Hours and Margins - Watch Out!
I was chatting with a client recently and he posed the question, “How is it my crews are “hitting” job hour budgets and our margins are down?” This is a common question we hear, especially when the focus is on achieving hourly over/under results. What is often overlooked is the unit cost of those hours. This may seem obvious, but left unaddressed it can become a very expensive oversight (see “Expensive Problem” below).
Why does this happen?
The source of the problem is both macro and micro. The macro reason is the increasing cost of labor across the board. H2B wages rates are higher than they have ever been, and a robust economy has increased competition for the same labor pool… as construction businesses outbid landscape companies for talent. The micro reason has more to do with business management software and systems. Specifically bidding software and the labor rates established in the item catalogues of that software. Simply stated, these rates may be outdated and not reflect real payroll rates. This problem is compounded by multi-year contracts and construction projects that were bid from six months to two years ago when payroll rates were lower.
What can you do?
The first practice is catalog maintenance. You must establish a monthly process of reviewing actual average payroll data to “update” the hourly labor bid rate in your item catalog to ensure that future and proposals are priced at the most recent labor costs. In the Real Time Route Adjustment table that number must be updated. In my example $16.98 is the actual cost, the $15.60 rate is outdated. The $16.98 should be used as it is a more accurate cost rate.
The second practice is harder and it is schedule and work ticket management. You must establish a daily process using actual jobs/work tickets on a schedule board. NOTE: These job hour budgets “come directly from the job estimates”. Everyday when the crew clocks into the landscape software application, an actual AVERAGE cost rate is calculated for the crew. This average crew cost rate can be flagged when that rate is higher than the labor rate used in the estimate. This information provides the supervisor with the ability to MAKE A DECISION whether to adjust job hours for the crew in order to maintain the original gross profit margin. In the Real Time Route Adjustment table that adjustment - using a 10-hour job as an example - is 9.37 hours. This means the allowable budget for the crew that day can’t be 10 hours, it has to 9.37 hours. Were the crew to use 10 hours your over/under hour report would look just fine, but your gross margins would not.
I am not suggesting that quality issues, service issues etc. be ignored… they cannot be. But at a minimum you have some options to managing the gross margin. In fact, were this a multi-visit weekly maintenance contract, I would not only employ these strategies, I would create a “bank of hours” report to manage the margin over the entire contract time frame. It’s not a perfect system, but it is a good place to start.
Real Time Route Adjustment
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