Determining Your Hourly Rate for Lawn Care/Landscaping Business (Part 2)

Alright, so this is part two and we are talking about hourly rate and what you need to make your hourly rate in order to cover your labor costs and your overhead and make a profit. So we already talked about those things already. That was in part one. Now we are going to go to part two and we are going to actually go over some examples. These are examples of what a typical landscape business owner might see in their business if they have a one man or two man crew. So let's start with a one man crew. Going to do a one man crew. I'm going to use a different color here. So we've got a one man crew and we're going to assume this person is mowing, like I said in the first video, is that this is going to really vary based upon.

What type of services you are offering. Are you doing mowing, are you doing landscaping, what are the services you are offering? Because that's really going to determine what, what your hourly rate is, how efficient you are, is there more drive time, things like that. So first of all, let's just assume it's a one man crew and you're mowing. And so I got some notes here because I wanted to actually get the numbers right and not just do this on the fly. So we are going to do some assumptions and making some rounding and kind of some generalizations. Every single one of these numbers can vary very much. But I wanted to make a point here today as we go throughout this example here. So one man crew. One man. We're gonna assume that this employee works a full eight hours. I'm gonna change to a black marker so you all can see a little bit better. So we're gonna assume that this employee is going to work for eight hours per day. They are going to be paid 15 bucks an hour. But remember if you watched the first video we talked about how really even if you're paying someone 15 bucks an hour is really 20 because.

After L and I, all the other costs that you have to pay for that employee. So we're going to assume that this one man crew is, is going to work an eight hour day. Now remember, if they're an eight hour day, they're not efficient, they're not working at someone's house, they're not doing billable hours, all eight hours. So we're going to assume that they have an.

87.5% efficiency, efficiency rating. So efficiency. And that basically comes out down to seven hours of actual working time. Okay, so out of an eight hour day, this individual is going to Work seven. This employee is going to work six, seven hours. So that other hour is going to be taking a break, it's going to be driving, it's going to be, you know, all the other things that aren't actually at someone's job might be eating their lunch, whatever it is. Let's assume at one hour of the day they aren't super efficient, they are actually working. Not necessarily that they're not efficient, they're just driving, doing non build, unloading the grass clippings at the end of day, things like that. So seven out of the eight hours are actual billable hours. And like I said, this can determine on size of property. Like if you have smaller properties, you can. They're not going to be working seven hours. But if you have larger commercial properties, this might be less. So it's just really a really big range. But let's break down now real quickly the different costs associated with this day and with this crew. So we're going to look at the overhead and the labor cost. These are the costs involved with this one man crew. So we're going to assume that we got to Pay this person $20 per hour is the cost to the business. We're paying them 15 bucks an hour, but the cost of the business is about 20 after all the other deductions and things like that. And so for labor cost, we're getting our cost of $20 per hour, eight hours in the day. So our total cost for labor is $160. For overhead, I'm going to assume that we are going to have an overhead of $15 per hour. And the reason I'm going to assume that is, is that this individual, this one man crew, is driving a truck around the whole day. They have equipment on that truck. They have to be insured. They have a uniform, they have a manager, they have an office person that has to watch over a lot of what to do. So the overhead expense of this individual is me, 15 bucks an hour. And if you look at the eight hour day, that is going to equate out to $120 over the course of this eight hour day. So if you look at the cost, the total cost for this one man crew to operate via labor, remember there's two costs involved here, labor and overhead. We got cost of $280 for this individual to be working. All right, so what I'm going to do now is look at the revenue that this one employee, this one man crew is generating. So over here we got revenue.

So over here we got cost. The Total cost to employ this person and make them have equipment and all that stuff for mowing and the gas, Insurance, et cetera, $280 the revenue. Now on the other hand, we are going to assume that this individual has a $50. We are having an hourly rate of $50. So essentially we are charging the client $50 per hour to be there. Like I said, whether or not you're actually charging by the hour, I always suggest you don't. I suggest that you charge by the job. So you know, $50 a cut, $30, give them a set price. However, if you break down the time that you're there and it comes out to $50 an hour, that is what the number you're looking at. Now if you can increase that number by being more efficient, that's when you start making profit. But anyways, we're going to assume that this one man crew is doing 50 bucks an hour when he's working. And so his revenue over here, because remember he is only working seven hours out of the day. So he's not doing eight hours times 50. He's doing seven hours times 50. So, so the total revenue for this one man crew is gonna be $350. That's the revenue, okay? So this is the amount of money that he's gonna generate because he is making $50 per hour when he's working seven hours. Alright? So that's the seven times five, I'm sorry, times 50 is $350. That is the revenue. Now if we take the cost and we subtract it from the revenue, we got 50. 350 in revenue minus the 280 in cost. Now we come down to the profit. This is the profit that we are coming up with now. So this is the profit. It's a very important number here. So it deserves a lot of lines. The profit here on this job now or this whole day for this one man crew is going to be $70.

So what we did there is we took the revenue, we subtracted out the cost. This is the profit, $70 that, that you're going to make from this one man crew mowing lawns all day. He's working a full eight hours and this is the profit. This is like after everything, this is the bottom line. $70. Alright? This is the total amount of profit. Now what we're going to do here for this example is do profit.

Per man hour, alright? And that is. So what we're going to do is take 70, divide that by eight and you're going to come out with $8, 8.5 dollars. So $8.50 per man hour of profit. So what that means is that we take the profit, the $70 and we divide that by the total man hours worked, not actually on the job, but just what we paid him for. That's eight, eight hours of work. So he generated 8.5 dollars of profit per man hour. Alright, so now this is for a one man group. Now let's see what changes with when we look at the same example but for a two man crew. Alright, so let's work through this again together. Let's see if I don't have to erase the whole board here. I'll just try to do it piece by piece so you can kind of compare. So now we're going to look at a two man crew. So instead of a one man crew, we are now going to change out to a two man crew and see what the differences are in profits as well as how your hourly rate can change. So we are going to assume, we are going to assume that the hourly rate while they are working doesn't change $50 an hour. Now we are also going to make them work this two man crew the same eight hour day. Now the problem is with a two man crew your efficiency isn't going to be as good. The reason for that is because people start waiting around after jobs and things like for instance, if you're mowing and someone else is trimming, doing line trimmer, they are not going. The line trimming guy might finish before the mower and then sit around for a few minutes. Another example is when they are driving. Now you have two people driving. The cost of two people driving plus overhead is enormous. And so their efficiency isn't going to be as great. They're not going to be able to time exactly when someone else is mowing, that someone else is mowing and they finish at the exact same moment. So we are going to assume that they are going to have a 75, 75% efficiency rating. So these are actually pretty good numbers. So 75% efficiency rating.

Which means out of these eight hours they are only going to work six hours actually out on a job. The reason for that is because they're going to get more jobs done in a day which means they're going to have to drive around more. If they're on a lawn mowing route, they're going to be in the truck, they're going to be having more non billable hours. So they are going to work six out of their eight hours. Throughout the day. Let's keep working through the example here. So labor, we are going to assume we pay them the exact same amount, $20 an hour cost of doing business to the company. But now we have twice as much labor. We have 16 hours because we have two man crew times eight hours. We have 16 hours that we are paying someone. So now our labor is going to double. This is now going to become 300 plus and $20 of labor cost for this two man crew. Now over here at overhead last time.

We had a higher number per hour because this overhead included the whole truck, the trailer, equipment, everything. The beauty of having a two man crew is that now your overhead doesn't go up as much because you have the same truck, the same trailer, same amount of equipment on that truck. The gas is no, it's not twice as much. It's not like this is the same $15 an hour because the second guy just jumps in the truck. He doesn't need another truck. He doesn't need all the more equipment. This is the debate that people have about one man versus two man cruise. Which is better is the overhead amount. You don't have to buy all those assets, the truck, the trailer, the equipment, et cetera. So the overhead now is going to drop down to $10 per hour. $10. That's per man hour. And the reason for that again is because there's the same truck and trailer, the same equipment that the one man crew had before. However, it's not like it's 7.5, it's not half. The reason for that is because you still have management and things involved with having additional employee that does increase overhead.

More facilities, cost, more rent, things like that, insurance. So $10 per hour, 16 hours work. So now this overhead amount is going to go to 160. So what you notice here, which is pretty amazing, the overhead only went up $40. So it was 120 before. It only went to 160 by adding a second guy. The reason for that again is you don't have a second truck, trailer and all the equipment. It's the same setup. But that $40 is all the other overhead involved besides equipment, cost of fuel, etc. So and equip all that good stuff. So anyways, overhead 160 labor 320. So the total cost for this day for this two man crew for their cost of labor and their overhead is going to be a total of $480. This is the total cost for this two man crew. Now let's look at the revenue here, because they worked a total of eight hours per day each, so 16 hours total. However, they were 75% efficient. And six out of the eight hours they actually were on the job and doing things that were billable. So we're gonna take that six times by two because there's two man crew, so there's 12 billable hours. We're times that by the 50 an hour rate here, the hourly rate that they're working at $50 per hour. And so you're gonna come out with a revenue now with the two man crew is going to be $600. You'll notice before the revenue was 350 with one man crew. And now it's not $700, it's not double. Because remember, we're not as efficient with two man crew. So that's the breakdown here. Efficiency versus the cost of less overhead is the balance that you got to weigh out of whether or not you do one man or two man crews for mowing or three man et cetera. So now we have a revenue of $600. And we have. Now these numbers all change because again we're going to do revenue minus cost in order to determine our profit. This time though, our revenue is $600, that's this number here. And our costs are $480. So now instead of having $70 in profit.

Our profit margin becomes $600 in revenue minus 480 in cost. You have a profit dollar amount of $120. So $120 is our profit. And it's because we have a two man crew, we're gonna get more jobs done, things like that. Now what is the profit per man hour? So for a one man crew, he's more efficient and he was able to make $8.50 per man hour of profit. Now with a two man crew, even though we made more profit, we had to work twice as many hours. So our profit per man hour goes to six, $6.70.

So you can see here all the different variables that come into play and what points in this example, you can make your company better and make it more profitable. The number one way, the easiest way is increasing this number. So if you increase the value, the professionalism, the uniforms, how you do business and charge $60 an hour, all of a sudden in this example where they have 12 man hours of billable time, you can add $10 times 12 billable hours. So for instance, if you charge $60 instead of $50 per hour and you had this crew of two that worked a total of 12 billable hours. You would basically be doubling your profit margin. You would be doubling, multiplying by two, your profit margin because you get another $120 in profit. So, so that's the fastest way is to increase your hourly rate instantly. You can change your numbers just by increasing your hourly rate. Now you can't just raise your cost for no reason. Obviously you need to make sure that the value that you're providing is equivalent to $60 an hour and that it justifies the $60. Now another way you can do that is instead of increasing the cost is decrease the amount of time it takes for them to do jobs. You can increase the efficiency of your employees. You figure out how they need to move, how they need to operate, who needs to be mowing, who needs to be trimming. How can you reduce that 25% loss of efficiency by having that two man crew? How can you reduce drive times? How can you get a denser route? That is all right here and that is going to also determine your hourly rate because you're going to have less waste when they're actually on the job. So that's when the guy trimming is waiting for the guy to finish mowing and just sitting in the truck waiting. Things like that, increasing efficiency and reducing that time that it takes a job. So that's one way to increase your profit. The efficiency part is another way to increase your profit. This labor rate is another way to increase your profit. I don't like to play with this one. I would rather pay people more. I don't think it's a way to increase your profit is reduce your labor expense. I don't like that. I would rather pay people more and focus on efficiency and the hourly rate because that drives really hard line profit. Instead of working with dollars and cents on labor and then losing my good people, I just don't think that I'm going to be able to charge 60, 80 bucks an hour if I don't have good, great people. And so I don't like playing too much with the labor cost. Overhead is another area that you can improve on. Can you get more efficient fuel on your vehicles? Can you get equipment that's more efficient? Can you somehow reduce the overhead by having less managers in place by making accountability with all of your employees? And can you reduce the amount of office staff you have by having a good software system? This is where you can make more money right here as well. So I hope this helped. The reason I talked about this so much is because it's all boiling down to your hourly rate. And the hourly rate is determined by your labor and your overhead cost. So if you take this number, your labor 320 plus your overhead 160 plus your profit, which is over here, the 120 over here. If you add that all up together, that's your total revenue. And so these are the three numbers you gotta be watching. Labor, your labor cost, your overhead cost, and your profit margin. And these are the three things that if you basically take a business, you got costs minus expense, you got your revenue minus expenses equals profit. And so if you wanted to reduce your cost and increase your revenue, hourly rate is the fastest way to do that. I would make sure that you are increasing this number. And by doing this doesn't mean always raising your prices. If you can become more efficient, you also raise the dollar amount you're making per hour. So I hope that helps a little bit. I'm not really making a case as far as one man versus two man cruise by showing the profit per man hour. I just wanted to show that there is a difference in the amount of profitability you're going to have as you add more people to a crew. So I hope that helped. Mike Andes and if you haven't already, go to landscapebusinesscourse.com check it out. I know it'll help you so much. Thanks again for joining us. I'll see you next time.