Envisor always emphasizes how important it is for companies to identify and document their “Business Process.” This refers to how 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. An effective estimating system is essential because it helps a company stay profitable and efficient. Accurate estimates ensure projects are priced correctly, preventing losses from underbidding or missing out on jobs by overpricing.
A clear system also makes operations smoother for management purposes by setting consistent guidelines, reducing mistakes, and improving communication between teams. This ensures jobs are completed on time, costs are tracked properly, and invoices go out quickly. In the long run, a solid estimating system supports growth and success
There are three essential components of an effective estimating system. Estimating should be:
- Cost-Based
- Standardized
- Aligned with the budget
Let’s take a look at each component
Cost-Based Estimation
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 cost or pricing data associated with landscape work are typically:
- Labor
- Materials
- Equipment Rental
- Subcontractor Expense
Identifying the actual costs of materials, equipment rental, and subcontractors is pretty simple. Be sure to include any tax and delivery fees in the costs.
Labor Hours Required
Identifying labor costs is a bit more complicated at times. Labor cost comprises two main components: labor hours required to complete the work and the loaded cost per hour for your workforce. Hours associated with performing the scope of work should include any load/unload time and drive time 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 during 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.
Standardized Production Rates
When it comes to estimating, 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, assigning 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.
Composite Wage Rate
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 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.
Standardized Estimation
An acceptable 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.
The Risk of Inconsistency
In too many companies, we see a hodgepodge of estimating philosophies and processes. When each person or department uses a different method to estimate costs, it becomes nearly impossible to ensure accuracy across projects. This lack of consistency not only increases the risk of errors, but also makes it difficult to train new team members effectively. Without a standardized approach, new hires are left to navigate unclear systems, leading to inconsistent results and longer training periods.
Additionally, when estimates aren’t created using a clear, consistent process, it becomes challenging to streamline the workflow from estimating to production. This can cause delays, a lack of communication, and missed opportunities for cost savings or productivity improvements. Standardization is key to improving efficiency, accuracy, and the overall organization of a company’s operations.
Aligning Estimation with the 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 profit. These financial benchmarks serve as a guide for all aspects of the business, including the estimating process. They tie directly back to the budget and can be modified or adjusted based on year-to-date budget variances.
For example, when setting prices for projects, it’s important to make sure that the estimates not only cover direct costs like labor, materials, and equipment but also contribute to meeting the overall financial goals set by the budget. By aligning estimates with the operating budget, a company can avoid underpricing jobs, which could erode profit margins, or overpricing, which could result in lost business to competitors.
Price Flexibility
Pricing targets and strategies should be flexible and adjusted based on the company’s current financial performance. Throughout the year, as projects are completed and revenues are tracked, variances from the budget —whether positive or negative—can be used to fine-tune estimates for future jobs.
Aligning estimation with the budget allows companies to remain agile and responsive to financial shifts, ensuring that every project contributes to the larger financial picture
Learn With Envisor
We believe that good systems produce predictable outcomes, and building an effective estimating system allows an organization to reach its full potential with manageable job costs, accurate estimates, and efficient teamwork.
For more information on Envisor or additional resources to help grow and mature your business, please visit us at our website or find helpful content at Envisor Landscape Academy.
