Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Contractors love trucks and equipment. It reminds me of the adage, “The only difference between men and boys is not their age but the price of their toys.”
“Iron Man Mike” epitomized what we’re talking about. He loved his trucks, mowers, skid-steers, ATVs, etc. Unfortunately, his iron-rich diet was eating his financial lunch. What follows are some of the ways that contractors mishandle their trucks and equipment.
As a refresher, here are some general T&E cost benchmarks that I mentioned in a previous article:
- Fuel: 3% +/- 1% of sales
- Mechanics, parts & repairs: 3% +/- 1% of sales
- Misc. (truck, auto & Inland Marine insurance, registrations, wraps, racks, etc.): 1%-2% of sales
- Straight-line depreciation: 3% +/- 1% of sales
- Total: 12% +/- 2% of sales
These benchmarks will apply to most green industry companies. Yours may slightly vary, but the important thing is that you understand and track them.
Asset rich but cash poor.
Bill and Emily had a small landscape installation company in the Midwest with annual revenue of roughly $500,000. Their jobs were priced correctly but they were still cash poor. Bill loved his equipment and had two expensive skid-steers (with all the attachments), a mini-excavator and an 18-wheeler with a flatbed to haul his arsenal. T&E expenses on their profit and loss (P&L) statement were 18%+. While most of the equipment was paid for, it ate up a lot of cash and generated a lot of repair costs as it got older. Add to this the large plant and hardscape inventory that they had. A lot of it they bought in the spring for “potential” jobs. The remainder they grew on the acreage that they bought to start a tree and shrub farm.
The problem: Bill and Emily made too many “smart investments” in trucks, equipment and inventory. They were asset rich but cash poor. Their money wasn’t liquid.
The solution: Get liquid. Consider selling some of the extra equipment and don’t act on every great deal that comes along. Also, sell some of the inventory that you have for potential jobs and buy in the spring what you can sell that year.
Bidding truck and equipment costs in general and administrative (G&A) overhead.
Frank had a full-service landscape company with annual revenue just at $1 million. His field T&E costs on his P&L were 11% of revenue, or $110,000. He would include his T&E costs in his G&A overhead costs when he priced his work. Total G&A costs (including T&E costs) were $350,000 or 35% of revenue. He would estimate his labor and materials cost for a job and divide the total by 0.50. This supposedly would give him a 15% net profit margin (NPM). However, at year’s end, he would rarely see a 15% NPM on his P&L.
The problem: Frank was averaging the cost of his field trucks and equipment in his pricing. This might be OK for his maintenance and lawn care services because the amount of T&E usage was pretty consistent. However, his design/build installation work required varying amounts of equipment. One job might require just a pick-up truck and wheelbarrows, while another job might require a skid-steer and a mini-excavator. His cost estimating system would underprice the equipment-intense jobs and overprice the labor-intense ones. Guess which jobs he’d win: the underpriced ones. The more equipment he used, the less money he’d make.
The solution: Remove your field T&E costs out of your G&A overhead costs when pricing your work. Add field T&E costs into your bids as it is needed. If you only need a truck and wheelbarrow on a job, put that cost in your bid. However, if a job requires a skid-steer and mini-excavator, charge both to the job in the bid. The Dual Overhead Recovery System (DORS) puts all truck and equipment costs in G&A overhead when pricing jobs, and this is a critical mistake.
These are just two of the mistakes commonly made by green industry contractors regarding field truck and equipment costs. Contractors love equipment and that’s OK if it is paying for itself. Quite often it’s not. If it was field labor, it would be like having three guys on the payroll who were playing cards in the back room all day. Every cost in the company, especially field trucks and equipment costs, has to justify its existence and be passed onto the customer with an appropriate margin applied to it. Apply these simple rules to your field T&E costs and it should improve your bottom line.