Man hour rating (Job Costing)

Discussion in 'Business Operations' started by Ghopper3345, Dec 31, 2012.

  1. Sean Adams

    Sean Adams LawnSite Gold Member
    Messages: 3,597

    You do not price or bid based on where you are "headed", you bid based on where you are. I have owned and operated 7 figure lawn & landscape businesses and I work closely with business owners who generate as little as $100,000 per year and several who generate over $5,000,000 per year.

    If you would like to discuss this point by point, I'm game. This is nearly 25 years of doing.... and doing successfully I might add.

    If you take a scenario like I described, a business owner with little overhead and expense (either by luck, circumstance or choice), the absolute BEST move he or she can make is to take advantage of that scenario, penetrate a market and as the business grows (and expenses and debt service), so do their prices.

    I did not suggest that a market bearing $42 per hour means that this business owner should charge $20 per hour. I stated that he is able to come in at $35 an hour and grab those customers because his rate is lower.

    You mistakenly assume that his quality of work is lower or that he is a lowballing-here-today-gone-tomorrow novice who hasn't taken into account that his equipment and trucks are paid for. In fact, a portion of his $35 per man hour rate does recover his money out of pocket, and in one year I might add.

    You stated that my advice is why there is failure on this site and in this industry. In fact, the advice I give is what ultimately separates the winners who succeed from the guys who are always whining about not being able to grow their business or make any money.

    You can turn your nose up at work if you don't get your price because you think there is a certain way to do business. THAT is why many do not succeed. There are so many variables that go into determining a price, things I did not even discuss, but if you want to we certainly can.

    If you understood business or math you would quickly be able to determine that his pricing model gives him significant room for growth without tipping the scales.

    And please @coolluv, keep in mind, I am talking about a real business here, not one where you pass out a bunch of flyers in March, cross your fingers and then add up what happened at the end of the year.

    So, at $35 per man per hour, this business owner is marketing and advertising year round, working on his business, not in his business. Consistently seeking out new opportunities and new clients for his business.

    He successfully bids out at $35 per hour per man. This is a simple example.... Taking an average middle income residential northeast property where he provides 28-30 mowings, mulch, fertilizing, clean-ups and shrub maintenance, with only 2 employees servicing this property the entire year (excluding COGS at an average 25% mark-up), there will be a total of 40 hours spent on ths property, or 80 man hours, totaling $2,835.00 in revenue.

    But let's just say that BOOM-POW, as @coolluv suggests, his business suddenly is exploding and now he has to finance trucks, finance equipment, hire more people and rent a facility to work out of for the following season.

    Oh no!!! Now what? Well, let's see....

    This business owner has several options:

    1.) Continue running a real business where he is soliciting new work year round and as the business grows, so does his price point for NEW clients....hmmm

    2.) Determine what these new expenses will cost his business and determine how he can recover these new expenses and still profit which will not be difficult or costly.

    Follow me here @coolluv....

    He has to finance 2 new trucks at $500 a month each, a new facility he has to rent at $800 a month, and new equipment that he has to finance at $800 a month - total additional expense is $31,200 per year.

    Since he has 215 working days and has determined that he has 9 billable hours per day to sell for the season, he knows he has $1,935 hours to sell. With 4 employees at his rate of $35 per hour per man that means he was in the ballpark of generating $271,000 in revenue.

    Now for the sake of math and to make this easy (again without considering the multitude of variables that matter such as efficiency, organization, AR recovery, etc...) let's say that all is remaining exactly the same as the previous year in regard to clients, work, etc...

    If said business owner was generating $271,000 in revenue based on $35 per man per hour and now just to COVER the new expenses of trucks, equipment, facility that adds on another $31,200 in cost, that means he would need to now generate $302,200 in revenue.

    So he has two choices:

    1.) Being that he determined the previous year he needed $24 an hour per man to cover expenses, overhead, etc... and he was billing out 4 employees at $35 per hour, that means that pre-tax he was generating $44 per hour in profit for the 1,935 hours sold. He profited $85,140. So now he can keep all the same and take the hit of losing profit of $31,200 due to expansion or...

    2.) He can determine what he now needs to charge per hour per man to stay at the same profit level and cover these new expenses. Keep in mind he was charging $35 per hour per man. Doing the math (again, assuming he has secured NO NEW CLIENTS), he would need to generate $302,200 in revenue instead of $271,000. He has 1,935 hours to sell for 4 employees. That means $302,200 divided by 1,935 hours or $$156 per hour total (for 4 guys) or $39 per hour now per man.


    Guess what, looking good so far.

    Now he has 2 new trucks, a facility, new equipment and in order to maintain his profit fro the previous year he only needs to bill out at $39 per hour per man now. What was the going rate in his market?

    $42 per man per hour.

    Not only has he grown his business (in terms of new equipment, trucks, etc...) but he is still a less expensive alternative to his competition.

    But let's be real here.... This guy is running a REAL BUSINESS. He is not going to incur these expenses unless warranted, which means he was out marketing and advertising and getting new clients, which means even more revenue than before.

    So ya see @coolluv, my advice is not incorrect, in fact, it is spot on. It is a matter of how one runs their business, follows their numbers, becomes lean and mean when and where necessary and grows based upon new opportunity and revenue, not based on wanting a shiny new truck.

    Before anyone goes poking holes in my examples above, I was using elementary examples and numbers to prove a point. I am well aware of losing customers to raising prices, the economy, lowballers, competition, etc... But my point is, when you run your business the right way - being organized, constantly advertising, taking care of your clients, finding/training/motivating quality employees, knowing your numbers and understanding you should be operating a blue-collar business in a white-collar fashion, success is imminent.
  2. cpllawncare

    cpllawncare LawnSite Silver Member
    Messages: 2,659

    I'm so glad to see some of you guys get it, Dave you sound like me on some of the other threads, I get so sick of reading guys post about how they "have no overhead" It's impossible to run a business with zero overhead. My biggest guestion that I've yet to get answered is from a "general" standpoint what is the best balance of debt, obviously I'm going to get "NO DEBT" answers and that would be nice, but I truly believe it's a balance issue for someone like me who is trying to grow their business. I don't want to fall into the undercapitilized catagory OR the to much debt burden catagory, so there must be a middle catagory. I've sat down and ran my numbers over and over I have not come up with a good number for contuined growth, I know I can't charge $60 per man hr though and continue to grow, new work would come in so slow I would end up drowning, that's where I figured 45 per man hr for a two man crew figured about right. I still make a decent profit but it's not so high that it scares away potential new clients. I can close about 60% of my deals with this number.
  3. cpllawncare

    cpllawncare LawnSite Silver Member
    Messages: 2,659

    Well dang Sean answered my question. Thanks.
  4. djagusch

    djagusch LawnSite Platinum Member
    from MN
    Messages: 4,358

    My banker put the debt issue to me like this. He has never seen a mid to high growth company do so without adding debt. You just can't do it.

    Very slow or steady sales you can get the debt down but takes discipline to do so.

    What I have noticed is some companies do the high growth for a yr or 2. Then see them flatten the growth or slightly retract (during this time I think they are thinning the bad accounts out and managing to get debt down). Then you see the high growth again. Sort of a cycle, each level I think takes different turns in the buisness system they need in place or change to adapt for the next growth cycle.
    Posted via Mobile Device
  5. Sean Adams

    Sean Adams LawnSite Gold Member
    Messages: 3,597

    No problem. I am not trying to pick on @coolluv, but I have learned over the years that the guys who "think" they know how to run a business are actually worse off than those who admit they don't know.

    Interestingly enough, I am a big proponent of financing as much as possible - using OPM to grow your business, but only if someone knows how to run a business, manage employees, advertise effectively and sell their service. So the idea of having "no overhead" is fine, if that happens to be your scenario, and if it is, good for that person and they should take advantage of that, as long as they are able to recoup their initial investment.

    Growth in this business is relative - its based on decisions made moving forward and the sacrifices one is willing to make to allow for sustainable growth.

    Getting 10 new mowing clients does not warrant 2 new zero turns and a shiny new truck, but unfortunately many people look at it that way.

    I can't say this enough - know your numbers.
  6. coolluv

    coolluv Banned
    from Atlanta
    Messages: 4,514

    Thats not how you presented things in your original post. I commented on your flawed posts and I stand by my statements.

    You also assume that the business owner is sitting on mountains of cash in your above example. How many are starting a business that can walk away in one year and work on the business. You provide an unrealistic example as your explanation for doling out bad advice in your original posts.

    I'm not going to argue with you.

  7. Sean Adams

    Sean Adams LawnSite Gold Member
    Messages: 3,597

    I didn't think you would argue with me. That being said, my original post was a few sentences long without detail or explanation - I was participating in a discussion, not teaching a class, therefore, there was nothing flawed about my initial post. And who said the business owner was sitting on mounds of cash? Not me. And where does it indicate that it is his first year of business? Nowhere.

    With all due respect, I think you need to recognize who you are criticizing before you proclaim things to be inaccurate, wrong, etc...
  8. coolluv

    coolluv Banned
    from Atlanta
    Messages: 4,514

    I live in the real world. Most people that come to this forum are interested in starting a business because they either lost a job and can't find another due to the economy or are following a passion or dream. Most don't have unlimited funds to purchase all the equipment they need or have the amount of money it takes to advertise to get the results you specify.

    I know of several local businesses that have grown fast and are very successful. But they did so with hundreds of thousand of dollars of initial investment to be able to market the business and buy the necessary equipment. That's not the norm. I'm sure you have ran and help others run businesses that are successful. But your example was not of a new business as you stated. But you gave the impression (To me at least) that that was the case.

    Your participation in the discussion not teaching a class was misleading at best. YOU are held to a higher standard as you are the expert here. I don't have your credentials only my real world experience. I used to worry about lowballers but I have come to realize that those customers are not the customers I want. I started with what most start with.....A truck and a few mowers and very little money. It took me 3 years just to break even. I'm not bank rolled or rich. I started this because of losing a job and not being able to find one for a long time. I have always worked out doors and enjoy doing so. I enjoy what I do now.

    But it takes time to grow and learn from mistakes ....and make enough money to make ends meet. Most are like me and are learning as they grow. If I had a huge amount of cash to start with...well yeah I would be a lot further along. But like me most don't. So I stand by what I said.

  9. Sean Adams

    Sean Adams LawnSite Gold Member
    Messages: 3,597

    You are obsessed with the idea that I am referring to this kind of success based on having a lot of money to start with. I did not start with any money. In fact, didn't even have a truck - had to borrow my Mom's station wagon, return it every night with gas and cleaned inside and out.

    The young man I am referring to did not start with any money either. He is in his 5th year of business.

    In 2013 you do not need money to advertise a business in this industry. Give me $200 and some time and I can grow a business as big as I want it to be. It's about effort, salesmanship, and technology.

    You have the very unfortunate and misguided belief that it takes money or being bankrolled to be a success or grow a business....once again, very incorrect.
  10. Blades Lawn Maintenance

    Blades Lawn Maintenance LawnSite Bronze Member
    Male, from Montague, NJ
    Messages: 1,237

    Dang Sean...Mind blown!!!

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