Don't sell yourself short

A few winters ago, I met with an irrigation contractor in New England who wanted to calculate his rates for service work. At the time, he was charging $40 per hour for service repairs. After a fairly thorough analysis of costs and the market, we determined that he needed to charge $50 per man-hour, an increase of 25 percent. Convinced that he needed to increase his rates, the contractor made the change. Six months later I revisited him and asked him if he had lost any customers due to the rate increase. He told me that not only did he retain every customer, only two customers even mentioned the increase.

This service contractor provided excellent service to his customers, but he was underpricing his work. As a result of the analysis that I did for his company, this contractor put an extra $15,000 in his pocket in the first six months of his season.

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Irrigation service work for small jobs lasting less than a day or two can be some of the most lucrative work that you perform if you price it correctly. However, you must be aware of potential pitfalls when it comes to pricing your irrigation service work. These pitfalls include covering drive-time labor (and other non-site-time labor, such as loading the trucks at the yard and picking up materials) and the service truck, and establishing daily billable goals for individuals and crews performing the work.

You can also use the methods outlined here to calculate time and materials (T&M) rates for other types of work. Substituting your costs for materials, labor, labor burden and general and administrative (G&A) overhead in place of the ones used in the examples will allow you to develop accurate labor rates to use in T&M situations. Your pricing will probably be close to that established in the examples. However, you should take the time to complete these exercises using your costs in order to ensure that your rates are accurate.

What's it really cost?

Before you start developing your labor rates, you should address how to handle the pricing of the materials that are used for repairs and non-site time, such as drive time, load time and picking-up-materials time. I recommend charging for repair materials independent of labor rates. Most contractors charge clients the manufacturer's list price for irrigation materials used in T&M service work. Sometimes you may lower list prices for commercial customers. However, I recommend marking up materials a minimum of 20 to 25 percent above actual invoice cost. Residential irrigation markets will usually allow you to mark up materials 40 to 60 percent above invoice cost, which should bring your pricing for materials close to the “list” or retail price that residential customers would have to pay on the open market.

Off-site labor time (drive, load and picking-up-materials time) can be handled one of three ways:

  1. It can be included in the hourly “curb-time” rate charged to the client. Curb time is the actual time that a technician or crew is on the job site. It starts when they arrive at the site (curb) and ends when they leave the site. You calculate the curb-time rate by dividing the total price (including all costs except for materials and net profit) for an average day of service work by the average amount of on-site (curb-time) labor hours. In our example, the price of $442 is divided by eight hours of curb time. The resultant curb-time rate is $55.30 per curb-time man-hour. I would round it up to $56.

  2. The client is charged for actual off-site time, primarily the drive time to the job site. This is often referred to as “portal-to-portal” billing. Essentially, the clock starts once the driver leaves the yard and stops when the job is completed or, in some cases, when the driver returns to the yard. This method has some inherent problems, especially if the driver starts from a location other than the yard, gets stuck in traffic or has to make other stops along the way. In our example, the portal-to-portal price is $44.24 per man-hour, and I would round that up to $45.

    An average amount of off-site time could be allocated to the job instead, but this puts you into the third method.

  3. You can charge a show-up or “trip-charge” fee that includes drive time and other non-site time plus a certain amount of time on the job (the first thirty minutes on site). Time after that is normally charged at a pre-determined rate and in 15-minute increments or parts thereof.

    In our example, I would charge $45 to show up, knowing that the average job was 20 minutes from the office or yard and required approximately 10 minutes of additional off-site time for loading the truck. The trip-charge rate would include these 30 minutes plus the first 30 minutes of time on the job. Additional time on the job would be charged at $12 per 15-minute increment or part thereof.

Putting it together

Let's look at the example in the box on page Contractor 24, and the scenario that follows to see how we determined these rates.

  • Our sprinkler technician works alone and gets paid for 10 hours a day, 50 hours per week, meaning the overtime factor (OTF) is 10 percent (5 hours of overtime divided by 50 hours of straight time equals a 10 percent OTF).

  • All work is performed on a “T&M” basis, so the “Risk Factor” is zero.

  • The technician's hourly rate is $13.

  • Labor burden is 30 percent.

  • The technician drives a van that calculates out to be $6 cost per hour (CPH).

  • An average job is 20 minutes from the office.

  • An additional 40 to 60 minutes per day is required to load the truck, pick up materials and complete administrative work.

  • You plan to perform and bill a minimum of four jobs per day.

  • Materials are charged to the customer at current list prices.

  • Approximately $100 of materials (at cost) is to be installed per day.

  • The general and administrative (G&A) overhead cost per labor hour (OPH) amount has previously been calculated to be $12.

  • A combined net profit margin and contingency factor of 20 percent is to be included in the work.

    Turning again to the box on page Contractor 24:

  • We have put eight man-hours in our Phase I curb-time production costs.

  • Phase II general conditions contain the remaining two man-hours of estimated daily load, drive, administration and materials pick up time.

  • The service van is also included in Phase II general conditions at eight hours for the day. We use eight hours because the cost per hour is calculated using an eight-hour day. You can use 10 hours in your daily costs, if desired.

  • Total price, including all costs and 20 percent net profit, for an average day of sprinkler repair work is $442, which is indicated at the bottom of the Phase III calculations.

Put another way, total revenue that must be generated per day to cover all costs (including G&A overhead and providing a 20 percent net profit margin) is $442. In other words, we must bill $442 per day, excluding materials, to cover all costs and to show a 20 percent net profit.

The box below shows more meaningful scenarios using the trip charge method.

Each of the three scenarios produces an extra $20 to $26 of net profit, in addition to the $88 net profit built into the day rate. And remember, this net profit is also supplemented by the net profit on the materials each day. The difference between your cost and what you charge the customer is pure profit.

The key is to keep your technician busy and billable all day, and to bill a minimum of $442 per day. If that occurs, you are making money and any revenue billed above the $442 is extra net profit.

Scenario 1
You bill four jobs per day and keep the service technician busy and billable all day. Generated revenues are:
4 (jobs) × $45 (show-up charge) $180
6 hours billed at $48/hour 288
Total $468
You have exceeded your goal of $442 by $26.
Scenario 2
You bill five jobs per day and keep the repairman billable all day.
5 (jobs) × $45 (show-up charge) $225
5 hours billed at $48/hour 240
Total $465
You have exceeded your goal of $442 by $23.
Scenario 3
You bill six jobs per day and keep the repairman billable all day.
6 (jobs) × $45 (show-up charge) $270
4 hours billed at $48/hour 192
Total $462
You have exceeded your goal of $442 by $20.

You should track your irrigation service work on a daily basis. Many of my clients use GPS (Global Positioning System) software to track their service vans. The minimum items that should be monitored are:

  • Sales or total billable dollar amounts per day per technician.

  • Labor hours and job tasks. For example, driving to the Jones' residence takes 15 minutes, repairing two heads takes 35 minutes, returning to the shop takes 15 minutes and picking up irrigation materials takes 20 minutes.

  • Materials used and billed per job.

Once you have historical data to work from, go back and adjust your hourly rates and trip charge rate, if desired.

The price is right

Irrigation service and time and materials (T&M) work can — and should — be some of your most profitable work, if you calculate your pricing correctly. Be sure to include off-site labor time and vehicles in your prices, and remember to set daily goals for billable production hours and revenue. Use the example to calculate your labor rates and add a service helper if desired.

IRRIGATION SERVICE PRICING
Scenario cost data
Crew average wage (CAW): $13.00
Overtime factor (OTF): $10.00
Risk factor (RF): 0.00 percent
Crew average wage with OTF and RF $14.30
Labor burden: 30.00 percent
Sales tax: N/A
G&A overhead per hour (OPH): $12.00
Net profit margin 20.00 percent
Service truck/van rate: $6.00
Curb time man-hours per day: 8.00

Scenario Labor Cost Total
Phase I
• Production or “Curb” time costs
8.0 man-hours
$ 14.30/$114.40
$ -
Phase II
• General conditions (off-site or non-curb-time costs
2.0 man-hours
$14.30/$28.60
8.0 service truck/van hours
$ 6.00/$48.00
Subtotals $143.00 $48.00
Phase III
• Margins and markups
A. Sales tax N/A
B. Labor burden $43.00
Subtotals $186.00 $48.00
Total direct costs (TDC) $234.00
C. G&A overhead costs
10 (number of man-hours × OPH) $12.00 à #120.00
“BEP” (subtotal of total direct costs + G&A overhead) $354.00
D. Contingency factor (if desired) $ -
E. Net profit margin
20.00 percent $ 88.00
F. Total price for a day of service work $442.00
Scenario analysis
A. Curb-time rate (total price divided by curb-time man-hours): $442 divided by 8.0= $55.30
B. Portal-to-portal rate (total price divided by all man-hours): $442 divided by 10.0= $44.24
C. Show-up fee or “Trip-charge” rate (total price divided by all man-hours): $442 divided by 10.0= $44.24

Remember, the net profit on materials is pure profit. Also, these pricing methods are to be used for jobs of short duration, which are fairly typical of your work. If a T&M job requires a lot of extra drive time, or if it includes difficult job site conditions, adjust your pricing accordingly. If after you calculate your T&M prices, they look too good to be true, they probably are. Go back and check your arithmetic and don't be afraid to add some extra net profit if they appear too low. Your rates should be reasonably close to market rates. The main difference is that now you have confidence in knowing how you arrived at your rates and how to adjust them if conditions change. You can also set well-defined daily production and revenue goals using them.

You can price your irrigation service with confidence knowing that all of your costs are covered by your rates. You can also know with confidence that you are going to make money every time a service truck leaves your yard. And pricing with confidence is what the irrigation service business is all about.

This article was adapted from James Huston's book, Estimating for Landscape & Irrigation Contractors. The author is president of Smith Huston, Inc., which specializes in construction and services management consulting to the Green Industry. Mr. Huston is a member of the American Society of Professional Estimators and he is one of only two Certified Professional Landscape Estimators in the world. For further information on the products and services offered by Smith Huston, call 1-800-451-5588, e-mail SHI at shi@smith-huston.com, or visit the Smith Huston web page at http://www.smith-huston.com.

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© 2014 Penton Media Inc.

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