HIDDEN COSTS, LOST PROFITS

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Landscape estimating specialist, Colm Kenny MSCSI MRICS MILI provides a simple method for integrating hidden costs in landscape pricing

To succeed as a contractor, you must price projects so they cover your labour costs, material and operating costs, and still make a decent profit. Contractors are generally good at calculating their material costs, but not so good when calculating their true labour or overhead costs.

When I ask contractors what their yearly operating costs areas are, they often answer in the range of 10-15%. However, operating costs are not a percentage of costs or sales, and they should not be viewed as such. You don’t pay your staff a percentage of the jobs you undertake, do you? Your operating costs are fixed, covering every expense for your company to stay open and do business during the year regardless of how much work you take on. Many contractors don’t know their exact job costs, equipment costs and overhead budget, and consequently don’t know how much profit they are making or should be making on any given job. Without an understanding of your numbers, you will end up busy and in debt instead of productive and profitable.

It’s easy to see why most landscape contractors are never able to answer me when I ask them what their overhead costs are. On most construction projects, main building contractors are given a fully itemised bill of quantities where they fill in their rates and a preliminaries section, which outlines the project particulars including requirements of both the client and design team. This element gives the main contractor the opportunity to price the overhead costs (also known as indirect costs), as well as the direct expenses of the project. In my experience, main contractors have a far better handle on their costs because they are given a formal opportunity to price them on a regular basis. Indirect costs include general offices expenses, phones, broadband, accountancy fees, travel expenses, marketing, membership subscriptions, software subscriptions, finance charges… the list is endless. Direct expenses include site management, temporary accommodation, site storage, coordination of subcontractors, attendance at site meetings, project insurances, and any working restrictions such as having to work at night time. When a main contractor is seeking a quote for the landscape elements of a project they generally send you the two relevant elements from the pricing document. These are usually element (40), which quantifies the hard landscaping and element (80), which quantifies the soft landscaping. In most cases, the main contractor will not issue the preliminaries section of the pricing document. The landscape contractor must account for these regardless as the job still has to be coordinated, meetings attended, materials ordered, documents managed, health and safety training provided and so on. The practice of not issuing the preliminaries section is not just confined to the landscape subcontractors. The majority of subcontractors, with the exception of mechanical and electrical contractors, usually don’t receive a formal preliminaries section.

While you may not be given a formal invitation or opportunity to price all these hidden costs, they need to be added to your overall tender sum. This can be done in two ways. The first is simply to add a line to your quotation, call it preliminaries, and put the figure beside it. While it might be a quick and convenient way to go about covering your indirect costs, the method I prefer is to calculate and account for these costs by recovering them in your labour rates. It is more accurate, and sometime less controversial. A main contractor’s quantity surveyor might get offended If he sees a one liner inserted into a pricing document with your preliminaries cost beside it, but if it is factored into the rates for each item they are none the wiser.

The first step in implementing this method is to calculate your indirect overhead costs. It might be best to look at costs from last year and adjust for projected increases in items such as insurance and wage inflation, and then divide them by the total number of direct labour hours you’re forecasting for the upcoming year. The result is an estimated amount for overheads you need to add to every projected labour hour.

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Calculating costs

Here’s a simple example of how the labour cost overhead recovery works. Let’s assume you are a paving contractor, who supplies labour only to main contractors and you have three men paving at a wage cost to you of €20 an hour. You can bill the three men out at 40 hours per week, 50 weeks per year, for a total of 2,000 working annual hours per employee per year. Let’s assume your annual overhead expenses are €60,000. If you divide €60,000 by 6,000 (2,000 man hours x 3 = 6,000), you will see that the overhead recovery rate would be €10 per man hour. If you add the €20 each man is being paid to your overheads, you would have a rate of €30. This €30 is just the cost to you before profit which you still have to factor in. It would also be prudent to add a factor for working days lost, and I don’t need to list out all the reasons why you might lose days.c: 64, m: 23, y: 90, k: 41Of course, this is the most basic example, but if you expand on this you can calculate the exact cost you need to plant each tree or shrub or any other scope of works. For instance, c: 44, m: 16, y: 90, k: 0think of a soft landscaping project where you have 100 specimen shrubs to plant, which you are buying at €3.50 Font: Agenda-Light each. Your labour rate is €30 and it’s a Tuesday after a long weekend. It will take five hours to set out the plants and plant them. That gives you a cost of €1.50 to plant each one; the arithmetic is €3.50 + €1.50 = €5.00 before profit. And you need to factor in other costs such as travel time, fuel and any other direct expenses you may incur.

My principal advice is to know your costs and manage your business by the numbers. Numbers don’t lie, and while gut instincts are a good measure, I prefer to use an accurate calculations coupled with good intuition. Gaining a more accurate understanding of the true costs to run your business will help you get better control of your bottom line and increase your profitability. ✽

COLM KENNY, MSCSI

MRICS MILI is unique in Ireland in that he is both a chartered quantity surveyor and a Landscape Architect. He provides cost consultancy services to landscape industry professionals, technical advisors, contractors and facility management companies. He can be contacted on 086 874 4300 or by email info@landscapeqs.ie

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