Improving your field labour ratio

Last issue we focused on benchmarking a company’s field labour ratio. To recap: that number is the cost of wages for field (non-overhead) staff divided by your sales revenue. The lower this number, the better — because it indicates you are spending less on labour for each dollar of sales earned.
The field labour ratio is one of the most important key performance indicators for any landscape company because labour has more impact on profitability than any other cost in your company. You might come up short on some material estimates occasionally, but I’ll bet your two-gallon hostas have never backed your skid steer into your client’s swimming pool. 
Managing labour, and getting the most out of your labour, will have the single biggest impact on your profitability. Yet it seems that every owner I meet struggles to find, keep, manage and motivate their single most important asset. So here’s the massive obstacle facing just about every company: labour is both your biggest determinant of profit AND your biggest headache. Even if you never solve the labour problem, you can double your company’s net profits with just a few strategies that any company can apply. 
Revenue per man-hour is a really simple, really effective number. It tells you how much total revenue (including revenue earned form materials, equipment, overhead markups and profit) is produced each man-hour.
To calculate your company’s benchmark revenue per man hour: 
  • Figure out your man-hours available. Add up all the anticipated payroll hours for your field staff only. Don’t include overhead staff. 
  • Example: 8 field staff x 1,700 hours each = 13,600 man-hours
  • Next, subtract ‘unbillable’ hours. These are payroll hours where staff is paid, but aren’t producing any revenue (e.g. drive time, shop time, training time, mechanical work, etc.) 
  • Example: 13,600 hours @ 80 per cent productive time = 10,800 man-hours
  • Last, divide your sales goal by your productive/billable man-hours
  • Example: $850,000 (sales goal) divided by 10,800 man-hours = $78.70 per man-hour
EXPERT TIP: Create unique revenue-per-hour goals for each division in your company. Maintenance work has lower revenue-per-hour vs. install work, because there is very little material.
Once you know the benchmark revenue-per-hour you need to hit your sales goal, simply divide each estimate’s selling price by the number of man-hours estimated to get that estimate’s revenue-per-hour. If it’s higher than your benchmark, great — that estimate is going to help you beat your sales goal. If it’s lower than your benchmark, then it might not be the best job for your company. Remember: your most precious resource is good field labour staff. You don’t want to tie them up on jobs that don’t produce much revenue. 
What’s “throughput?” you ask. It’s a number that is even better than revenue-per-hour. Throughput is the money left in your company after you pay your external vendors. To calculate throughput on a job, simply take the job’s revenue and subtract your vendor’s costs — such as materials, subs and rentals. The money left over is called throughput. 
Throughput is better than revenue-per-hour, since revenue-per-hour can be misleading if you do a lot of work with subs, or you sell high-priced materials at very little markup. Your revenue looks great, but if most of the sales revenue goes to pay vendors — it doesn’t help your company a whole lot. Throughput fixes that problem by showing you how much money is left in your company after you pay your vendors.
Divide each job’s throughput by its estimated man-hours to calculate throughput-per-hour. The higher this number, the better the job, and the lower your labour ratio will be.
Equipment is a fantastic way to reduce your field labour ratio. Your field labour ratio (and revenue-per-hour) go way up when equipment is used to speed up jobs. Not only does each job’s revenue-per-man-hour increase with increased speed or less people, but the time saved on each job can be spent earning revenue on a new job. You get benefits to your revenue-per-hour on both sides!
Trucks: Larger trucks carry a bigger monthly payment, but if you are hauling or delivering materials using larger payloads can save a lot of delivery hours.
Skid steers: Tracked skid steers carry a heftier price tag, but do less damage than wheeled machines in a wet spring or fall. With an average monthly lease of about $750 per month, a three-person crew needs to save only one half-day per month for this machine to pay for itself!
Power wheelbarrows: They cost 100 times more than your standard two-handle, one-wheel version, but everyone I’ve ever met who bought one says they can’t remember how they did work without it.
Mini-excavators: Combined with a few work tools (augers, hammers, grading buckets, thumb buckets), mini-excavators are the Swiss Army knife of landscapers. They get into tight places, dig 20 times faster than humans, and most contractors I know rarely see them … because they are always out on-site.
EXPERT TIP: Replace old equipment that’s unreliable! You might feel good having no payments, but breakdowns cause extra labour hours, lots of downtime fixing and transporting the equipment — all of which increase your field labour ratio.
Whether you do design/build or maintenance, there are no profit margins like upsell margins. Look for materials that get installed with very little labour (patio furniture, lighting kits, decorative structures, art pieces) and work them into your sales processes. These material types typically have strong markups and drive your revenue up with very few labour hours.
Mark Bradley is CEO of LMN, based in Ontario. The objective of this article is give general guidance on common financial numbers specific to the landscape industry. It is not intended to provide or act as professional financial advice. 

Landscape Trades, October 2017