Labor costs are top-of-mind for any landscaping business. For many landscapers, these expenses creep up unnoticed until profits are razor-thin or, worse, non-existent. The reality is that without closely tracking labor costs in landscaping, it’s nearly impossible to maintain healthy profit margins.

In our consulting work with landscaping businesses, we often see owners struggle to understand where their money is going. A common issue is that labor costs are either underreported, lumped into the wrong categories, or not analyzed at all. This renders the owner unable to see the full picture of their profitability, let alone make informed decisions about pricing, hiring, or efficiency improvements.

Today’s blog explains why tracking labor costs is essential, how to set up your financial reports to see these numbers clearly, and how the Profit First system can help you regain control of your labor expenses and keep your business profitable.

Why Labor Costs Are Critical to Profitability

Labor is often the largest expense in a landscaping business. Unlike the relatively predictable material costs, labor costs can spiral out of control if not monitored carefully. Overtime hours, inefficiencies on job sites, or underbidding projects can lead to labor costs eating into your profits.

To avoid surprises, it’s crucial to understand the role labor plays in your profitability. When tracking labor costs in landscaping, they should be broken down into two key categories:

1. Direct Labor Costs: These are the costs directly tied to delivering your landscaping services, such as wages for crew members, subcontractors, and any other field workers.
2. Indirect Labor Costs: These include administrative or office staff salaries, which are not tied to a specific project but still impact your overall overhead.

Tracking these separately allows you to see exactly how much it costs to deliver your services and identify areas where you might be overspending. A helpful tool to track these is your Profit and Loss Statement. And they’re not as intuitive as we’d hope. 

Set Up Your Profit & Loss Statement Correctly

One of the most common mistakes landscaping businesses make is not organizing their profit and loss (P&L) statements in a way that helps with decision-making. Without a clear structure, it’s difficult to analyze labor costs and their impact on profitability.

A properly structured P&L statement should have these sections:

1. Sales (Revenue): This is the total amount your business earns from completed projects.
2. Cost of Goods Sold (COGS): This section includes all the costs directly related to delivering your services. For landscaping businesses, direct labor costs should be recorded in this section.
3. Gross Profit: This is calculated by subtracting COGS from Sales. It shows how much money you’re making after covering the costs of delivering your services.
4. Operating Expenses: These include indirect costs such as rent, office salaries, marketing, and utilities.

By including labor costs into the COGS section, you can directly analyze how much it costs to deliver your services and calculate your gross profit. This distinction is critical for understanding your business’s financial health, enabling you to make informed decisions. 

The Impact of Mismanaged Labor Costs

When labor costs aren’t tracked or analyzed correctly, several problems can arise:

1. Hidden Costs: Without clear tracking, overtime, inefficiencies, or unnecessary labor costs can go unnoticed.
2. Inaccurate Pricing: If you don’t know how much it costs to complete a project, you may undercharge, leading to slim or negative profit margins.
3. Reduced Profitability: High labor costs without a corresponding increase in revenue can shrink your gross profit, leaving little to cover operating expenses or owner’s pay.
4. Cash Flow Problems: Labor is often paid weekly or biweekly, and if you’re not tracking costs properly, you might find yourself scrambling to cover payroll.

By keeping an eye on labor costs, you can avoid these pitfalls and create a more sustainable business model. As with any data, the effectiveness of your reports is directly related to the integrity or accuracy of the information you’re looking at. 

You will want to ensure that you’re tracking your costs correctly. 

How to Track Labor Costs Effectively

Here are actionable steps to track labor costs with greater accuracy. 

1. Use a Time Tracking System: Implement software or tools to track employee hours by project or service. This ensures you know exactly how much time is being spent on each job.
2. Categorize Labor Correctly: Direct labor should be separated from indirect labor on your P&L statement. This clarity helps you understand the true cost of delivering your services.
3. Review Payroll Regularly: Compare payroll reports to project budgets to ensure you stay within your labor cost estimates.
4. Monitor Labor-to-Sales Ratios: A healthy ratio ensures you’re not overspending on labor compared to your revenue. If your labor costs are too high, it’s a sign you need to increase prices, improve efficiency, or both.

Now that you’re crushing it at tracking your labor costs, now it’s time to make sure you are making decisions that prioritize profit for you. This is where the Profit First method comes in. 

Profit First: A System for Managing Labor Costs

The Profit First system can help landscapers take control of their labor costs and improve profitability. Too many businesses see profit as a nice-to-have or an after-the-fact benefit. But we believe that you should structure your business around profit. 

Here’s how it works:

1. Separate Funds Into Accounts: Profit First uses multiple bank accounts to allocate revenue for specific purposes—profit, owner’s pay, taxes, operating expenses, and materials/labor.
2. Set Allocations for Labor: A portion of every payment you receive should be allocated to a designated “Labor” account. This ensures you always have the funds to cover payroll and don’t accidentally spend it elsewhere.
3. Track Gross Profit: By allocating funds for direct labor costs upfront, you can calculate your gross profit in real time. This clarity allows you to make adjustments quickly if labor costs are cutting into your margins.
4. Build Profitability Into Your Pricing: With Profit First, you prioritize profit and work backward to ensure your pricing covers labor costs and other expenses. This guarantees that every project contributes to your business’s financial health.

When Labor Costs Are Too High

If you’re following these steps and you find that your labor costs are eating into your profits, it’s time to take corrective action. 

Start by asking these key questions:

• Are we spending too much time on each project? Evaluate job efficiency and look for ways to streamline processes.
• Are we undercharging for our services? If your labor-to-sales ratio is too high, it might be time to raise your prices.
• Are we taking on unprofitable projects? Review past projects to identify patterns where labor costs consistently exceeded revenue.
• Are we managing overtime effectively? Limit overtime hours to avoid unnecessary labor cost spikes.

By addressing these issues, you can bring labor costs back in line and protect your profit margins.

Healthy Profit Margins Lead to a Healthy Business

Tracking labor costs in landscaping isn’t just about cutting expenses—it’s about creating a sustainable, profitable business. When you have a clear understanding of how much it costs to deliver your services, you can:

• Make informed decisions about pricing and hiring.
• Improve job efficiency and project planning.
• Reduce financial stress by ensuring payroll is always covered.

Most importantly, tracking labor costs allows you to see the bigger picture of your business’s financial health. By combining this practice with the Profit First system, you can set your landscaping business on a path to long-term success.

Labor costs are one of the most significant expenses for landscaping businesses, and they require careful management. By setting up your financial reports correctly, tracking costs consistently, and implementing the Profit First system, you can gain clarity, improve efficiency, and maintain healthy profit margins.

Don’t let labor costs surprise you or eat away at your profits. Take control of your numbers, prioritize profitability, and build a landscaping business that thrives.

Schedule a call to learn how the AccountSolve team can help you today.