If you’re tired of breaking even or even losing on jobs frequently, it may be time to review your current estimating practices.
Like some other landscape contractors, you might not even have a formal estimating system. David Arnold, managing partner at Two Twelve Advisors, LLC, points out that while smaller companies might not have the resources to develop accurate production rates, even certain large businesses still practice guesstimating because that’s how they’ve always done it.
“I would suggest to all those companies, big and small, that think they don’t have time to establish a process for estimating that they should think second about that,” Arnold says. “Ultimately, it’s the ability to be consistent and stop losing on jobs. We can consistently be profitable on jobs.”
Sometimes it takes financial pain to force you to bring consistency into the estimating process, but being able to create accurate estimates job after job will allow you to be more confident and secure in your numbers.
Why Estimating Is a Struggle
The main reason landscape companies struggle with accurate estimating is because they do not know their actual costs. This includes everything from overhead costs to direct project costs. Consider the costs it takes to run your business, the costs to produce the work, and your desired net profit.
“Small business owners are usually stretched thin, so it is easier to create a simple multiplier formula to come up with a project estimate,” says Scott Burk, president of Scott’s Landscaping, Inc., based in Centre Hall, Pennsylvania. “This is a fast method of estimating but yields varied results of which most are inaccurate.”
Rather than basing your estimates off personal experience, you need to utilize a mathematical estimating process. Arnold says when you don’t take a mathematical approach to estimating, you can’t adjust your numbers to make sure the next job isn’t just guesswork as well.
Tony Bass, founder of Tony Bass Consulting, says a lot of contractors can be in a hurry when estimating and skip gathering certain details in the field. While they collect the square footage of the property, they might have failed to count the number of shrubs on the property that will need to be pruned and the frequency of pruning required.
“A proper estimating process will account for every single task that would be involved in completing a job,” Bass says.
Bass says that each and every task no matter how small should be listed as part of the estimating process. He says underestimating labor and not allocating a fee for the equipment used on the job are two of the most frequent estimating mistakes he sees. Bass says there should be an hourly rate for each piece of equipment you use and to include that charge in your estimate, especially now as inflation and acquisition costs are going up faster on equipment.
Burk adds that landscape companies should have an accurate annual budget to use as a financial roadmap for the year.
“Many companies lack the financial data required on a monthly basis to know where their company is at financially,” Burk says. “Tracking your costs on a monthly basis will show you where your company is at 12 times per year! If the company is not on track three months into the year, changes can be made to become profitable before the end of the year. Purchases of equipment should be based on the financial standing of the company and not based on need.”
Burk says another common mistake is not having accurate production rates for your company. These will vary for every company based on the different tasks and equipment you have. A company that does large retention walls regularly is going to have a better production rate than a less experienced company.
“If these two companies have the exact same hourly rate and material costs, the more experienced company is going to have a more competitive price to build the exact same wall then the less experienced company,” Burk says. “There is nothing wrong with this. It is just the fact that the more experienced company is more efficient in that particular scope of work. If you know your company’s actual production rates and use them to bid your projects, you will become much more accurate and you will get the projects that you are most efficient at.”
Another issue is when there is a disconnect between the estimating staff and the production crew.
“Closing that loop and making sure you’ve got consistent feedback and communication between the estimator and production is critical,” says Andrew Dickson, vice president of operations with LandOpt.
Dickson advises having a subject matter expert look over the draft the estimator produces to make sure it’s realistic and accurate. This helps create ownership over the budget from the start of the job, instead of shifting the blame when a job runs over. Dickson says it’s good for estimators to have a strong understanding of how the work is done in the field.
“The production person, when that estimate gets to them, may have a completely different way of looking at the job or the estimator didn’t really think through it,” Dickson says. “So, it’s critical to have someone that’s been out in the field to be on the estimator.”
Crews should also be aware of what their budgets are and what they’re trying to achieve on each job.
Adjusting Rates for Inflation
If you already have an estimating system in place, you could still be losing out if you are not keeping your costs up to date, as inflation causes price increases across the board. Dickson says if you are using an Excel spreadsheet to calculate your estimates but haven’t updated your costs and production rates recently, you can find you’re not performing well three quarters into the year.
“With costs fluctuating as much as they are in the current market, watching your actual to budget costs each month might lead you to adjust your overhead rate mid-season this year!” Burk says.
Because prices are so unpredictable, Bass encourages having language in your contracts that allows for change orders as material prices shift.
“Make sure you’re getting written quotations from your vendors in advance,” Bass says. “Second, request that they give you an expiration date of how long the quote is for. If you’re able to get an expiration date, then communicate that with the customer in advance.”
Some estimating software packages will update material costs automatically when a vendor changes their prices, but you should be reviewing your estimating system’s cost at least annually. Bass and Arnold suggest reviewing your costs twice due to the current market.
When calculating the hourly rate of your equipment, Bass says you need consider the inflation rate in the replacement cost of equipment.
“We’ve been calculating inflation rates on future costs of equipment, 2 to 3 percent for the last 40 years,” Bass says. “Now, equipment is going up at rates of 10 to 15 percent per year. Many contractors are missing this inflation rate in the replacement cost of their future equipment.”
With the rapid inflation going on right now, Arnold suggests not making your estimates so tight.
“If I estimate plant material, a one-gallon shrub, is going to cost me $5 and if it costs me $5.50 or $5.75 and that’s going to be detrimental to my gross margin, that’s potentially a problem,” Arnold says.