Imagine that you have a buddy, a fellow landscaping contractor. He’s asking you for some advice. This friend has got plenty of work coming in, and currently his business is pulling in about $500K of revenue. He feels like his business should be in a good spot financially, but somehow the money keeps disappearing. It’s a real mystery – until you wonder how exactly your friend is managing overhead costs in landscaping business operations.
Let’s take a closer look at your friend’s overhead snapshot. He’s got rent for $8K a month, two truck payments for $1,200 a month each, an office administrator at $3,500 a month, software subscriptions, insurance…All told, it adds up to about $180K a year, or 36% of his revenue.
He’s above the threshold and doesn’t even realize it.
But how is he supposed to know that? What can he do? How much overhead is too much?
What is Overhead?
Before we can talk about best practices for managing overhead costs in landscaping business terms, let’s actually define it. Overhead expenses are the costs you have to keep your company’s lights on and your doors open. We’re not talking about direct, specific job expenses, like field labor or materials. Overhead refers more to indirect expenses, things you have to have whether you’re actively working or not. Things like insurance, electricity, shop rent, office admin, marketing, company vehicles…and so on.
You can’t charge a customer directly for overhead expenses, so you have to recover those costs through your pricing markup, often called an “overhead recovery markup.” If your pricing doesn’t account for managing overhead costs in landscaping business operations, you’ll end up eating those costs yourself.
Two Traps: Too Much and Too Little
A big dilemma around managing overhead costs in landscaping business settings is this: How much overhead is too much? How much overhead is too little? How do you know when you reach one of those extremes, and what do you do when you get there?
Too Much
Let’s say you’re a contractor just starting out in the landscaping business. You have a few team members doing the “billable work.” Your company currently hovers somewhere around the $300-$600K revenue range, but it’s set up more like a $2M operation. You already have a large shop space, new trucks for every crew member on your team, and an office administrator on your payroll from day one.
That’s a pretty sweet setup…but it may seem less sweet once you start running numbers. If that overhead burden pushes your overhead recovery markup past 30% of the job price just to break even, you’ve priced yourself out of the market. And you’ve barely started competing yet.
The problem here isn’t necessarily your ambition. It’s more that your ambition got too far ahead of your timing. The infrastructure got ahead of the revenue you need to actually support it. And now you either need to play catch-up, or start downsizing.
Too Little
On the flip side, there’s the trap of having too little overhead. This often looks like an owner-operator who wants to keep costs lean, so they do everything themselves, from answering phones to sending invoices to writing materials.
There’s still a cost here, but it’s a hidden one. Cutting down on overhead doesn’t happen in a vacuum. Every hour you spend on administrative tasks is an hour where you’re not selling, managing crews, or doing any of the other high-value work that actually grows the business. At a certain point, something’s gotta give.
What if that penny-wise landscaping owner caved and finally hired an office administrator, at a cost of about $3,500? They might balk at the number at first, thinking it way too high. But if having that administrator around frees up the owner enough that they’re able to close two extra jobs a month at $4,000 each, that’s a $4,500 net gain. The administrator, it turns out, has more than paid for herself.
Don’t forget that starving your infrastructure has a cost, too, even if it’s harder to see on a spreadsheet.
Should You Cut Costs, or Grow Into Your Overhead?
The struggle of managing overhead costs in landscaping business often comes down to one extremely common problem. When overhead costs start to feel too heavy, there’s two levers available for you to pull. The first is to cut overhead expenses to create some extra margin. The second is to focus on growing revenue with the overhead setup you already have.
Most people will reach for that first lever automatically. If you want to save money, then having fewer costs is the way to do it, right? In truth, the second lever often represents the savvier move. Sometimes trying to reduce overhead costs ends up being literally more trouble than it’s worth.
Before you decide that cutting costs is your best way of managing overhead costs in landscaping business operations, give yourself a gut check. Ask yourself these three questions:
- Will cutting this hurt my ability to produce revenue? For example, canceling the quoting software that helps you turn around bids in 24 hours.
- Will cutting this cost me more time than money? Like dropping that office administrator, and absorbing 20 hours a week of administrative tasks back into your own workload.
- Will cutting this reduce my production capacity? Such as selling the equipment that lets your crew finish jobs faster.
If the answer to any of these questions is yes, cutting overhead costs is likely the wrong move. That’s why it’s often a better idea to focus on growing revenue, and not on shrinking overhead. So instead of cutting your office administrator and sending yourself back into all those time-consuming tasks, you might focus on ways to produce enough revenue to better cover the admin cost.
Occasionally you’ll find that cutting overhead costs actually is the right solution. Sometimes overhead gets pretty bloated, and trimming just makes sense. Your business might still pay for a large shop or office that barely gets used, subscriptions you’ve forgotten about, or equipment that’s gathering dust. Trim away. Those cuts reduce waste without reducing your capacity.
Your Overhead Benchmark
For landscaping contractors, especially ones that do installations, a healthy overhead target is under 30% of your business’s total revenue. If your company makes $500K, your overhead costs should stay under $150K a year. If your business makes $2M in revenue, then you have about a $600K ceiling to work with.
What if Your Overhead is Well Below 30%?
Again, fewer costs – or cutting them – doesn’t always represent the best business move. If your overhead costs are well below the benchmark, it’s not actually a great sign. It’s more likely that what it actually means is that you’re underinvesting in your own business. Are you handling tasks yourself that someone else should probably take care of? Are you missing tools that would make your crews more efficient? The opportunity cost is real!
What if Your Overhead is Well Above 30%?
If this is the case, you need to ask yourself two questions:
- Are my overhead expenses too heavy for my current revenue size?
- Am I getting enough production and efficiency out of the infrastructure I already have?
Sometimes the answer is to grow into your costs, and sometimes the answer is to do some trimming.
If you’ve recently hired, expanded your shop, or invested in new equipment, being temporarily above 30% is less of a crisis and more a sign you’ve built ahead of your revenue. Your goal then becomes closing that gap by selling more work. But if your overhead has crept up without a clear reason and your margins are suffering, then you need to start going line by line and figuring out what’s not pulling its weight. Either path is manageable once you know which one you’re actually on.
If you’re reading this, it might not be a bad idea to take this as an opportunity to run your own numbers and see where you shape up. Plug revenue, labor, and overhead into SynkedUP’s free budget calculator and see where you land. A lot of landscapers are surprised by what they find.
Managing Overhead Costs in Landscaping Business Made Easier
Sometimes overhead costs seem like the villain of your business’ story, but they’re just a tool. When you do a decent job of managing overhead costs in landscaping business operations, having that overhead lets your business scale and compete. It also stops you from having to trade every hour of your day away for dollars. But when mismanaged, your overhead quietly eats your profits as you wonder where the money went.
Remember your friend from the intro? Now he knows his number, (36%), he knows which of his expenses produce value and which don’t, and he has a plan. What about you?
To learn more about how to manage your overhead expenses, and how landscaping software can make both calculating and managing costs way easier, schedule a demo with SynkedUP today. We’ll help you get started!
