October 13, 2021
The problem with unit pricing
Assuming a fixed cost per item may be detrimental to your bottom line
BY MARK BRADLEY
Pricing work by the unit is as old as the landscape industry itself. Many contractors use this pricing system as their default method. Others are forced into unit pricing by cities, architects or project managers who insist on getting bids in a unit price format. No matter why you’re doing it, recognize that unit pricing is hurting your company’s profits, not helping them.
Unit prices seem easyOne of the most significant problems with unit pricing is assuming a fixed amount of labour per item. This might be 1.5 hours per tree or 0.15 hours per square foot, but that labour is just an average. While it might help you guesstimate the time it’s going to take to complete a job, it’s more than likely to hurt your profits when submitting a unit price bid.
Using unit prices is like forecasting the average weather. The average temperature might be 9 C, but that doesn’t tell you how to dress each day. What if it rains? If you woke up and dressed for the average temperature, you’d rarely be dressed appropriately.
Let’s say you have a job where you have to plant 20 trees. You’re going to send a four-person crew and figure they can plant those trees in nine hours. Your cost will likely include labour ($720), equipment ($550), trees ($4,000), delivery charges ($400), overhead recovery ($540) and other materials ($1,000). The cost accumulates to $7,060 or $353 per tree, and your price estimate is $11,700 or $585 per tree.
We’re okay here because we calculated the $585 based on the estimated job labour. We’re as close to accurate as we can reasonably get.
Bid changes typically hurt the contractorNow let’s imagine the customer says: “Thank you for your price. We’re a little bit over budget, so we only want you to install 15 trees.” I’ll draw up a PO for 15 trees based on $585 per tree, for a total of $8,775.
Unfortunately, in this instance, your costs as a contractor do not drop proportionately to the materials. Here’s why:
- Trucks still need to be loaded and leave the yard
- The vehicles still need fuel and must be loaded.
- It takes the same amount of time to drive to the site.
- Equipment must be tied up on the site for the day.
- Delivery charges remain the same.
- The crew will not clock out at 3:15 p.m. because there are fewer trees, so they’ll likely stretch the job out to the end of the day.
- Overhead on this job doesn’t decrease. We still have the same rent that day, and spend the exact time ordering and managing the work on this project.
- So let’s revisit our estimate, but this time with only 15 trees. The original estimate of $585 per tree isn’t very good at 15 trees. The cost per tree increased from $353 per tree to $390 per tree, and our price is $585 when it should be $647 per tree. Now our company is eating $100 per tree in increased costs and lost revenue and we’re under-bidding this job by $1,500.
Bid increases can hurt tooLet’s imagine we’re the low bidder at $585 a tree. They liked our bid so much, and they increased their budget from 20 trees to 30 trees.
However, 30 trees are too many to plant in a single day, so we’re going to have to send the crew back for a second day to plant the extra 10 trees. In reality, we’re not going to get to a second job that day. By the time we mobilize, install the trees and break for lunch, there’s not enough time left in the day to start another job.
In this scenario, our cost per tree increases to $374 from $353. It’s not quite as bad as the previous example, but increased costs and decreased revenue means we’re eating $60 per tree and under-bidding the job by $1,800.
The average price is rarely rightThere are scenarios where unit pricing can work in your favour. Not every change hurts the contractor, but changes are far more likely to be to the contractor’s detriment than to our benefit — especially when contracts are awarded on a low bid basis.
Average unit prices are rarely correct. They cannot factor in significant job variables:
- Are we installing five or 100 trees? You’ll undoubtedly install the 100 trees faster per tree as economies of scale kick in.
- What kind of equipment is available for the job?
- How are materials being picked up and delivered?
- What’s the access like to the planting location? Soil conditions?
- Which crew is expected to do the work?
- What season will the work be done?
Cost-based pricingIf you are pricing your work with unit pricing, it’s time to stop. It would be best if you always were cost-based estimating using actual labour, equipment, materials, sub and overhead recovery costs when arriving at your bid. Not only will you have a more accurate price, but you’ll also have a clear plan about how long a job should take, what equipment and material should be delivered, and what your actual net profit is.
If you have a customer or bid that insists on this pricing method, you have little choice but to roll with the punches, but always consider the impact of potential changes. If possible, ask for the opportunity to re-price before you agree to any changes. And at the very least, take the opportunity to educate your customer. Every job is different, but remember, the price is rarely right when pricing is based on averages.
Master the upsellWhether you do design/build or maintenance, there’s no profit margin like an upsell margin.
Look for materials that are installed with minimal labour — such as plants, patio furniture, lighting kits, decorative structures or art pieces — and work them into your sales processes. These materials and products typically have substantial markups and drive revenue increases with few labour hours added.
Every accomplished business owner will tell you that knowing your numbers is critical to success. For landscapers, your field labour ratio is the key to maximizing labour productivity. Put these strategies into practice to improve your field labour ratio, and you’ll be well on your way to potentially doubling your net profits.
Mark Bradley is CEO of LMN Software, and former CEO of TBG Environmental, both based in Ontario.