Michael Hornung, president of the Valley Green Companies in Sartell, Minn., called me the other day. Mike has been a client since 2003. His company specializes in lawn care and Christmas decorations and, due to market conditions, he wanted to discuss price increases for 2022.
We chatted for about 20 minutes and as I later reflected upon our conversation, it dawned on me that many of the readers of this magazine probably share his concern for the upcoming year. What follows is my take on our conversation as it pertains to the pricing of products and services for 2022.
Field Labor and Truck & Equipment Cost.
Labor costs: Most of my clients could increase their sales 40-50% if they could find the labor to perform the work. Primarily due to the labor shortage, costs for the same have skyrocketed these last five years. Like any other commodity, as the supply of qualified labor decreases, the demand usually increases, as does its cost. While the following formula has some serious flaws, for every dollar that labor hourly pay increases, you have to increase your price to the customer by about three dollars. It’s roughly a 3:1 ratio. For instance, the crew average wage (CAW) for our sample three-man crew is currently $18 (($20 + $18 +$16) ÷ 3). This crew is working a 45-hour week, so the overtime factor (OTF) is 5.6%. We’ll add in a 10% risk factor because things don’t always work out as planned. Next, we have a 20% labor burden to cover costs from Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act, workers’ compensation and commercial liability insurances, vacations, holidays and paid time off for field crews, as well as 401K and medical insurance costs for field crews. Finally, we have a one-ton crew truck pulling an open trailer that cost $13 per hour. As you can see on our MS Excel worksheet (cell K8), in 2021 at 20% net profit margin, all of this translates to a $58.92 portal-to-portal man-hour price or $1,650 (cell I52) for an entire crew-day.
Scenario 1: If we plan to raise each labor rate by just $1 in 2022, the man-hour rate increases to $60.66 or $1,698 for the entire crew-day. That’s an increase of 2.95% ($1.74 ÷$58.92) or $1.74 per man-hour which is just shy of our 3:1 ratio.
However, that’s not necessarily the end of the cost increases. Michael told me that his fuel costs have increased 45% over last year. Fuel costs usually run 3 +/-1% of sales. A 150% increase on average, which I see throughout the United States, would increase our 2022 fuel cost to 4.5% of sales, or roughly an additional cost for the truck and trailer of $1.50 per hour. I’d increase the crew truck and trailer cost per hour by $2 to help cover any future increases. All in, we have a 4.3% increase ($71 ÷ $1,650) or $1,721 per crew-day for our installation crew.
Scenario 2: Due to the labor shortage, you decide to extend the crew work week to 50 man-hours per week. This increases your OTF from 5.6% to 10% and your cost per field labor an additional $0.84. In order to provide a better benefit package to help keep and attract field crews, you decide to provide five paid holidays and vacation pay. This increases your field labor burden by 4%. Next, your office staff wants a pay increase. Add to that the general inflation cost increase and your G&A overhead cost goes from $18 per man-hour to $19. These increased expenses cause your daily revenue goal for this crew to increase to $1,823 or $65.12 per man-hour. That’s a 10.5% increase ($173 ÷$1,650) from your 2020 pricing.
Conclusion. I think the recent increases in labor and fuel costs, when entered into our MSX pricing worksheets, easily justify a 5% price increase for labor in 2022. Add to this the additional costs for inflation, materials, shipping and supply chain shortages, and a 10% increase (or more) isn’t out of the question. No one likes increased prices, but in the current market of increased costs, people understand why they are necessary. The question is, “Are these costs going to come out of your pocket or your customers’ pockets?” Guess whose pocket(s) Mike’s cost increases are coming out of. Be like Mike!