The gross margin of the company is the “fiscal furnace” that keeps your financials and profits nice and warm. Without the right gross margin levels, it is extremely difficult to make money. In fact, without getting the right revenue at the right gross margins it will be impossible to make money.
The gross margin of a company is a direct reflection on three critical areas that all organizations must be proficient at and they are: estimating, pricing and execution of the work, or a combination of all three.
The first step to get to the right gross margin is to establish your HAWs: hourly average wages per revenue stream. The HAWs are at the very root of gross margins and play right into the next step.
After you get your HAWs established it is now time for the next step: estimating.
Step two will deal with estimating how many HAWs or hours needed to perform the work and how much materials will be needed like fertilizer, mulch, weed control, etc.
During our Turnaround Tour 2017, we discovered that there were some informal systems for estimating but they did lean more on the side of “guesstimating” vs. estimating. Many folks out there know what I’m talking about, right?
So let’s start taking the guessing out of the key process of estimating and review several key areas that will help you arrive at an accurate estimate. Remember there are only three things you must know with every estimate you do:
Know your costs.
Know your costs.
Know your costs.
Know your costs! Know what your labor (total HAWs) and material costs are and you will be well on your way to getting the right gross margin.
Here are some estimating tips:
Review and know the specifications.
These normally call out for various activities and tasks along with frequencies: Like mow 35 to 48 times per year, fertilize the lawn six times per year, remove trash weekly, etc.
Review the job.
Visit the jobsite and learn the nuances of the job. Identify equipment accessibility, what types and sizes of equipment can be used, level of current performance compared to what the specifications are defining.
Meet with the customer.
Learn what their expectations are versus what the specifications state or what the job looks like. Learn their expectations and translate these into how many hours it will take to deliver on these expectations.
Perform the estimate and triangulate!
Crew hours: Size up the job and decide how long will it take the crew for each visit to get the work accomplished. This works well for smaller jobs. Take the hours (including travel time) and decide frequencies per year. Total up the man-hours needed per year and multiply by your HAWs. Then add material costs.
Estimate time for each task: List all the tasks identified in the specifications and then assign hours for each task and multiply by the frequency of the task. Then finish off with HAWs and material costs.
Compare with existing job: Take a look at an existing job that is similar in size and scope of work and use your knowledge and experience to calibrate your price.
Measure and use productions rates: The best way to estimate is to measure the job and get counts in all categories then assign production rates to accomplish each area. Like mowing the lawn with a 36-inch mower at 15,000 sq. ft. per hour, watering pots at 10 minutes each etc.