The Pricing You Deserve

For example, I frequently spend time pouring over web analytics data for Snow Magazine’s website. It’s sort of like reading the editorial tea leaves to gain insights on what is top of mind among snow and ice management professionals. It’s a fair estimation that, at any time of the year, of the Top 10 requested topics/articles, easily 60%-70% have to do with some aspect of salting, deicing or anti-icing strategy.

So, I went back through nearly two decades of editorial material and culled some of the best of the best material. In many cases, I updated existing information and augmented it with new content to create this month’s cover story. By no means is this the end-all, be-all primer on salting, deicing and anti-icing because, as with a lot of things, this strategy is fluid (pardon the pun) and is constantly evolving, improving and getting better. But hopefully on the following pages you’ll find some useful tips or insights that make you reflect on your own strategy and how you can achieve greater results in the field. And as always, I’d love to hear your feedback on what you’re doing within your own snow and ice management operation to improve performance, increase your efficiency, and strengthen your margins. So, don’t hesitate to reach out: mzawacki@ascaonline.org. And as always, have a safe and profitable winter. – Mike Zawacki, editor

Along with snow removal, salting and deicing work can be some of your most profitable winter work. Too many contractors rely upon Mother Nature rather than on a well-thought-out strategy, accurate pricing, and a properly formatted profit and loss (P&L) statement, all of which minimize risk while optimizing chances for increased profitability. Otherwise, the biggest “snow” job you may face is a diluted profit and loss (P&L) statement at the end of the season that gives you bad data and a false sense of security.

THE SITUATION

John wants to re-evaluate his pricing structure for his salting and deicing work. The market for winter work is competitive. The going rate for salting is $200 per ton ($0.10 per pound) and $125 per hour (portal-to-portal) for snow plowing with a one-ton truck. He has five plow drivers, three of which salt. Here are some details about John’s operation:

• John’s crews will be paid an average of 10 hours per storm. Eight hours will be spent on-site plowing and/or salting. The other two hours will include drive time and a minimal amount of prep time at the yard before and after each storm.
• The typical winter will have fifteen storms, and three drivers will spend approximately four of the 10 hours on-site salting per storm. Drivers will spend another two man-hours loading salt and traveling between jobs. Total man-hours spent on salt operations per storm per driver is six.
• The average driver will be paid $25 per hour and will put in about 150 hours salting and/or plowing in the winter.
• For this example, salt costs $85 per ton. Sales tax is 6 percent on materials. A driver can spread roughly two tons of salt per hour using a one-ton truck.
• Labor burden is 25 percent. The overtime factor is zero.
• John wants a risk factor of 20 percent included in the labor rate to offset any errors in the average plowing and salting time. He also wants a minimum net profit of 20 percent on all winter work.
• General and administrative (G&A) overhead costs for the year are $250,000. Billable field labor hours during the regular season total 10,000. Dividing the G&A overhead amount by the billable hours produces an overhead per hour (OPH) cost of $25. Even though all G&A overhead for the year is theoretically covered during the regular season, John wants to add $25 OPH to each hour of winter work.

John wants to calculate a minimum per-ton and per-pound rate for his salting services that accounts for the above criteria, and which covers all costs. Will he make money with market rates being what they are? And how much winter work contributes toward his G&A overhead costs? To price his salting and deicing work, he prepares a pricing scenario for a typical storm for both types of work.

SALT PRICING

John’s salting total direct cost (TDC) per man-hour is $187.63. This total plus the $25 OPH is $212.63 per man-hour. The $212.63 is John’s break-even point (BEP). Add a 20 percent net profit margin to the BEP and John needs to bill roughly $265.79 per man-hour. All of this translates into a price per ton of $199.34 or $0.100 per pound.

The gross profit margin (GPM) for John’s salting work is 29.4% or $78.16 per man-hour. More importantly, his net profit is 20.0% and his net profit per man-hour is $53.16.

John could improve his GPM by increasing his production above his benchmark of 2 tons per curb-time man-hour. Decreasing the general condition hours through better scheduling and/or more efficient loading would also increase the overall GPM on salting work. He could also increase his GPM by charging a minimum amount for smaller jobs. By “stacking” these jobs back-to-back, John could significantly increase his hourly billable amount and his GPM.

The key is for John to bill a minimum amount per storm. John and his drivers should focus on billing a minimum of $398.69 per curb-time man-hour (when drivers are on site salting) and a minimum of $1,600 per storm (8 tons x $200) per driver for salting. If they meet these benchmarks, John will be profitable. Revenue for plowing will be in addition to the $1,600.

There is no doubt that his winter work is profitable and probably could be more so. Scheduling, establishing minimum prices for salting, and setting targeted minimum hourly and per storm billable dollar amounts will all contribute toward a healthy bottom line.

Salting is John’s most profitable winter work. However, with winter work, the market pretty much sets the price. He must play the market’s game and win. To do so, he must understand his costs and how general conditions (drive time and prep time) impacts profitability.

Winter work’s contribution to general and administrative (G&A) overhead costs is simple to calculate. Included in his winter prices is $25 for each labor hour the drivers are paid. The total hours paid to drivers is 750 (5 drivers x 15 storms x 10 hours per storm). We obtain the amount of G&A overhead costs included in the winter billings by multiplying the 750 hours by the $25 OPH = $18,750. As a result, winter work contributes $18,750 toward G&A overhead costs.

OTHER CONSIDERATIONS

To monitor the profitability of deicing work, the company profit and loss (P&L) financial statement should identify the sales and direct costs for both snow removal and salting. Preferably winter work should be a division of its own with its own P&L statement. This will help identify its GPM. Direct costs include field labor, labor burden, materials with sales tax, truck, equipment and any subcontractor costs. Once direct costs are subtracted from sales, the GPM for winter work will be identified.

P&L statements dilute if winter work is not separated from other work. Because this work can realize gross profit margins of 40 to 60 percent, it will distort the gross profit margins for other divisions. As a side note, once a certain type of work comprises more than 20 percent of total company revenue, it is wise to separate it with its own P&L.

Failing to measure and monitor winter work with a separate P&L that identifies GPM in terms of percentages and whole dollars, prohibits you from realizing how much winter work contributes to profitability. Unprofitable or marginally profitable divisions will be hidden from management’s attention until an extremely mild winter occurs with significantly lower winter revenue than normal. This exposes the sub-performing divisions, but by then it’s too to address and fix the problem.

Winter work can be some of your most profitable work. However, you must know your numbers and benchmarks to set realistic goals. Because the market determines what you will charge for plowing and deicing work, you must know your costs to ensure you can make money playing the market’s game.

FINAL THOUGHTS

John can play the market’s game and win. However, he has to do his homework and know his numbers. Revenue per truck for salting for a typical storm should be approximately $1,600 (8 tons x $200). Revenue per a typical storm for a truck that just plows should be in the vicinity of $1,200 (10 hours x $120). A truck doing both plowing and salting should generate just over $2,000 per typical storm. Setting revenue goals for snow and ice events, and job costing each storm immediately after it, will help ensure that John isn’t the one getting snowed.

Jim Huston runs J.R. Huston Consulting, a green industry consulting firm.