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The Grow show is brought to you by The Harvest Group and is a regular podcast series focusing on the difficult issues and challenges contractors face day-to-day in their businesses. The Harvest Group includes Bill Arman, Ed Laflamme, Steve Cesare and Cindy Code.
This podcast is part two of a three-part series titled: How to make more money.
Here’s what the series looks like:
- Part One: What is gross margin, and the basics of gross margins
- Part Two: How to increase your gross margin with job sequencing
- Part Three: Ten simple ways to increase gross margins
Introduction. What is gross margin and why is it important to your financial success? Most of the improvements that can be made to your financials, without raising your prices, is in the area of gross margin. Since raising prices is probably not high on the list of options, we will begin with how to manage your direct costs side or how to lower your direct costs.
Gross margin really is the “financial furnace” for the organization and provides the best opportunity to make more money for an organization.
Gross margin, defined for the maintenance business, is as follows:
Gross Margin = Revenue less direct costs
Direct Costs = Labor plus burden plus materials
Burden equals payroll taxes like unemployment insurance (both fed and state), FICA, Social Security and worker’s compensation. Some contractors include general liability, health insurance and retirement. Other contractors don’t include this because it is difficult to separate out. Smaller companies generally just include payroll taxes
Payroll taxes, FICA, SUI, FUI and WC usually amount to about 20 to 25 percent of payroll/ hourly rate. So, if you are paying a guy $10 per hour, he really costs you around $12.50 per hour.
Burden does not include vacations and holidays, unless you replace the people with substitutes when they are on vacation or holiday.
Burden also does not include equipment, gas or supervision. It does include labor (foremen and below) plus burden plus materials.
So this is what we are focusing on: gross margin = revenue minus direct costs.
Job sequencing step one: Dispatch
- Dispatch (getting out of the yard in 10 minutes or less)
- Get keys from key lock box; have numbered and spare keys in a separate box.
- Foremen should touch base with supervisor for any last minute directions.
- Minimize loading and unloading.
- All trucks should move only forward, if you have to back up, use a spotter.
- For larger crews/yards, use split departure times.
- Think about having locked down trailers vs. loading and unloading every day.
Job sequencing step two: Routing
- Get to the job in the most efficient way. Consider traffic patterns, requirements on the timing of service (like no noise levels before a certain time), etc.
- Usually the spoke method of going out the furthest and working your way back toward the yard works the best.
- Always try to sell jobs between two existing jobs to have maximum time on the job not on the road.
Job sequencing step three: Basic Job Sequencing
- Who does what and in what order? This is where most of the gross margin can be made.
- Use right-sized machines for the work. Equipment is a lot less expensive than labor. For example: 21- vs. 36-inch mower is two to three times faster.
- Do your guys have a set way of doing things, like this mower cuts in first or that mower mows first?
- Always try to have the largest mower mow as much as possible.
- Use a stick edger vs. weed eater.
Job sequencing step four: Getting Fuel
- Consider using a gas guy in the yard to fill up.
- Does the whole crew stop and get gas?
- Does the foreman drop the guys off and then go to gas up?
Job sequencing step five: Arrival Back at the Yard
- Avoid lines.
- Have two loading ramps one on each side of the dumpster.
- Consider adding a gas jockey.
- Get all equipment ready to go for the next morning’s dispatch.
- Broken equipment dealt with and back up equipment distributed.
- Get sharpened blades put on mowers.
- Crew foreman and supervisor touch base to see what went on that day and what is planned for tomorrow.
Review of the main points:
- Basic job sequencing
- Getting gas
- Arrival back in yard
So, to improve gross margin at your company, follow and observe your guys from when they walk into the yard until they leave in the afternoon. See where you can shave time off.
Our next podcast will review 10 simple operational areas to improve your gross margin.