If you’ve been keeping up with our Great Idea week after week, you’ve heard us talk about the work we at The Grow Group do with our coaching clients and ACE Peer Group members to help them monitor their financial metrics and maximize their profits. We always start with the numbers that come right from their financial statements—such as gross margin, accounts receivable, cash, and, of course, profit.
But there is one number that doesn’t readily show itself on these statements and yet has the power to make or break a landscaping company. That number is indirect labor costs, and if you want to succeed in this industry, you can’t afford to ignore this metric.
Indirect labor is the cost of all the time that your hourly team members are clocked in but are not producing billable work—that’s why it’s sometimes called “unbillable time.” Some of the biggest buckets of indirect labor for landscaping companies are:
Training
Loading and unloading
Drive time
Call-backs or warranty work
The first step to understanding your indirect labor is tracking it. This doesn’t have to be an elaborate process:
Take your average hourly wage. Say it’s $15.
Multiply it by 25% to capture your average hourly payroll burden: $15 x .25 = $3.75.
Add your average hourly wage and your average hourly payroll burden: $15 + $3.75 = $18.75. This is your average hourly cost of indirect labor.
Now add up the average amount of time an hourly worker spends per week on each of the four categories above: say it’s 30 minutes on training, 200 minutes on loading and unloading, 300 minutes on driving, and 120 minutes on warranty work. Add these together and you get 650 minutes, or 10.83 hours. This is your average weekly total of indirect time per worker.
Then multiply your average hourly cost of indirect labor by your average weekly total of indirect time per worker: $18.75 x 10.83 = $203.06. This is the total amount you’re spending weekly, on average, on indirect labor per worker.
If you have 30 hourly team members, that’s $6,091.80/week, or $316,773.60 a year. It’s amazing how quickly that total adds up. Imagine if you were to reduce your indirect time by just 10%—over the course of a year, you could save tens of thousands of dollars, and those dollars go directly to your bottom line.
It’s impossible to entirely eliminate indirect time, but you can reduce it and get smarter and more efficient in how you spend it. We’ll touch on specific ways you can do that in next week’s Great Idea; this week, use the law of averages to start tracking your indirect labor costs. As the sign in Grunder Landscaping Co.’s shop says, procrastination is opportunity’s natural assassin—do it now!
Enjoy the long weekend and have a great week.
Vince Torchia
Vice President, The Grow Group
Our Fall Field Trips bring owners and their teams onsite to Grunder Landscaping Co. headquarters in Dayton, Ohio, one of the most successful companies of its kind in the Midwest. You’ll spend a jam-packed day going behind the scenes with president and CEO Marty Grunder, touring the facility and grounds, and meeting with the GLC leadership team to see how they execute and optimize each area of the business. Learn first-hand what they’re doing to trim their indirect labor costs to 10%.
We purposely limit this event to just 14 attendees so we can guarantee you get the one-on-one attention you need. These events sell out every year so if you plan on joining us, please reserve your spot soon.