Overhead Recovery (the reason you feel lost) - Ep.71

Hey, everyone, it's Mike Andes, and you're listening. You might be watching to the Landscape business course podcast. The video stream here on YouTube or on Facebook. Thank you again for joining in. Today's gonna be a short episode, but I had a couple people email me in the past 24 hours about the same thing. And it is overhead recovery. And if you're just starting out, you might have never really thought about overhead recovery or what it even means. But we are talking about something that, in my opinion, eats into the profit margins of many landscapers. And it's why they sell so much, you know, jobs. And up front, they looks like they're gonna make a bunch of money. And at the end of the job, they realize they didn't make any money or they realized. They wonder where the money went. It just disappeared. And all of a sudden, they did a great job, they thought, on the project, and they thought they made good money on it. And yet there's no money in the bank. There was no money made on the job. And so a big part of this is overhead recovery. So when we talk about overhead, it's really a cost of doing business. So, you know, there's certain fixed costs that are involved in running a business, and then there's variable costs. So you've heard me probably talk about this before. In our industry of landscaping and lawn care, we have a high variable cost. What that means is as. So if we got a graph here, as you do more and more work, the variable cost also correlates with that. In other words, the more work you do, the more cost you have. This would be your revenue, your revenue. As you do more revenue, your cost. Your variable costs.

Also increase. They are closely correlated with your revenue. There are certain economies of scale, so it might not exactly be parallel, however, as as your revenue increases, your variable costs go up. Your variable costs are things like labor, materials, et cetera. Your biggest cost centers are usually variable costs. The more work you do, the more costs you have. Now, there's another cost, though, that is fixed cost. And these are things that regardless of whether or not you sell a million dollars this month or $10 this month, you're gonna have a certain level of fixed cost costs. Okay, so these are fixed costs right here, fixed cost. And these are going to include things like.

Rent. If you have a property, they're going to include things like payments on your equipment. It's going to include things like insurance. And usually this isn't exactly right, because usually your fixed costs are going to go up slightly according to Your revenue, you're going to get more fixed, fixed expenses, fixed costs as your revenue increases. So maybe more accurately, it should be something like this. However, your fixed costs don't change. So if you're, if your month, I mean, sorry, if your year looks, your revenue goes like this.

You know, and this is, you know, spring and summer and things like that, busy up here and winter on these other sides, your variable cost is going to correlate with that. However, your fixed cost isn't going to change that much. And this is where people get into trouble in the winter when their fixed costs are high, their revenue is down, variable costs are low. They're not hiring more people, they're not having a bunch of materials that they have to buy. But it's in these places where people really start to fall apart in their business and cash flow when it comes to landscaping. However, when we talk about overhead recovery, the big thing we want to talk about is like, first of all, what is overhead? So overhead is a cost of doing business that isn't directly correlated with a specific job. For instance, if you go to a job, you're going to budget, you know, what are your materials, what's your labor? Very few business owners. Then think about the other costs involved with doing that job. What's the cost of insuring all the trucks that are going to drive to that job? What's the cost of having workers insurance, workers compensation on all the employees that work on that job site? You know, that might cost you just that, a couple dollars an hour. And so the cost of insurance, the cost of fuel, of driving people back and forth to that individual's house, yes, you might have 50 hours on that landscape project budgeted for man hours. However, have you factored in to your hourly rate, your overhead? If you haven't, you need to do it in other places. So there's two ways to do what I'm talking about today. I'm talking about overhead recovery. And you can do it two ways. One is bake it into your hourly rate. So if you're charging $50 per hour, $50 per man hour.

And you have, you want to recover $10 per hour of overhead per man hour, you will need to charge $60 per man hour and say, well, how do you know that your overhead is $10 per hour? What you'll need to do is take all your expense list, see what is considered overhead, then like what are fixed and your rent and your insurance and gas expenses, and then divide it by how many hours that you accumulate. You cumulatively hire throughout that entire month. So let's say it's $10 per month, $10 per hour of overhead expense that you have to charge. Now, this is the rate you are going to charge the customer, all right? Because it's going to include your overhead recovery. So this is way number one. However, I find a lot too far. Too often what people will do is they start fudging these numbers like, oh, well, Maybe it's not $10 in overhead recovery on this job, things like that. So this is another alternative way of doing this. When you're looking at a job, you're going to be looking at labor, materials, and instead of trying to bake, maybe you're against raising your hourly rate, for instance. Well, let's do this. Let's try to get your overhead recovery on three different areas. So these are three different areas that you can get your overhead recovered on and bake it into your pricing for your jobs. So number one is materials and supplies. So this is going to be everything from soil and mulch that you use on a job to the fertilizers that you use. All of that. A lot of times what people will do on their estimate is 60 man hours, and then they'll charge the cost of their materials and supplies, but they'll charge those at the cost that they get wholesale. So, for instance, for materials.

At our company, we might get our mulch for, say, $20 per yard. But when I go to an estimate and I'm going to use 10 yards of material, I'm not going to charge them $200. I'm not going to charge 200. That's the cost to me. However, I'm going to charge them $35 per yard and thus charge them $350. For. For those 10 yards of mulch, you say, well, you're charging more than your cost. Yes, that $150 that I make here is overhead recovery. That $150 is going to go into the truck that I need to haul that amount of material. I have to go. You might have to go and pick it up from a depot, a supplier depot, or we have to warehouse our materials at our shop. So we want to make sure we open, take that overhead and get it back. And that cost of having to retail and store all of that material, we want to make that back in the estimate. So when I go to a job and I have 10 yards of mulch, I'm not charging my cost. I'm charging the retail value of that product and the markup. There is overhead Recovery. So materials and supplies, that's the first way that you can recoup your overhead. Number two is equipment. A lot of people don't think about this one. And that is, as you get more and more equipment, get bigger and bigger and bigger pieces of equipment. For landscaping specifically, you stop thinking about the cost that it takes to get that piece of equipment. For instance, if your hourly rate is $60 per hour and someone out on a mowing crew and they're making 60 bucks an hour when they're at a job, when you have a landscaping job and you have a $50,000 track loader or a $50,000 excavator, to charge the same hourly rate of $60 is really crazy. Because one guy can have a push mower, a weed whacker, and a blower and a small trailer and a small truck and be out on his way making 60 bucks an hour mowing lawns. To then have a same. The operator that has greater experience, you have to pay him more. And he's hauling a big truck and a big trailer with a big piece of equipment that you paid a bunch of money for. To be making him then only charging the customer $60 per hour for his time is crazy. So what we do is we still have our same hourly rate across the board, whether you're mowing lawns or you're doing excavator work. But we make sure we recoup the cost that $50,000 machine by charging what it would usually cost us to rent. So if I was gonna rent that piece of equipment, it might cost me $299 for the rental of an excavator for a day and. And getting it delivered to my job site from a rental company. Now.

Instead of raising my hourly rate and making it more complicated, I am just going to charge $299 per day when I am using that piece of equipment on a job site. So what we do is when our pricing list for our estimators, all they need to do is put how many days we need each piece of equipment. That can be everything from an aerator to a sod cutter to an excavator to a track loader, a skid steer, whatever piece of equipment that we're using that's bigger than just a regular mowing crew or just hand tools, we are going to make sure that we are recharging for that. Even though we bought it, Even though there's no direct cost to us, we don't have to pay $300 for that track loader. To be there, we paid it, there's no debt on it. It's free and clear. However, we will still charge that 299 as if we were going to rent that piece of equipment. And so if someone works say a 10 hour day on that piece of equipment, you know, $60 per hour is their labor rate. However, we have charged $300 and over the course of that 10 hour day, basically $30 per hour has been in overhead recovery. All right, so at the end of the day the customer is really getting charged $90 per hour, which is much more accurate for equipment operator on a very piece of expensive piece of equipment. With a big truck trailer like these are cost, you have to figure because a lot of people will do this. Well, great. I have an excavator, I have a track loader. I can just charge my $60 per hour and beat everyone else's prices and everything is fine and good. However, they forget that they're going to have to pay someone $25.

Per hour for labor. Labor they're gonna have to there and they're going to have to charge an additional, let's say $5 per hour for fuel and insurance. Then they're going to have to pay an average of $5 per hour for a truck. Getting that truck. And then they got a trailer, the massive trailer, the equipment hauler. It might cost you seven, eight grand. When are you going to recoup that money? Then the piece of equipment that they got a loan on, that's going to be additional 20 bucks an hour in cost. These are real costs that people don't figure in. And then they look back and they well, I was charging $60 an hour. Isn't that enough? Yes it is. But you weren't taking into account of all the overhead in equipment that you bought. And so whether it be sod cutters or rollers or whatever, we are using heavy pieces of equipment. We are going to make sure that our estimators figure that in by having how many days we are going to need that piece of equipment. And if we own it, we still charge the cost that we would otherwise have to rent that piece of equipment for. Number three way that you can. The third way that you can recoup your overhead is through debris charges. So this is not going to work on mowing, mowing estimates, this is not going to work. You don't want to charge people extra to bag their clippings based upon how much they get. That being said, you should charge more if you're bagging, clippings so we give people option if they don't want to beg their clippings, they get to go down one pay category in our pricing matrix, which is like five or ten bucks. So they save money if they don't haul away debris. And that's one way that we kind of figure that into our mowing. It takes longer to bag the clippings and things. However, when it comes to landscaping jobs, leaf cleanups, trimming trees, so many people do this again, they will charge their hourly rate and they say, oh well, all it is is labor. It's very simple. I don't need equipment and it's very simple. If I am going to have 24 hours, three guys there for eight hours, I'm going to charge 24 hours times my hourly rate. And that's fine and good, all labor. But they Forget that there's 20 yards of debris that they're going to chop up from trees and leaves and all that junk. Now you might say, well that's easy. I'm just going to take it back to my shop and I just burn it there. Well, the time it's going to take you to burn it is another cost, another overhead cost. That person while they're burning that for a day and you have a big burn day every couple months, or maybe you just bury it, maybe just dump at your shop. That's still adding value to the client and you can charge for the debris. So one way, another way you can take care of your overhead cost is charge for the debris. So what we do is we have different costs. For instance,$99,199 different costs that are based upon how much debris we are going to accumulate. Is it just going to fit in a back of a pickup? If so, that's going to be 99 bucks. They can fill that up as much as they want. It might be sticks and branches and leaves and weeds or dirt. Whatever it is, that's the price. We will bring it to our shop, we will then move it to the dump later on once it gets larger. So like the handling of those materials, moving that material is all overhead cost. You're not at the job site, you're not making money. So you got to figure that in for maybe 10 yard dump trailer or a 10 yard dump truck that you have is going to be 199 and you can figure out different sizes or things like that. But keep it simple because now when an estimator goes to a job site, this is how they should be doing it. It's very simple. When it comes to estimating, you got materials.

Materials. And then you have your labor costs. So your hours, how many hours are you at a job? And a lot of people forget the last one, which we're going to call overhead recovery. All right? However, what we are going to do is, is really just bake that overhead recovery into our equipment costs per day into our materials. So for instance, when this estimator goes out to an estimate, he says, okay, I need 10 yards of.

Gravel.

And I need 2 yards.

Of bark and I need, let's say 20 pounds.

Of lime. Alright, then you got your hours. All right, so let's say this job is going to take two guys an entire day. So let's say charge them 16 hours of labor. And then over here we are going to need a track loader for the entire day. And we're going to do it all in one day. 16 hours, two guys, one day. So over here we're going to charge for our equipment. Equipment. And this is going to be one day track loader.

Alright, then what's going to happen is the estimator is going to take this. They're going to look at your price matrix, which you should have standardized pricing. Especially if you're in the course, you know exactly what this is all about. You need to have standardized pricing. Then at the office, they're going to take this. The office or the estimator, they're going to be, okay, 20 pounds of lime. That is going to be, let's charge $3 per pound. And so they're going to be $60. And a lot of people are like, wait a second, I can get 20 pounds of lime for $10. Yeah, but that $50 is overhead recovery. That extra that you're making there, maybe we don't charge $3 per pound. You get what I'm saying though? Let's just say, you know, even if you did, let's say the cost $20 to buy this lime. And so you made $40 overhead recovery on this. Two yards of bark you might charge. Let's say you're going to charge $40 per yard for your bark. So now you're at $80 cost to the client. You say, well, wait a second, I can buy that for $20 per yard and you're charging the customer 80. Yeah, but the extra 40 you make there is overhead recovery, 10 yards of gravel. Okay, well you say, well, I can get that for $20 a yard too, but you're going to charge $40 per yard. And now it's $400 instead of 200. That extra 200 is an overhead recovery. Now, all of a sudden, you've made $40 from here. You have made $40 from here, and you've made $200 from here in overhead recovery. So 200 from the gravel, 4, 40 from the bark, because you charged an extra there and $40 from the lime. Now you have recovered $280 in overhead recovery. That is profit for some people. But really, at the end of the day, these are costs that you're just not taking into account right now because most people would just take your hours. Let's say I'm charging $40, $40 per man hour. And so I'm going to go to this. I'm going to charge $640 for the day. 16 times 4. That's correct. So $640, that's $40 per man hour.

At 16 hours for the day. $640. Most people would charge their $20 for their lime, their $40 for the bark, their 10 yards of gravel for 200, and then they would add it to this, and then they would say, $640, plus the cost of my materials and I'm done. But they forget about overhead recovery and overhead recovery. Charging $299 over here. So this, at this job, this job could have been a great job and all. But just by factoring in overhead, you've been able to add 299 and $280 to the bottom line. So 6, 2, 8 0, that's 400, 4, $579. An extra $579 in overhead recovery. I promise you, if you didn't charge this and you didn't charge us overhead recovery, you would lose money on this job just by charging your hours and then your cost of goods, because you're going to have to go pick up that gravel, you're going to go pick up that bark, you're going to have to pick up that line. You're going to need a big truck and trailer to haul around this track loader and pay the loans on that track loader. These are all important things that most people don't think about. And then they wonder why they don't make any profit off on a job. So I take into consideration your materials, your hourly rate, your equipment, your supplies, and see if you can factor in your overhead by charging retail, pricing a little bit of a markup on your supplies and your equipment, and then making sure. Or the alternative is on your hourly rate to bake it in. So instead of going 40, you just say, okay, well we're going to charge 50 bucks per hour. However, the best way to do this is baking the pricing that the retail pricing into your materials cost that you're getting at wholesale as well as charging when you have more equipment on the job site. So I hope that answers some of your questions. I know that's not the perfect answer. Some people will disagree with how I do this. However, this is the cleanest way to do it because the more equipment you have and bigger equipment and things like that on a job site, you will then make more profit which will cover the cost of buying those pieces of equipment. So this is really my opinion, so some people differ with me, but I hope it helps you Again, this is Mike Andes. He was listening to landscapebusinesscourse.com thank you all so much for joining the course and being part of the community. Quick announcement is I've changed my email address. Mikelandscapebusinesscourse.com still works. However, we've been having some glitches with our server and so I changed it. Infoandscapebusinesscourse.com and stay tuned because January 2019 we're going to have a landscapers conference. It's going to be called Landscape Summit 2019. Stay tuned for the details. We're going to have a live in person seminar and conference with a couple hundred other landscape business owners and we're going to see what we can do together. Thanks so much. Thanks again for listening. Mike Andes, landscape businesscourse.com.