Envisor always stresses how important it is for companies to identify and document their "Business Process," or the way that work flows through the organization. In fact, we developed the Green Dot Operating System in part to facilitate clarity around work flows.
Today, we want to focus on the Estimate phase of the business process. There are three essential components of an effective estimating system.
1. Estimating should be Cost-Based
2. Estimating should be Standardized
3. Estimating should align with the Budget
Let's take a look at each point.
1. Cost-based estimating simply means that once we define the scope of work for any project or maintenance job, all of the direct costs associated with performing the work must be identified. The direct costs associated with landscape work are typically:
- Equipment Rental
- Subcontractor Expense
Identifying the actual costs of Materials, Equipment Rental, and Subcontractors are pretty simple. Be sure to include any tax and delivery fees. Identifying labor costs is a bit more complicated.
Labor cost comprises two main components: labor hours required to complete the work and the loaded cost per hour for your workforce.
So, let's take a quick look at each.
How many hours are required to complete the scope of work? Hours associated with performing the scope of work should include any load/unload time and any drive to and from the job.
There are two ways to develop the labor hour budget for a job. You can guess, or you can use standardized production rates, or you can use a combination of both. The problem with just guessing at the labor hours is that it is very hard to teach others to guess, and it's inconsistent at best. You might be right on this job and not so right on the next.
We recommend using a combination of standardized labor production rates in combination with some experienced guesswork on non-standardized work tasks. Here's how it works.
Standardized production rates are labor hours (or minutes) that are assigned to specific landscape tasks. For example, 2.5 hours to plant a 3" caliper tree or six minutes for a 3-gallon shrub.
Standard labor production rates can be established for most scope tasks that we regularly perform, including maintenance tasks. The idea behind using standard labor production rates is that it takes a large portion of the guesswork out of the estimating process and allows for the training of new team members in estimating.
The second piece of the labor puzzle is to calculate your average composite wage rate per hour.
The easiest way to do this is to identify all direct labor, including foremen. Add all of their hourly rates together, then divide by the number of men. This is your average hourly wage. Now add your burden, which includes taxes and worker's compensation. This is generally a percentage, such as 20%, in which case the composite wage rate is the average wage plus 20%.
To finalize your labor cost, multiply your total hours by your average composite wage.
Once all of the direct costs associated with the scope of work have been quantified, a gross margin, or markup value, will be assigned to those costs to arrive at the desired selling price.
2. The estimating system should be standardized throughout the company. In other words, create a clear understanding of WHO is authorized to estimate work and WHAT standard estimating tool or software the company will use.
Some companies might use a standard spreadsheet template or software like Aspire or others. However, it's also important to standardize HOW the estimating data gets delivered downstream to production to produce and to accounting to ensure that the work will get invoiced once it is complete.
In too many companies, we see a hodgepodge of estimating philosophies and processes. Without standardization, it is very hard to increase estimating accuracy, train new team members, and organize workflow into production.
3. Estimating should align with the overall operating budget. Each year as a company establishes the operating budget, revenues and gross margin targets are established to ensure that the company can meet its financial obligations for growth and profitability. Pricing targets and strategies tie directly back to the budget and can be modified or manipulated based on year-to-date budget variances.
In summary, at Envisor, we believe that good systems produce predictable outcomes. Building an effective estimating system allows an organization to:
- Create accurate estimates
- Manage Job Costs
- Invoice all Jobs in a Timely Manner
- Train New Team Members
For more information on Envisor or additional resources to help grow and mature your business, please visit us at envisorco.com or find helpful content at envisoru.teachable.com