Jim Huston Certified Professional Landscape Estimator, J.R. Huston Enterprises, Inc.

The Company Break-Even Point (The October Surprise)

A company usually reaches its break-even point (BEP) in the 9th or 10th month of its fiscal year. You reach your BEP when your accumulated gross profit margin (General & Administrative overhead costs plus net profit) equals your G&A overhead budget dollar amount for the year. If you hit your break-even point prior to the end of the fiscal year, any dollar amounts on bids above Phases I and II direct costs (plus sales tax and field labor burden) will be net profit for that year. That’s if the work is completed and billed prior to the end of the fiscal year.

Work bid after the BEP is met, which will be completed and billed before the fiscal year end, can be bid with the realization that any amount above direct costs in the bid goes to the net profit margin on the bottom line. If your net profit margin on a bid is 10% and your G&A overhead amounts to another 15%, your net profit margin is really 25%, since your G&A overhead is already covered for the year.

Some contractors understand this concept and know that, after they meet their BEP, they can bid work cheaper than they normally would at the end of the year without really cutting net profit. I would not recommend this strategy unless you have a very justifiable reason. Because of the inherent risk in projects, especially construction ones, you should always strive to work for profit.

In other words, once you hit $666,667 in sales for the year, theoretically you should have accumulated enough gross profit to cover all of your $200,000 G&A overhead costs. This is your break-even point. If your gross profit margin is approximately 30%, multiply the $666,667 by .3 and you get $200,000.

Remember: This is the “projected” or budgeted BEP. Due to fluctuations in Gross Profit Margin (GPM) on individual jobs throughout the year and other factors, the “actual” BEP may be different as seen on your profit and loss (P&L) statement. Therefore, it’s necessary to monitor the “budgeted-to-actual” BEP.

How it Works: An Example

A New England contractor wrapped up his landscaping season with a healthy bottom line. His fiscal year ended March 31. Late in the fall he was given a chance to bid on a winter pruning job that his crew would complete prior to the end of his fiscal year. He wanted the job because winter revenue, other than snow plowing and sanding, was hard to come by. This job would keep three people busy for a good part of the winter and the contractor could put his division manager on the crew. This would transfer the manager’s winter hours and salary from a G&A overhead expense to billable hours. An additional benefit: the contractor would not have to lay off the other two crew members and risk losing them if they did not return in the spring. He knew he had to be competitive to get the project.

With a 10% net profit and G&A overhead, this job would normally go for about $42,000. The contractor turned in a bid for $28,000, which just covered his direct costs. And he still did not get the job!

Compare Budget to Actual Costs

Indirect costs, or G&A overhead costs, are essential to monitor. Like field-labor downtime, G&A can get out of control and eat up your bottom line, while individual job-cost reports look great.

I don’t recommend attempting to allocate actual G&A overhead expenses to your jobs through job costing. Rather, I prefer to simply compare direct costs bid to actual performance, by means of GPM on a job-by-job basis. It is easy to do this with a P&L statement. If your GPM turns out better than estimated, great! If not, find the problem and fix it before the next time.

Jim Huston is president of J.R. Huston Enterprises, Inc., which specializes in construction and services management consulting to the Green Industry. He holds the distinction of being one of only two Certified Professional Landscape Estimators in the world.