Rooting out the Causes of Low Gross Margin
The root cause could be in the estimate, performance or execution.
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This podcast will focus on Making More Money with The Gross Margin Trouble Shooter Process. This process will help root out the root causes of low Gross Margin.
First, a quick review of the most common ways gross margin is too low or goes down:
- Turn over of personnel
- Having the wrong customer
- Increase in costs without a price adjustment Insufficient increases
- Scope of work change without price adjustment
- Extra work performed without being billed
- Inaccurate job costing
- Basic administration or lack thereof
- Lack of mind set
- No system or processes in place
- Operational execution
And, our topic for today, inaccurate or no estimating process. Is it an:
- Estimating Problem/Issue
- Expectation Problem or an
- Execution Problem
1 — Review the Estimate
- Is there an estimate? Is it in writing? Is it in the job file? If there was an estimate, see what was estimated originally to get this job done.
- Are there job specifications? Review the job specs and see if there any unique areas that need addressing or are they pretty much normal specs.
- Look at the estimate and determine:
o Do the estimated hours match up with the hours being spent on the job?
o How far over the estimated hours are you?
o Are there any obvious omissions or mistakes? Like travel time, scope of work change etc.
o Are you recording the time spent on this job accurately?
- Look for simple errors first, then go to the next step and look at the job.
2 — Review the Job: Expectations
- Bring the estimate and specifications with you if they exist.
- Go to the job site: track your travel time to get to the site.
- Review the job preferably when the crew is performing the work.
- What does the job look like quality wise?
- Are you performing at a satisfactory level and meeting internal expectations and more importantly are you meeting the customers’ expectations?
- Are you doing tasks that are not part of the scope of work? For example, parking lot sweeping or blowing. Sometimes the client’s expectations have changed and that has increased the hours needed to accomplish the work; like extra trash pick up or fix the sprinklers as part of the contract etc.
- Again look at the original estimate and see how the estimate matches up with reality both with tasks being done and how long it takes to complete them.
- Have the expectations changed from the original estimate? If so, then you need to figure exactly how much time these expectations have cost you.
- Next, decide how you can go about either offsetting these additional costs by increased efficiencies, or perhaps you need to make a legitimate cost increase proposal to the client.
3 — Review the job: Execution
- Review the bigger time components like mowing, detail, flower care, clean up.
- Observe the crew when they are working and see how they are performing the tasks, and how long it’s taking to perform the tasks.
- Look at vehicle set up. Where are they parked?
- Mowing, edging, clean up, etc. Is the right equipment being used and in the right order?
- Are you executing the job within the estimated times and if we are not, why?
4 — Re-estimate the Job
- Do a new estimate using all of the info gathered on the job and with your observations.
- Be specific with times to complete the tasks both regular routine work and the non-routine type of work.
- Here are the most common areas that are not in the estimate or not estimated accurately or where we just get it messed up.
o Travel time and loading and unloading time.
o Mowing and turf detail – either missed some areas or not using the right sized equipment.
o Hand watering pots or color beds.
o Large amounts of leaf drop that was unaccounted for.
o Misunderstanding of what is included in our scope of work or not included.
o The route sheet says to spend four hours here so that’s what the crew will do whether it needs it or not. The supervisor has not adjusted the schedule to what actually is needed to perform the job.
- You need to determine if the low gross margin is a result of:
o The Estimate
o Execution (and adjust accordingly)
- If it is an estimating issue you need to adjust the procedure to take into account what we have learned.
- If it is an expectation issue, you need to adjust the expectation. If the cost to meet the changing expectation is significant then you need to talk with the client about a price adjustment.
- If it is an execution issue, you need to adapt, change and innovate.