Perfect Profit

When I was in high school, my algebra teacher used to tell our class about all the times when we would use the “skills” we were learning, “as we walked down the math road of life.” Those were his actual words and, of course, no one believed him.

However, for landscape business owners, algebra is an often-used skill, especially in terms of pricing services like commercial mowing. The majority of contractors in the industry understand that the first step in proper pricing is knowing the cost of doing business in the first place. From there, contractors can determine the amount to charge per hour in order to break even, and final calculations determine the percent profit a company will make on a given job.

But there’s a trap built into figuring percent profit. The fact is, just because a contractor marks up his service, say, 10 percent, doesn’t mean he makes 10 percent profit. Following are some examples of how to work the numbers in order to make the percent profit you expect.

GRAB YOUR CALCULATOR. Scenario: A client wants you to bid on an eight-month commercial mowing contract including mowing, trimming, edging, tree and shrub pruning, weeding of plant beds, and blowing and clearing debris. After measuring the site and consulting your production rates, you’ve determined that this job will take 600 man-hours to complete.

Your cost to provide a three-person crew with all necessary equipment is $150,000 per year. Assuming that crew works 6,000 hours per year (2,000 man-hours per crew member) this breaks down to a necessary charge of $25 per hour to break even.

$150,000 total cost / 6,000 man hours = $25 per hour

For the 600-hour job, total bid would be $15,000.

600 man-hours x $25 per man-hour = $15,000

Of course, working to break even is not how businesses grow, so you decide to add a reasonable 10-percent profit to your bid in order to make some money and keep the overall bid competitive. To do this, logic would say to tack on an additional 10 percent of the total cost, resulting in a bid of $16,500.

$15,000 x 10% = $1,500
$15,000 + $1,500 = $16,500

This is where that mathematical trap comes into play. The previous equation did mark up the bid 10 percent, but it did not afford the contractor the expected 10-percent profit. By dividing the amount of the markup by the final total, you can see that the percent profit is actually just under 10 percent.

$1,500 / $16,500 = .09 = 9%

THE BIG EQUATION. In order to make the amount of money he wants, this contractor has to ask, “how much do I need to mark up my bid in order to equal 10 percent profit?” In mathematical terms, this question would look like the following equation, where x is the amount of the markup and y is the pre-profit cost of the job.

   x / (x + y)   = .1

In our scenario, y equals $15,000
  x / (x + $15,000)  = .1

To solve the equation, get x by itself by multiplying both sides of the equation by (x + $15,000)

(x + $15000) (x / (x + $15,000))  = .1(x + $15,000)
                        

x = .1 (x + $15,000)

Another way to read this is

x = .1x + .1($15,000)

Or

x = .1x + $1,500

To complete the equation, the next step is to, again, get both x’s on one side of the equation. This is done by subtracting .1x from both sides.

x = .1x + $1,500
-.1x = -.1x
.9x = $1,500

Finally, dividing both sides of the equation by .9 solves for x and determines the markup necessary to gain 10 percent profit.
(.9x)/.9 = $1,500/.9

x = $1,666

With this mark-up added to the cost of the job, the contractor arrives at the necessary bid to make 10-percent profit.

$15,000 + $1,666 = $16,666

Though the math may seem like an awful lot of work – and perhaps cause a headache for those who haven’t done much algebra recently – going through these steps can pay off in the end. The contractor in this scenario just made $166 that was missed in the original bid! If my algebra teacher told me I could make $166 for a few minutes of math, I’d have taken his job for sure.

The author is Assistant Editor of Lawn & Landscape magazine and can be reached at lspiers@lawnandlandscape.com.