An important metric for owners, sales people, and even production team members to understand is the company's costs. Everyone reading this Great Idea understands that if you bid a job for $10,000 and it costs you $20,000 to do the work it's a problem. A less obvious problem we sometimes see is when a company is pricing themselves out of a market, or if a high markup is disguising inefficiencies in systems and workflows.
Knowing exactly what your costs are will allow you to bid, sell, and perform the work effectively and efficiently. When our ACE Peer Groups meet, we review 13 metrics, and without a doubt one of the most impactful numbers we review and benchmark is gross profit margin.
To calculate this margin as a percent, take your total revenue, subtract the cost of goods sold and divide the result by your total revenue. Include only labor, materials, rentals, and subcontractors in your cost of goods sold. Our goal is for companies we work with to see about 50% in gross profit margin depending on the type of work you do. More specifically, you should see rates around:
50-55% for construction work
45-50% for maintenance work
Gross margin essentially measures how your production costs relate to the revenue they generate. This week, review your gross margin so that you can fully understand your costs to see where you can drive better results.
If your gross margin is above industry benchmarks
Great! Just ensure you're delivering quality work and a great client experience first, and that your high margin isn't because you're cutting corners. Then evaluate compensation: are your team members paid at or above industry and market standards? If not, you're risking losing labor that you can afford to keep.
If your gross margin is below industry benchmarks
Start by trying to find efficiencies with labor expenses. Don't lower wages, but do make sure you're minimizing indirect time. Your morning roll-out and truck routes are good areas to focus on. Educate your team so they understand the importance of meeting or beating the hours on every job. If your gross margin doesn't improve with these changes, it may be time to raise prices.
When we understand our costs, we're well positioned to make the right decisions for our business. Grunder Landscaping Co. has their costs clearly defined, and they use them for setting prices, making hiring decisions, and predicting the future needs of their business. Come see it all in action at our next Grunder Landscaping Co. Field Trip on June 23-24.
We hope to see you soon. In the meantime, if you have any questions you can always reach our team at grow@growgroupinc.com.
The Grow Group