Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Too many lawn maintenance contractors “wing” it when it comes to determining how much to charge for their services. Calculating an accurate hourly rate is essential if you are going to cover all of your costs and earn a reasonable net profit. Editor’s Note: You can see the worksheet for these scenarios by visiting bit.ly/lawnwebextras.
I’ll use both a bottom-up and a top-down approach to determine how much to charge. By bottom-up, I mean that I’ll calculate all of the field costs (field labor, labor burden and equipment) for this service. Then I’ll add general and administrative overhead and a reasonable net profit margin.
By top-down, I mean that once I calculate what I think is a reasonable hourly rate, I’ll then ask if my market will accept that rate. Will the market support such an hourly rate?
How it works in the field.
First, we calculate how much we need to charge for a day for this package (see my MS Excel worksheet “181.0 Two man mow crew.xls”). The costs for this scenario are as follows:
- The average wage for the crew is $16.00
- Overtime adds 10% to this figure or $1.60.
- We apply a 10% risk factor to the hourly rate or another $1.60.
- Total cost per man-hour is $19.20 (16 + 1.60 + 1.60).
- Labor burden (FICA, FUTA, SUTA, payroll taxes, insurances for workers’ compensation and liability, paid time off, etc.) adds 20% to this cost or $3.84.
- The truck and trailer costs $15 per hour or $120 (8 hours x $15) per day.
- The general and administrative (G&A) overhead cost per man-hour is $12. We use a unit cost per man-hour of $12 because applying G&A overhead as a percent isn’t accurate.
- We desire a minimum 10% net profit margin (NPM) for this package. A 10% margin is equivalent to an 11.11% markup. You calculate the 10% margin by dividing the break-even point (BEP) by one minus the desired NPM (1 - .10 = .9).
Next, we add up all of the costs:
- 8 MHrs on site + 2 MHrs mobilization per person at $19.20 per man-hour totals: $384.00
- To this we add the 20% labor burden or $3.84 per man-hour: $76.80
- Next we add the field equipment costs by multiplying the average run-time hours per day by the cost per hour (CPH) for each machine.
- 5 hours for the 48-inch ride-on mower @ $12 CPH: $60
- 3 hours for the 36-inch walk-behind mower @ $6.50 CPH: $19.50
- 1 hours for the 21-inch push mower @ $5 CPH: $5
- 5 hours for edgers, trimmers, blowers, etc. @ $4 CPH: $20
- Total cost for field equipment: $104.50
- Eight hours of truck and trailer time @ $15 per hour totals: 120
- The total direct costs (TDC) are $685.30
- Add the G&A overhead cost at $12 per man-hour (20 x $12.): $240.00
- This gives us our break-even point (BEP): $925.30
- We then add a 10% margin to the BEP ($925.30 ÷ (1 - .1)) = ($925.30 ÷ .9): $102.81
- Our daily revenue goal for this crew is just over $1,000: $1,028.11
Analyzing our daily revenue goal.
This two-person crew needs to generate just over $1,000 per day in 20 man-hours to achieve a 10% net profit margin. This is a little over $500 per day per person. If this crew can cut an average of eighteen lawns per day, the average price per lawn at 10% NPM is $57.12. At 15% NPM, the average lawn price would be $60.48.
Many (probably most) contractors would have a minimum one man-hour charge to drop their tailgate. In our scenario, it would probably be $50 or 55.
A 20% benchmark for “windshield” time (load/unload, drive time, etc.) is a good goal for such a crew. This translates into an 80% curb-time (time on-site) benchmark.
If you felt confident about your daily amount of curb-time, you could charge a curb-time rate.
To calculate your curb-time rate, simply divide your daily revenue figures by the average curb-time man-hours per day.
- Curb-time Man-hour TDC is $42.83
- Curb-time Man-hour BEP is $57.83
- Curb-time Man-hour 10% NPM is $64.26
- Curb-time Man-hour 15% NPM is $68.04
I’d argue that given the costs in our scenario, a bottom-up analysis of the rates that we’ve calculated shows that they are reasonable and accurate. You have to apply them to specific markets to determine if they will fly in a given market.