The Owner Is an Employee, Too!
Why your paycheck belongs in your business costs, not your profits.
I've talked with a lot of landscape contractors who work incredibly hard building their businesses. They estimate jobs, meet customers, order materials, supervise employees, run equipment, install landscapes — and somehow still find time to keep the books, usually after everyone else has gone home for the day.
They pay their employees. They pay their suppliers, their insurance, and their equipment expenses. Then, at the end of the month, they look at what's left and pay themselves.
Sometimes there's plenty. Sometimes there's very little. And sometimes there's nothing at all.
Sound familiar?
Then I've got a question for you: Why is everyone in your company getting paid for their work except you?
You Work for Your Company
Let's get something straight. If you own a landscape company and actively work in it, you're really doing two different jobs. You're an owner. And you're also an employee — at least in the practical sense that you're performing work the business needs in order to operate.
Those are two very different responsibilities.
As an owner, you've invested your time, money, and effort into building a business. You've accepted the financial risk, made the hard decisions, and taken responsibility for whether the company succeeds or fails.
As someone working within the company, you're providing labor and services that have real value. And that work deserves to be compensated.
Whether you're digging holes, running a skid steer, meeting customers, preparing estimates, designing landscapes, or managing your crews, your time is a business expense.
Your company should be paying you for the work you perform, just as it pays everyone else.
Here's where things get interesting, though. How your company accounts for that compensation depends on what kind of work you're doing.
Field Labor: A Direct Cost
Let's say you're out working alongside your installation crew — operating equipment, laying pavers, planting trees, or doing any of the other work directly tied to completing a project.
That's field labor, and field labor is a direct cost. Just like the wages you pay the rest of your crew, your compensation for that work belongs in the cost of completing the job.
Suppose you determine that your field labor is worth $40 an hour, and you spend 25 hours on a project. That's $1,000 in direct labor compensation.
But that isn't necessarily the full cost of your labor to the business. Just as with any other employee, employer payroll taxes, workers' compensation insurance, benefits, and other employment-related expenses can push the actual cost of that labor higher. Those additional expenses are commonly called labor burden, and your estimates need to recover the full cost of your labor — not simply the amount you intend to take home.
It doesn't matter that you own the company. If you weren't out there doing that work, you'd have to pay someone else to do it.
So why would you treat your own labor as free?
Office and Management Labor: An Indirect Cost
Now let's look at the other side of your workday.
You're meeting prospective customers, preparing proposals, designing projects, scheduling crews, purchasing materials, handling payroll, managing employees, and generally keeping the wheels on the business. You're working just as hard, but most of that work isn't directly attributable to any one particular job.
That work is generally considered indirect labor, or overhead. Overhead includes the costs necessary to operate your business that aren't charged directly to individual projects: office expenses, insurance, administrative salaries, software, bookkeeping, and management. (Software alone can feel like its own department these days. Everything is a subscription now.)
If you're the one handling those responsibilities, your compensation belongs in that overhead budget.
Think about it. If you hired an estimator, a salesperson, a designer, or an operations manager to take those duties off your plate, you'd have to pay them, and their compensation would be part of the cost of operating your company. Your compensation for performing those same functions shouldn't be treated any differently. And just as with field labor, any applicable labor burden tied to your management compensation needs to be included in your overhead budget, too.
Field labor is recovered as a direct project cost. Office and management labor is recovered through overhead.
Both are legitimate costs of doing business.
Let's Say You Want to Earn $100,000 a Year
Let's put some numbers to all of this.
Suppose you own a landscape contracting business and decide you want to earn $100,000 a year for the work you perform. That's your compensation target.
Not your profit target.
After taking an honest look at your responsibilities, you figure that roughly half your time goes to working in the field and the other half to sales, estimating, design, administration, and management. Your compensation should be allocated the same way.
Your Work | Annual Compensation | Classification |
Field labor — 50% | $50,000 | Direct cost |
Office and management — 50% | $50,000 | Indirect cost (overhead) |
Total compensation | $100,000 |
Simple enough, right? The real question is how you recover that money.
Recovering Your Field Labor
Let's assume you work about 2,000 hours a year — 1,000 in the field and 1,000 on office and management responsibilities. You want to recover $50,000 for the field portion of your work.
But here's something important to understand: hours worked and hours billed aren't necessarily the same thing.
Our example assumes 2,000 working hours a year, based on 40 hours a week for 50 weeks. That's only an example. Many landscape contractors operate in regions where seasonal weather significantly limits the working year. Winter shutdowns, excessive rainfall, extreme temperatures, holidays, equipment downtime, and other interruptions all cut into the hours available for productive work.
And even when you're working, not every hour is billable. Loading equipment, traveling between jobs, dealing with unexpected problems, and other unproductive time all reduce the hours available for direct labor cost recovery.
For our example, let's assume that of your 1,000 annual field hours, only 800 are realistically recoverable through billable project work. You still need to recover $50,000 in field compensation:
$50,000 ÷ 800 billable hours = $62.50 per billable hour
Now let's add labor burden.
Don't Forget Labor Burden
Just like any other employee, the cost of your labor may include more than your compensation. Employer payroll taxes, workers' compensation insurance, benefits, and other applicable employment expenses can add considerably to it.
For illustration, let's assume those additional expenses amount to 25% of your compensation.
Owner Field Labor | Annual Cost | Per Billable Hour |
Compensation | $50,000 | $62.50 |
Labor burden (25%) | $12,500 | $15.63 |
Total direct labor recovery | $62,500 | $78.13 |
That means your company must recover approximately $78.13 per billable hour just to cover your field compensation and its associated labor burden.
Keep in mind that's a direct cost recovery rate, not the final price charged to the customer. Overhead and profit still need to be recovered on top of it. Your actual labor burden will depend on your business structure, insurance, benefits, and other applicable expenses.
What If You Have Fewer Billable Hours?
Your compensation target doesn't change simply because the weather keeps you off the job. Your hourly recovery rate does. Here's what it takes to recover the same $62,500 — your $50,000 in field compensation plus its 25% labor burden — at different levels of billable hours:
Annual Billable Field Hours | Fully Burdened Hourly Recovery |
1,000 | $62.50 |
900 | $69.44 |
800 | $78.13 |
750 | $83.33 |
600 | $104.17 |
A quick note on that first row: the $62.50 at 1,000 hours is a fully burdened rate — $62,500 in compensation and labor burden spread across 1,000 billable hours. It isn't the same $62.50 we calculated earlier, which was your compensation alone, before burden, spread across 800 billable hours. Same number, different math.
The fewer billable hours you have, the more each one has to carry.
Don't base your pricing on how many hours you hope to work. Base it on how many hours you can realistically bill.
Recovering Your Office and Management Labor
That takes care of the field. Now let's look at the other half of your compensation.
You spend about half your working time handling sales, estimating, design, scheduling, purchasing, administration, and management. Those responsibilities are necessary to operate the business, but in this example they aren't charged directly to individual installation projects. Instead, their cost becomes part of your company's overhead.
Your $50,000 in management compensation, plus the illustrative 25% labor burden, adds $62,500 to your annual overhead. Let's assume the company's other operating overhead expenses total $162,500.
Annual Overhead | Amount |
Other operating overhead | $162,500 |
Owner management compensation | $50,000 |
Applicable labor burden (25%) | $12,500 |
Total annual overhead | $225,000 |
Your company needs to recover $225,000 a year through its pricing to cover those indirect operating expenses. That figure includes your management compensation.
It doesn't include profit.
Overhead is a cost. Profit is what remains after those costs are paid.
Let's Look at the Whole Business
Now let's put everything together. Suppose your landscape company generates $1 million in annual revenue.
Based on my experience, many landscape contracting businesses have cost structures that fall somewhere within these general ranges:
Labor: 20–25%
Equipment: 20–25%
Materials: 20–25%
Overhead: 20–25%
Profit: 10–20%
These are general observations, not industry standards or percentages every company should expect to achieve. A maintenance-focused company will have a different cost structure than a hardscape contractor. A design-build company may look different from an irrigation contractor. Geography, climate, labor availability, equipment ownership, and the services offered can all influence the numbers.
And because these are ranges, they aren't intended to be added together at their maximum values. (Do that and you're running a company at 120% of revenue — which, come to think of it, a few of us have tried.)
For our example, we'll use the following breakdown:
Category | Percentage | Annual Amount |
Labor (direct) | 22.5% | $225,000 |
Equipment | 22.5% | $225,000 |
Materials | 22.5% | $225,000 |
Overhead (indirect) | 22.5% | $225,000 |
Operating profit | 10% | $100,000 |
Total revenue | 100% | $1,000,000 |
Now go back to our owner's $100,000 in compensation.
The $50,000 allocated to field labor, plus $12,500 in applicable labor burden, is already included in the $225,000 direct labor budget. The other $50,000 allocated to office and management responsibilities, plus its $12,500 in labor burden, is already included in the $225,000 overhead budget.
That means the company has accounted for the owner's entire $100,000 in compensation, along with the illustrative $25,000 in labor burden — and the business still generates $100,000 in operating profit.
That's the important distinction. The owner has been compensated for working in the business before the company calculates its profit.
And that profit belongs to the business.
What Is Profit For?
Which raises a fair question: if profit isn't your paycheck, what is it for?
Profit isn't simply the money left over for the owner to spend. Profit is what allows a business to become stronger. It can build cash reserves, purchase equipment, reduce debt, fund expansion, and carry the company through difficult times. It also represents the financial return for taking on the risks of owning the business.
And yes, some of that profit may eventually be distributed to the owner. But that's different from being compensated for the work you perform.
Your compensation pays you for your labor. Profit rewards you for owning and successfully operating the business.
Those are two very different things.
What Would It Cost to Replace You?
Here's something else worth thinking about. Suppose you decided to take six months off. Who would do your work?
Would you need another installer? An estimator? A designer? A salesperson? A project manager? An office administrator?
Maybe several of them!
And what would you have to pay them? Those costs wouldn't disappear simply because you stepped away. The company would have to account for them.
So why aren't you accounting for those costs while you're doing the work yourself?
If your company can't afford to compensate someone to perform your responsibilities, perhaps your pricing isn't reflecting the true cost of operating the business. That's something every business owner should understand.
Stop Paying Yourself Last
I understand that starting and growing a business can be difficult. Sometimes cash flow is tight. Sometimes you have to make sacrifices. And sometimes owners defer their own compensation to keep the company operating.
But that shouldn't become your permanent business model.
If you're consistently paying yourself whatever happens to be left over, you may not really know whether your company is profitable. You might simply be working for less than your labor is worth.
Or worse, working for nothing.
There's a better way to approach it:
Establish a reasonable compensation target.
Determine how much of your time is spent performing direct project labor and how much is spent operating the business.
Estimate how many of those field hours you can realistically bill.
Include your fully burdened direct labor cost in your project estimates.
Include your management and administrative compensation, along with its applicable burden, in overhead.
Recover those costs through your pricing.
Then — and only then — calculate your profit.
One additional distinction: the way an owner actually receives compensation for tax and accounting purposes depends on how the business is organized. But regardless of whether that money is paid through payroll or owner draws, the value of the owner's work still needs to be reflected in the company's pricing.
Build a Business That Pays You
There's nothing wrong with working hard. There's nothing wrong with being the owner who shows up first, leaves last, and does whatever needs to be done.
But working hard and running a profitable business aren't necessarily the same thing.
You should know what your time is worth. You should know how much it costs to operate your company. And you should establish prices that recover those costs while generating a reasonable profit.
Because your company has two financial responsibilities to you.
It should compensate you for the work you perform.
And it should generate a return on the business you've built.
If your business can't do both, it's time to take a closer look at your numbers.
After all, you're an owner. But you're also one of the people doing the work.
And you deserve to get paid for it.
~ Eric
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