Determining Your Hourly Rate - Part 1

Hey everyone, it's Mike Andes. You're listening to Landscape Business course podcast you might be watching on YouTube or Facebook. And I highly suggest you do that today because today we're going to be using this whiteboard. We are going to be talking about profit margin, we're going to be talking about hourly rate. That's really the main thing we're focusing on today. And then we're going to look at some examples of a one man crew versus a two man crew and break down the numbers, exactly what you're making profit per man hour. So very, very important today. And like I said, you might want to watch because there's going to be a lot of variety up here on the board. So I'm going to break this into two video parts if you're watching this, because I want to first talk about the hourly rate and then we're going to take examples and see how that hourly rate affects the bottom line, the profit margin of your business. So first off, let's talk about the hourly rate. So when it comes to the hourly rate, today we're going to use this number here, $15 an hour for labor costs on average. But really your labor cost can vary, your overhead can vary and it really depend, depends a lot of times on your cost of living in your area, what the average rates are to get people to come to your business for labor, for overhead, cost of living, things like that. But for the hourly rate that you're charging your customer, because really at the end of the day, we are charging by the hour, regardless of whether or not you charge by the job, we are selling time. And so even if you're doing landscaping jobs or you're doing mowing jobs and you're giving a set price per square foot, even if you, when it all boils down to it, the longer you're working at someone's house, usually the more money you're making. And so you really are working on an hourly rate, even if you don't give estimates based upon an hourly rate. So knowing that hourly rate, based upon my experience in our industry is going to range anywhere from 30 to 80 bucks an hour. I know it's a massive range. That's the hourly rate that the customer is getting charged. And, and a lot of times when landscaping owners are starting out, they are on the bottom end of the spectrum. And as they progress, as they add more features and services like for instance, irrigation or heavy grading machine operation excavators, things like that in hardscaping, they can start making the higher end of that number. And so. So what we want to talk about right now, though is before we jump into examples, I want to talk about what is your hourly rate, how is it calculated, and how do you determine this number? Because I get asked all the time, what should my hourly rate be? Or people give me a number and they say, is this enough or is this a good hourly rate to be charging? And there's no right answer. Like I said, your labor cost, your cost of living, it's all so very much interdependent. And the big thing is, what type of services are you doing? Because it could be on the 30, you could be at the 80 depending on if you're pulling weeds versus if you're an excavator, you're gonna be charging different hourly rates for those. And so, but really, when it comes down to hourly rate, you gotta know the cost behind your hourly rate. Because baked into your hourly rate is two things very simple. Your costs and your profit. And so if you don't have this equation correct and your costs are more than you expect, it's eating into your profit margin. So, for instance, if you're charging 60 dol per man hour, 40 of that might be cost, 20 of it is profit. But if you are off on your labor costs or your overhead, that's the cost portion. And if that cost portion goes from 40 to $50, now your profit margin is only $10 per hour. So it's very important that you figure out exactly how to determine your hourly rate. And how you do that is, number one, you got to know your profit. But that is only determined after your cost of labor, cost and overhead. So hourly rate, we're going to be looking at basically the hour for labor as well as overhead. So let's talk about labor for a minute. I'm going to assume throughout today that you're going to pay someone 15 bucks an hour. It's kind of standard in our industry. A lot of times people will start people off lower, like 12. If they're experienced, they might get up to 20. We start everyone at this number. That's their day one. They start there. Within a couple years, they're over $20 per hour. So we are probably a little bit higher though, than most people as far as hourly rates for labor. Because we live in Washington, minimum wage is probably going to be 15 in a few years. And so we'll probably be more on 18 to $20 starting wage in our company pretty soon. But for today, we're going to assume 15 bucks an hour is the labor Cost. Now this is the number that you advertise. This is not the actual cost of hiring someone per hour, bucks per day. And so they start thinking, okay, well as long as I make more than $120per day, I'm going to be making money. The problem with that is, number one, they didn't take into account overhead at all. But the bigger thing, the bigger issue with this as we talk about labor is that $15 an hour is not the actual cost of employing that person. There's a lot of different factors that add to this cost. There's L and I. There is as you add more employees and your payroll goes up, your insurance is going to go up. There's a different Medicare, Medicaid. All the other things that you as an employer have to contribute to in addition to them, they have to take no their take home pay. Out of this 15 is gonna look more like 11 bucks per hour. That's gonna be because $4 of that is getting sucked up in federal taxes, state taxes, all the other deductions as far as Medicare, Medicaid or whatever it is and Social Security and all of that. Like they're gonna be like 10, 11 bucks an hour take home pay. Now that's to them, 15 bucks an hour is what you advertise them. But really at the end of the day, at A$15 an hour for A$15 an hour employee, you're looking at 20 bucks per hour. The reason for that too is because as you get more people and things, there's cost of management, there's cost more cost of uniforms and the facilities that you have. So I really think that if you're paying someone 15 bucks an hour, that's what you're advertising to them and telling them, hey, we're going to pay you 50 bucks an hour. That's what's on their pay stub. Really the cost to you as the business owner is at least 20 bucks. So these are the numbers we're going to use today. And now we're going to take this into account and say, okay, $20 per hour is what it costs us to hire someone for an hour. This is assuming like this is not a very experienced person. 15 bucks an hour is not going to get you no foreman or great worker. You're not going to be able to keep someone around for years upon end at 50 bucks an hour. So this is not best case scenario, but this is definitely favoring the business owner by saying it's just 15 bucks an hour. But remember, $20 per hour is A cost now to the employer after all these other things like L and I, insurance, et cetera. So now we got 20 bucks per hour. That's a cost. Some people are like, great, anything over 20 bucks per hour, I'm going to be making profit. There's just one thing, and that's overhead. Overhead is important and I see overhead per hour. So overhead is very. It's hard to determine what exactly overhead means. And today I'm really talking about things like a truck, facilities, equipment, all the other things that go into running a business, that as you scale up your business and get more employees, the overhead is going to increase. So as you get more employees, you're going to have to buy more trucks, you're going to have to buy more trailers, more equipment, you're going to have to pay for fuel in those trucks, you're going to have to pay more insurance, you are going to have to get a bigger facility, have a shop as you get 10 plus employees and things like that, you're going to have to have middle management that isn't necessarily producing revenue, but you need them for project managers and estimators. You are going to need office people and they don't produce money either. So.

Your overhead is going to increase. So for the sake of this example here, I really think that once the time after you count in things like gas and management and facilities. And facilities. Facilities is why I abbreviate things. Utilities, things like water, electric, and then you've got rent of your facilities. I guess that kind of falls under that. But then you've got equipment, there's more overhead, equipment costs, things like if you get loans or not, it's still an equipment, it's a cost of doing business, it's an overhead expense. Insurance is another overhead expense. It just goes on and on. There's a whole bunch of overhead. But today we are going to assume under this analogy here, this is going to be about, let's say $12. Let's say $12 per hour is going to be the overhead expense to this business owner. So let's assume that this person, someone goes into business, they hire someone at 15 bucks an hour, and they start charging $30 per hour to mow people's yards. And whether or not they say to people that they're charging $30 an hour, or if they just charge people $20 per cut or mow, edge and blow, 15 bucks per week or $20 bi weekly. But whatever it is, it breaks down eventually if they actually track their timing. The hourly rate came down to it and they charge 30 bucks an hour. All of a sudden, if you add up their cost, if they just take this number, they're making 10 bucks an hour. That's fantastic. But they don't forget to take into account the overhead. And they're actually losing $2 per hour. So the more they work and more their employee works, they're actually losing money per hour.

The thing about this too, which really is amazing.

Is really that an employee isn't working all the time. So even if you're charging $30 an hour while you're at a job, while you're at the job, you're not 100% efficient. You're not working. If you're hiring someone for eight hours a day, they're not going to work the entire eight hours. They got to drive to a job, they're going to take breaks, they are going to wait around sometimes, they're going to slack off sometimes if you don't have good employees. And so this number here at 30 bucks an hour, you'd be losing even more than $2 an hour if your hourly rate was 30 bucks. Because they're not going to be working the full 8 hours a day or 10 hours or whatever you work. They are going to have other periods of time where they're waiting, driving, etc. And they're not making 30 bucks an hour. So you're going to lose a whole lot more than $2 per hour. So anyways, that is really the breakdown of how you should be thinking about your hourly rate for those in the video. I'm going to break to a second video now and we're going to go into two different examples. One is for a one man crew and how we can use these numbers. And we're going to use a specific example and work through the numbers and see what the profit margins are. And then we're going to do the same thing for a two man crew. So here we go.