guaranty on plants and typically replace 1 out of every ten plants add 10% to the cost of every plant. So that $20.00 Azalea will now be $22.00. Use judgement as there is a significant difference between a $25 shrub and a $250 tree!
IMPORTANT NOTE! If you are purchasing materials wholesale, such as plant material, you will have to add local + state sales tax!
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REMEMBER...THESE ARE COSTS! NOT THE PRICE YOU CHARGE FOR THEM!
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INDIRECT COSTS
OVERHEAD
This is the big one that most new operators forget or underestimate. Overhead can make or break any company, especially an emerging one. It is often the one aspect of your business that you have the most control of and the last one that you pay attention to.
Overhead includes all of the aspects of your business that are NOT DIRECTLY contributing to the accomplishment of a single project but are necessary for the operation of the company.
Overhead includes things like rent on your office or shop, general business & liability insurance, business licensing, continuing education, marketing, office supplies, furniture and equipment. Payroll for office and sales staff. Professional association fees. the list goes on!
As the owner or operator of your company, your personal time, vehicle, office, cell phone among other things should be considered Overhead Expenses. If you are not counting them towards a business expense, you are paying for them yourself!
Account for ALL of your Overhead costs! And do not forget insurance or benefits for overhead employees! If your overhead costs exceed about 25% of your total company budget you might want to make some changes.
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Now, here's the tricky part!
OVERHEAD RECOVERY
Figuring out your INDIRECT or OVERHEAD costs is relatively easy. Simply add them up. But those INDIRECT overhead costs have to be accounted for and RECOVERED!
The tricky part is figuring how to get back, or RECOVER, the INDIRECT COSTS of your work.
Putting a line item in your estimate for OVERHEAD RECOVERY probably will not work!
The simplest way that you can recover those INDIRECT, overhead costs is by adding them to your DIRECT costs. This is typically done in one of two methods.
1. SINGLE OVERHEAD RECOVERY
In single overhead recovery you simply distribute your overhead (INDIRECT) costs into a single direct cost like labor.
Example: Over the course of a year Your company generates $1 million in revenue (this number is from your Budget). Your Labor costs are $250k, Your Equipment costs are $200k, Your Material costs Are $270k. So Your DIRECT costs are $720k. But your Overhead (INDIRECT) Costs are $250k.
You have to find a way to get that $250k back since you are not directly charging your customers for it. In SINGLE OVERHEAD RECOVERY you can distribute that into labor OR materials; not both.
If you choose to recover your overhead in LABOR you will divide the total Overhead costs by total anticipated Field Labor Hours.
EXAMPLE
OR....If You want to recover all your overhead in materials and your materials cost $270k, you will have to distribute $250k throughout all materials.
Doing the math you will find that 270 is 1.08 times 250. Therefore you must add 1.08 times cost to every material to arrive at price. So that shrub that has a cost of $20 including delivery etc. will now have an added 21.08 (20x1.08=21.08) for a price of $41.08 each!
Single Overhead Recovery works in some cases like when you have a sub-contractor providing materials and labor at a fixed price and you only need a supervisor alone to insure proper installation. You will not make anything on the sub (or maybe 5%) but you will not be able to mark up materials or most labor, just that supervisor. So it might be a good idea to do Single overhead recovery on labor in this case.
In most cases I recommend MULTIPLE-OVERHEAD RECOVERY
2. MULTIPLE OVERHEAD RECOVERY
Multiple Overhead Recovery allows you to spread your overhead recovery over multiple cost factors like labor and materials at the same or different rates.
In multiple overhead recovery you might spread a percentage, say 60% of overhead cost into labor and 40% into materials. You will have to decide what works for your company. For example, 60% of your $252,516k overhead (INDIRECT COSTS) is $151,510k. Distributed throughout 7,000 hours of anticipated labor, results in a markup of $21.64/hr or $23.20/hr with a 10% contingency.
And recovering 40% of overhead (INDIRECT COSTS) within materials results in a 40% markup of project materials. So that $22 shrub is sold at a$30.80 price.
EXAMPLES
LABOR MATERIALS
Knowing all of this will be crucial in estimating any work that your company performs. A thorough understanding of all of your costs will allow you to provide accurate and competitive project estimates and realistic proposals for your customers while insuring that your company will continue to remain sustainable and achieve healthy growth.
Now we must address PROFIT!
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PROFIT
PROFIT should not be considered the swag in your wallet! That comes from your pay. If you want to pay yourself more, you should adjust your budget appropriately. PROFIT should be thought of as the resource that allows your business to grow, expand and provide better service to your customers.
In big business, profit is the return on investment to shareholders. In our business it provides the capital necessary to improve the business. It is your return on investment! Profit provides the financial resources to invest in new locations, materials, equipment, personnel, marketing or even the company picnic! Profit keeps your business healthy and growing. And if you are not growing, you're dying!
I believe that for a landscape design/build firm a profit of 12%-17% is reasonable. You can achieve more if your service is amazing and probably a lot less if it is sub-par. Maintenance or specialty work like irrigation or lighting usually sees higher profits due to the more predictable nature of the work among other factors.
You can factor profit into your budget simply by adding up all of your costs, DIRECT and INDIRECT and adding your desired profit for every proposal that you submit.
REMEMBER: Direct costs + Indirect costs + Profit = Budget
Your estimates should reflect this. However this can come off as sketchy in an itemized proposal. Customers might be uncomfortable seeing a line item called profit. It is for this reason that profit is generally distributed into DIRECT COSTS in a similar manner as overhead recovery.
EXAMPLE
My personal opinion is that PROFIT is the fertilizer that fuels the future growth and overall health of any company. Without profit the company will atrophy and eventually die.
Developing a solid and realistic business budget and plan will insure your company's sustainability and overall health and potential growth. The accumulation of profit protects your company from unforeseen challenges and allows you to provide excellent customer service and satisfaction. save your profits! You will need them!
Remember! Profit does not go into your pocket! Profit is the fuel of you company's health and growth. If you want to pull more $, pay yourself more, but account for it!
You now have a pretty good idea of all of your costs and expenses. You may even have a much better grasp on what you are doing right and what you are doing wrong. It really is as simple as this.
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CONCLUSION: Putting it all together
Remember: Direct Costs + Indirect Costs + Profit = Revenue
Start by accounting for all expenses and revenue of the past year. No matter what it is, this will show you what you need to focus on and become a baseline on which to build a more predictably successful company.
I will follow this article with another devoted to estimating. Estimating, writing proposals and creating contracts is the method of putting all this into practice.
This article has been intended as a very basic introduction to the fundamental business concerns of a design/build landscape firm. It has been intended to briefly introduce concepts and concerns that many landscape companies face in the course of daily business. Every company is different and must respond to their own local dynamics and company philosophy.
I hope that you have found this helpful or beneficial in some way. Please feel free to share your thoughts with me: ermcquiston@gmail.com
Peace! Happy Landscaping!
~ Eric