Are Your Landscape Jobs Actually Profitable?
According to Lawn Care Millionaire, the typical net profit margin range varies from 5% to 20% in the lawn care and landscape industry. While some services will generate more profit than others, the real reason behind this variation is simple: people just don’t calculate their net landscaping profit margin in the same way.
In fact, many contractors are leaving critical cost factors out of their net profit calculations—meaning they’re not calculating their net profits accurately. This is causing them to overestimate their profits while job costing, when they actually should be charging more money to be able to cover their costs. This is super important, as it’s what can make the difference between making a 5% or a 20% net margin. Are you curious to know if you’re doing things right when it comes to crunching the numbers of the business that you’ve worked so hard to build?
We’re going to show you how to calculate real net profit on a single job so that you never have to worry about job profitability again. Plus, properly calculating net profit is the first step in learning how to increase your landscape profits.
Here’s how most landscapers, like John, calculate profit:
Total Job Revenue
– Cost of Material
– Execution Labor
= Net Profit
If we add in some real numbers, then John’s equation would look something like this:
$ 10,000
– $4,000
– $4,000
= $2,000
For this particular job, John seems to be making a net profit of 20%—which puts him at the top end of the industry standard range. However, John doesn’t realize that there are more components involved in calculating net profit than just the cost of material and execution labor.
This is how John should be calculating net profit:
Total Job Revenue
– Cost of Material
– Execution Labor
– Overhead
– Errors/Inefficiencies/Unforeseen Delays
= Net Profit
To show you exactly why the latter equation is so important to follow, we’re going to break it down and explain it to you component by component.
Total Job Revenue
Simply put, this is the amount charged to the client in order for the job to get done. In the case of our landscaper friend John, he charged his client $10,000 for a total backyard makeover.
$ 10,000
– Cost of Material
– Execution Labor
– Overhead
– Errors/Inefficiencies/Unforeseen Delays
= Net Profit
Pro Tip: It should go without saying that the total job revenue should ideally be high enough that it can absorb all of the aforementioned costs and still leave you with a fair profit at the end. If your net profit is lower than you’d like it to be—or if it’s in the negatives—then you might need to reconsider the amount that you’re charging to the client.
Cost of Material
This encompasses the cost of all the materials needed to get the job done, including all raw materials, tools, and equipment rentals. When we say all the materials, we mean every single item used to execute the job. This even includes materials that are taken for the job from a general bulk order, such as glue, nails, geo-textiles, etc.
How to calculate: Add up the bills of all the materials that were delivered or brought to the job site. If you’re only using a percentage of materials from a bulk order, then make sure to add a percentage of that bulk order bill into your calculation as well.
In John’s case, the cost of all his landscape construction materials equalled $4,000.
$ 10,000
– $4,000
– Execution Labor
– Overhead
– Errors/Inefficiencies/Unforeseen Delays
= Net Profit
Execution Labor
The execution labor includes all of the costs of the on-site crew. This obviously includes the hours that they’re working, but it also includes billable hours that are known as wasted labor. Wasted labor is when you have to pay your employees for things that don’t directly count towards the completion of the job or that could have been avoided. This could be hours spent driving to the job, coffee runs…etc.
How to calculate: Multiply the hourly rate of your on-site employees by the number of hours worked. Don’t forget to include the wasted labor hours. You should also add any government tax amounts or employee union fees to this calculation.
John has 4 employees—getting paid a rate of $25 per hour—working on his backyard job. Since it took them 40 hours to complete the job, he put $4,000 down for execution labor. But John didn’t account for any wasted labor, which actually adds another $750 onto his execution labor cost.
$ 10,000
– $4,000
– $4,750
– Overhead
– Errors/Inefficiencies/Unforeseen Delays
= Net Profit
Overhead
Overhead accounts for all business expenses that aren’t directly related to the landscaping job or service at hand. This includes administrative costs, office rent, utilities, insurance fees, etc. It also accounts for the salaries of all office employees, like your sales reps. However, any commission made outside of their yearly salary is not considered overhead and should always be attributed to a job. You might not be including overhead costs into each job’s net profit because you don’t think that it’s related. But contractor profit and overhead actually go hand in hand. Your overhead costs are what keeps the core parts of your business running. Not factoring them into your job calculations means that you’re going to be the one paying for them at the end of the day—equalling less net profit for you at the end of the year.
How to calculate: There are many different ways to calculate overhead, but our way is one of the simplest. If John’s full year budget for overhead is $100,000, then he needs to spread that number out over the number of working days in the year. Since John lives in a warmer climate, where his crews are able to work five days a week, all 52 weeks of the year, he can estimate 260 working days. If he takes his budget and divides it by the number of working days, his overhead cost per day is equivalent to $385. Since John has 3 crews, he can divide that number evenly between them to get an overhead cost per team, per day, of approximately $128.
Since it took John’s team 5 days to complete the project, his overhead cost for this particular job is $640.
$10,000
– $4,000
– $4,750
– $640
– Errors/Inefficiencies/Unforeseen Delays
= Net Profit
Errors, Inefficiencies & Unforeseen Delays
As much as we’d love for every job to go exactly as planned, sometimes you have to deal with unforeseen issues. If unfavourable weather causes delays on a job, overhead costs are still being spent on days where no revenue is being produced. If it starts to rain heavily in the afternoon and your team has to pack up after working just half the day, you’re still paying the same wasted labor cost for their drive to work without advancing the project as much as anticipated. Not having enough material on hand can mean that you have to send an employee out to stock up when they’re supposed to be working on-site. If a customer changes their mind halfway through a job, your employee calls in sick, or equipment breaks down, you end up being the one who pays for it.
How to calculate: Add up all material bills, overhead, and wages paid due to issues that came up during the job that could not be anticipated.
Bonus Tip: After you’ve practiced calculating this particular component on enough jobs, you’ll be able to put a standard estimate per job on all future quotes.
Extra Bonus Tip: Always have extra material on hand to avoid having to send an employee out to buy more.
John’s team installed a faulty water fountain during the backyard job. The client only noticed a week later—after John had already done the job’s net profit calculation. In all, he had to pay another $800 in material, overhead, and labor to correct the issue.
$ 10,000
– $4,000
– $4,750
– $640
– $800
= Net Profit
Net Profit
After properly recalculating his net profit, it turns out that John didn’t make the 20% net profit that he thought. He actually didn’t make a profit at all and is at a loss of $190—or -1.9%—on this particular job.
$ 10,000
– $4,000
– $4,750
– $640
– $800
= ($190)
We hope that this was helpful to you and that you can apply everything you learned to your next landscaping job. Calculating net profit the right way is an integral part of any business. Simply following our equation will help keep your company running smoothly when it comes to costing your jobs accurately.
