Understand your direct costs – intimately

Understand your direct costs – intimately

To make more money, it’s critical to have an accurate estimating program in place.

December 6, 2010


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 three of a 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

Today’s podcast will focus on: Making more money by improving your systems and processes.  

Over the course of this series, understanding gross margin has played an integral role in making more money in your business. As a review, here are some of the most common ways gross margin goes down:

•    Turnover of personnel
•    Having the wrong customer
•    Inaccurate estimating
•    Operational execution
•    Increase in costs without a price adjustment; insufficient increases
•    Scope of work change without price adjustment
•    Extra work performed without billing
•    Inaccurate job costing
•    Basic administration, or lack thereof
•    Lack of mind set
•    No system or process in place

Key improvements to your financials, without raising your prices, can and should be made in the area of gross margin. Since raising prices is probably not high on your list of options, we will begin with how to manage your direct cost side, or how to lower your direct costs in these two areas:

•    Workforce at the foremen level and below
•    Material cost

So this is what we are focusing on:
•    GROSS MARGIN –  Revenue minus Direct Costs

Three areas where landscape companies can save on direct costs and increase gross margins.

1 – Define the goals and have measurable benchmarks
•    Have clearly defined and understood goals
•    Define expected gross margin goals for each area of revenue – maintenance, enhancements, irrigation, installation, snow
•    Give ownership at the closest level to each revenue all the way to the crew level if possible
•    Define and assign goals
•    Set goals for improvement with specifics and with time frames to accomplish  
•    Track regularly – weekly if possible

Remember: “What gets measured gets managed, what gets managed gets improved.”

2 –Training and certification programs
•    Start with the desired results in mind like – quantity of workload, quality of work, efficiently performed work and work that is performed safely
•    Verify skills are learned through a certification process
•    Have rewards for new ideas that get the company more productive

3 – Have a good estimating process in place
•    With so much pressure being applied on pricing it becomes even more important to have an accurate estimating process in place.
•    Triangulate your estimating through several vantage points:
o    Measure it out. Use square foot measurements then apply production rates to these measurements
o    Price per square foot method. Measure the job and define categories like turf, flowers, beds and assign a price per square foot
o    Do a field estimate with your supervisors giving crew hours to do the job: like three guys here for three hours per week = nine hours per week
o    Compare the job in size and scope with another job you have that is making money

To make more money, it’s critical to have an accurate estimating program in place.

The next Grow Show podcast will review three more ways to increase your Gross Margin simply by having the right systems in place.


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