Pricing it Right
Putting together an accurate pricing plan will ensure that you don’t get snowed this winter.
Snow removal, sanding and salting work can be some of your most profitable work as long as you do not depend upon the weather. Too many contractors rely upon Mother Nature rather than a well-thought-out business plan and accurate pricing that minimizes risk while optimizing chances for increased profitability. Otherwise, the biggest snow job that you may face is a diluted profit and loss (P&L) statement that gives you a false sense of security.
Putting a price on it
To best understand the results of effective pricing, take a look at the following scenario. John owns a full-service landscape company. He wants to re-evaluate his pricing structure for winter snow removal and sanding work. The market for winter work is competitive. The going rate for sanding is $100 per cubic yard and $75 per hour for snow plowing with a one-ton truck. However, John is not sure that the $75 per hour rate covers his crew’s drive time and 30 minutes of prep time before and after each storm. John has five drivers who plow snow. Three of the drivers also spread sand.
John’s crews will be paid an average of 10 hours per storm. Eight hours will be spent on-site plowing or sanding. The other two hours will include drive time from job to job and a minimal amount of prep time at the yard before and after each storm. The typical winter will consist of 10 storms, and three drivers will spend approximately five of the 10 hours sanding per storm. The average driver will be paid $15 per hour and will put in approximately 100 hours sanding or plowing in the winter. Sand mixed with salt costs $25 per cubic yard. Sales tax is 6 percent on materials. A driver can spread roughly 2 cubic yards of sand mix per hour, including load time, using a one-ton truck. Labor burden (e.g., Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), worker’s compensation insurance, general liability insurance, etc.) is 25 percent. The overtime factor is zero. The owner wants a risk factor of 20 percent included in the labor rate to offset an error in the average drive time estimated for the two scenarios. The owner wants a minimum net profit of 20 percent on all winter work. General and administrative (G&A) overhead costs for the year are $100,000. Billable field labor hours during the regular season total $10,000. Dividing the G&A overhead amount by the billable hours produces an overhead per hour (OPH) cost of $10. Even though all G&A overhead for the year is theoretically covered during the regular season, John wants to add $10 OPH to each hour of winter work.
John wants to calculate a minimum curb-time rate for snow plowing and a per-cubic-yard rate for sanding that takes into account the above criteria and that covers all costs. He wants to know if he can make any money with market rates being what they are. He also wants to know how much winter work contributes toward his G&A overhead costs.
To price his snow removal, sanding and salting work, John prepares a bid scenario for a typical storm for both types of work. Once he completes these pricing scenarios, he can then address his questions.
Pricing snow-removal work
John pulls out a yellow legal pad and breaks the bidding process for snow removal work into three phases. The first phase contains the labor and equipment costs when the driver is on site plowing. The second phase contains the hook-up and drive time for the truck and driver when both are not on-site plowing. The total of these two numbers should equal the total paid hours for a driver for the day. Phase 3 includes the margins and markups for the bid (e.g., labor burden, G&A overhead, net profit and a contingency factor, if desired).
- Phase 1. Providing the service. John increases the driver’s labor rate of $15 by the 20-percent risk factor to obtain a “loaded” rate of $18. He then multiplies the 8 hours of phase 1 plowing time by this figure and enters the product on his bid worksheet.
- Phase 2. General conditions. John calculates general conditions just as he did phase-1 costs, but with one important difference: He does not include the cost of the plow in the equipment calculations because it is not being used and incurring wear and tear during general condition time.
- Phase 3. Margins and markups. John multiplies his labor cost in phases 1 and 2 by the 25-percent labor burden amount and enters it onto the bid worksheet. He then multiplies the 10 labor hours in phases 1 and 2 by the OPH of $10 to determine how much G&A overhead to add onto the bid worksheet. He then totals all of these figures to determine the break-even point (BEP) for the scenario. John then adds his desired 20-percent net profit margin to the BEP.
- Analysis. On average, John must bill $661 in a 10-hour period of snow removal in order to cover all costs and to make a 20-percent net profit margin. G&A overhead recovery accounts for 15.1 percent of the total. By adding these two together, we arrive at our gross profit margin of 35.1 percent. To determine the hourly curb-time rate, John simply divides the desired total billable amount per day by the projected number of curb-time hours ($661 ÷ 8 curb-time hours = $82.63). Dividing total direct costs of $429 per day by the 8 curb-time hours produces the direct costs per hour amount ($429 ÷ 8 curb-time hours = $53.63). The BEP per hour is calculated by dividing the BEP total of $529 by the 8 curb-time hours ($529 ÷ 8 = $66.13). In other words, for John to cover all of his direct costs (labor, burden, equipment, sales tax) John must bill at least $53.62 per curb-time hour. Seen another way, any amount billed above this $53.62 amount goes toward gross profit.
- Conclusion on snow removal work: John cannot match the market rate of $75 per curb hour while maintaining both a 20-percent net profit margin and two hours of non-billable general condition labor time per day. However, reducing general condition labor time to one hour (if possible) per day drops John’s rate to $73.44 ($661 ÷ 9 on-site or curb-time hours) while maintaining his goal of a 20-percent net profit margin. Reducing net profit to 10 percent produces a rate of $73.50 ($588 ÷ 8 = $73.50) without reducing general condition time. Reducing both net profit margin and general condition time to 10 percent and one hour respectively would allow John to drop his price to $65.33 ($588 ÷ 9 = $65.33) if market conditions dictated. Note that John will experience his best GPM if he can somehow schedule his crews to incur only one hour of general condition time per day.
John knows that his one-ton trucks cost him $7 per hour to operate. He doubles this amount to cover the extra wear and tear that he thinks that winter work will cause. John then calculates his plow cost per hour (CPH) by dividing the purchase and lifetime maintenance costs ($4,000 + $1,000 = $5,000) by the projected lifetime billable hours for a plow (8 seasons x 80 billable hours per season= 640 hours). He rounds the 640 to 650 lifetime billable hours and divides projected lifetime costs by the 650 hours ($5,000 ÷ 650 hours = $7.69), which he rounds up to an $8 CPH. John then adds the doubled truck CPH to the plow CPH and multiplies this total by the phase 1 equipment hours (8 hours x $22 = $176). He enters the total on the bid worksheet.
John also has one other option. He could possibly reduce his non-billable drive time to one hour if he could add 5 to 10 minutes of drive time to the bills for each of his customers. That is if he is billing on an hourly basis. It goes without saying that customers should be aware of this practice prior to receiving their bills.
There are two important things for John to note from this exercise. First is the impact that non-billable time has on hourly curb-time rates. Second is that any billable amounts above direct costs contribute directly to the bottom line of the company at the end of the year. Therefore, it is important for John to focus on his direct costs per day and per billable hour. These two numbers will provide John with easily targeted minimum billable amounts that will ensure that he covers all of his direct costs no matter what the scenario.
Pricing sanding and salting work
John prices out his sanding work as follows. The sander cost per hour is $13.00. With a 20 percent net profit margin on top of all of his costs, John must bill a minimum of $621 per driver per storm. This translates into a unit price of a little over $77.58 per cubic yard, which is well within the market price of $100 per cubic yard.
A more accurate GPM for sanding work at the market rate of $100 per cubic yard is 44.1 percent: ($800 - $447 TDC) ÷ $800 = 44.1 percent. John could improve his GPM by increasing his production above his benchmark of 2 cubic yards per curb-time hour. Decreasing the general condition hours through better scheduling or more efficient loading of sand would also increase the overall GPM on sanding work. John could also increase his GPM by charging a minimum 1 cubic yard amount (e.g., $100) for sanding on smaller jobs requiring less than 1 CY of sand. By doing so and by “stacking” these jobs back-to-back, John could easily bill up to $200 to $300 per curb-time hour. The GPM on this type of work could easily surpass the 44.1-percent figure by another 10 to 20 percent.
- Conclusion on sanding/salting work. The key is for John to bill a minimum amount per storm. John and his drivers should focus on billing a minimum of $200 per curb-time hour (when drivers are on site sanding) and a minimum of $800 per storm per driver. If they meet these criteria, they will make money.
The price is right
To answer John’s initial questions, there is no doubt that his winter work is profitable but probably could be more so. Scheduling, establishing minimum prices for sanding and salting work and setting targeted minimum hourly and daily billable dollar amounts will all contribute toward a healthier bottom line. Sanding is John’s most profitable winter work, which is normal. However, John must keep in mind that with winter work, the market pretty much sets the prices. He has to be able to play the market’s game and win. He must understand his numbers and how drive time and prep time can affect his profitability.
John’s question regarding winter work contribution to general and administrative (G&A) overhead costs can be answered rather simply. Included in his winter prices is $10 for each labor hour that the drivers are paid. The total hours paid to drivers is 500 (5 drivers x 10 storms x 10 hours per storm). We obtain the amount of G&A overhead costs included in the winter billings by multiplying the 500 hours by the $10 OPH = $5,000. Winter work contributes $5,000 toward G&A overhead costs.
- The profit and loss (P&L) statement. In order for John or any contractor to be able to monitor the profitability of snow and sanding work, the company profit and loss (P&L) financial statement should identify the sales and direct costs for both snow removal and sanding. Preferably winter work should be a division of its own with its own P&L statement. This will help to identify its GPM. Direct costs would include labor, labor burden, materials with sales tax, equipment and any subcontractor costs. Once direct costs are subtracted from sales, the GPM for winter work will be identified.
- Contracts. Residential. Residential plowing is usually done on a per-push basis. The best way to ensure that you are pricing correctly and making money plowing residential accounts is to prepare a scenario analysis using your costs and production numbers. Be sure to include the net profit that you desire. After each storm you should then enter your actual costs, hours and revenue into the scenario format to see how much money you made.
Company P&L statements become diluted if winter work is not separated from work performed during the regular season. Because winter work can often realize a GPM of 50 to 60 percent, it will distort figures and profit margins for other divisions. Once any type of work comprises more than 20 percent of total company sales, it is wise to separate it from other work by means of its own P&L statement. Contractors who do not specifically measure and monitor winter work with a separate P&L that identifies GPM in terms of percentages and whole dollars often do not realize how much winter work contributes to their company’s profitability. Unprofitable or marginally profitable divisions can be hidden and the problem does not become apparent until an extremely mild winter occurs with significantly lower winter revenue than normal. However, by then it is too late to address and fix the problem in the other division.
Commercial. Commercial plowing and sanding is quite another story. Two clients come to mind. They were both in the same city on the East Coast. One contractor billed his commercial accounts strictly on a per-push basis. The other had a fixed monthly billing amount for the four months of December through March. The total of the monthly billings covered a five-year average for the amount of inches of snowfall for the winter. Anything over the average was billed out on a time and materials (T&M) basis at the end of the month of April. To make this type of contract more appealing, the contractor would plow up to 10 inches above the average at no charge. I call this a fixed/variable or “flex” contract.
In the mid 1990s, the East Coast went through a five-year period of record snowfall followed by a year of almost no snow at all, followed by another record year. The contractor with the flex contracts was happy. His revenue reflected the change in snowfall from year to year. Most importantly, he covered his costs during the years when there was almost no snow at all. His clients were also happy because they had set budget numbers to deal with. While they did not like the extra billing in the record snow fall years, they did get a price break.
The contractor on a strictly per-push basis could not win. One year he would have minimal revenue, which did not even cover his costs to have the equipment and labor standing by. He was not happy but his clients were. The following year, he had record amounts of revenue. He was happy but his clients were not. At the end of one of the record snowfall years, he charged one of his “best” clients $80,000 for one storm at the end of March. The client had already been charged far more than their budget allowed. The $80,000 bill, while legitimate according to the per-push contract, was the straw that broke the camel’s back. The client only paid $40,000 and told my client to sue if he wanted more. No one was happy at the end of this season.
Winter work can be some of your most profitable work. However, it can cause a lot of trouble if you do not manage both your and your clients’ risks properly. Marketing winter work by means of realistic contracts is just as important as pricing your work properly. Setting revenue goals for snow events and job-costing each storm immediately afterwards will help ensure that you are not the one getting snowed.
This article was adapted from James Huston’s new book, How to Price Landscape & Irrigation Projects, due to be released this fall. The author is president of J.R. Huston Enterprises, 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 J.R. Huston Enterprises, call 1-800-451-5588, e-mail JRHEI at firstname.lastname@example.org or visit the J.R. Huston Enterprises web site at http://www.jrhuston.biz.
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