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How to measure efficiency

October 22, 2014 -  By

Another day, another tool forgotten at the shop. Someone left the site to drive back to get it. Then someone else had to drive to a vendor to get more stakes. The Simpson job was supposed to be finished in five days, but it’s day seven and counting. The mistakes never stop, but is this normal?

Just how bad, or good, is your company? There isn’t a contractor reading this article who doesn’t know he could be more efficient, productive and profitable if it weren’t for mistakes. But how much more? Can you measure what these types of slip-ups cost?

We like to keep things simple, so we use a simple metric—our efficiency rating—to measure productivity. This rating compares our actual sales to our potential sales. It compares “What did we earn?” with “What should we have earned?” It isn’t a guess. With a few basic numbers, you can calculate your potential. You need:

• Total payroll hours for field staff (no office staff);
• Total job expenses (materials, subcontractors, other and equipment, assuming you don’t count equipment as overhead); and
• Default/average markups for pricing.

Now, let’s use a sample set of numbers for a so-called “average” landscape company:

• Annual payroll hours (field staff) = 15,200;
• Annual equipment expenses = $120,000;
• Annual material expenses = $250,000;
• Annual subcontractor expenses = $25,000; and
• Annual rentals and other = $5,000.

You’re supposed to charge these job-related expenses on your estimates. If you apply your pricing system to these costs, you can estimate what your company should have sold this year. Start with labor. The aforementioned company has 15,200 field labor hours. At an average charge-out rate of $45 an hour, it had $684,000 in potential sales from labor.

Now you can calculate what you should’ve earned from your other expenses. Apply your pricing system to your job costs to estimate what you should’ve earned from those costs. For the example in the chart on page 50, I used a multiple overhead recovery system to add overhead and added a 10-percent profit to estimate what you should’ve earned based on these costs.

To price work correctly, multiply the cost by 1 + the overhead %, then divide that total by 1 – the profit %. For example: $120,000 x 1.25 (25% overhead markup) = $150,000. And $150,000 divided by 0.9 (which is 1 – .10, our 10% profit) equals the estimated revenue ($166,666). Confused? Watch the video at http://bit.do/profitmargin, which shows you how to fix a common pricing mistake.

Two numbers tell you exactly what your sales potential is: $684,000 (sales from labor) plus $506,942 (sales from other job costs) equals $1,190,942. If everything went perfectly, that’s how much you should’ve earned this year, but your sales were $900,000.

It’s simple to calculate efficiency. Divide actual sales by potential sales: $900,000 divided by $1,190,942 equals 75 percent. The sample company earns 75 percent of the revenue it should be earning in a perfect world. That doesn’t seem too bad, until you think about the dollars—more than $290,000 was unaccounted for. That’s potential sales lost to mistakes, unproductive time, job overages, etc. Consider this: It’s like loading $1,800 in the back of a truck every workday and driving down the road letting the money scatter into everyone else’s hands.

The best companies in the industry tend to be 85 percent to 95 percent efficient. That’s a big difference. Using the sample company’s numbers, if it was 85 percent efficient, its sales would’ve been more than $1 million for the exact job costs. That’s about $100,000 more to the bottom line at the end of the year—owners and key staff can take a good chunk of that home with them.

Eighty percent is a sound benchmark for an efficiency rating. At more than 80 percent, you probably have a healthy profit. At less than 80 percent, a company is its own worst enemy. Every company is going to have waste. We all have warranty work, meetings, unbilled time, mistakes and rework. These hours and costs don’t generate revenue. While these costs should be covered by the rates and markups you charge for your work, it’s unlikely you’ll ever hit 100 percent.

How to improve

There are many reasons companies have below-average efficiency ratings. Here’s an overview of common ones:

• Not charging enough, guessing at pricing or using so-called market pricing.
How to fix it: Learn an overhead recovery system. Don’t price another job without knowing how much your company makes on every job.

• Missing job costs on estimates.
How to fix it: Use estimating templates or checklists that remind estimators of all the costs they need to consider when bidding work.

• No scoreboard. Jobs take more than the estimated hours.
How to fix it: Base estimates on man-hours worked. Give crews man-hour goals. Use time sheet software to track and manage job hours.

• Too much unbilled time.
How to fix it: Reduce nonproductive time. Equip and inventory enclosed trailers to reduce trips to vendors. Lease or buy newer equipment to reduce downtime. Use more deliveries to reduce lost billable hours.

• Too much work done by hand.
How to fix it: Use equipment to reduce the man-hours required to complete the work. Equipment cost quickly is outpaced by the increase of sales and productivity.

So the next time you catch yourself complaining about low bidders, crazy weather or difficult customers, take a deep breath and move on. You can’t change any of those things. But what you can control is your company’s productivity, and I’ll bet there’s $100,000 or more sitting right under your nose. Be more efficient, and put more money in your pocket where it belongs.

What you should earn on expenses

Overhead Markup Profit Markup Estimated Revenue
Total equipment expenses $120,000 25% 10% $166,666
Total material expenses $250,000 10% 10% $305,555
Total subcontractor expenses $25,000 5% 10% $29,166
Total rentals and other $5,000 0% 10% $5,555
Total estimated revenue $506,942

Bradley is the president of TBG Landscape in Brooklin, Ontario, and the Landscape Management Network. Check out his workshops at golmn.com/events.

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