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Rebounding from El Niño

By:
  • Mike Rorie
- Posted: April 6, 2016
The entire snow industry has been going pretty strong over the past five years with a few record-setting seasons in some areas of the country - and two very strong seasons back-to-back. This season, however, we’ve only seen a few states reporting average to above-average snowfall, leaving most contractors behind in events and activity.

This has redirected our industry’s challenges from salt shortages and a weary workforce to a shortage of opportunity. As a result, our worries have shifted from material costs and scarcity to likely some overcapacity against demand.

So now that your capacities have been built up and your opportunities have been reduced, all while dealing with the aftermath of El Niño, it has become clear that the unpredictability of winter can have a tremendous impact on how our businesses perform during snow season.

How can you reduce your risk year to year and stabilize your business to handle highs and lows?

What contracts are you selling?
There are some steps off the bat that a company can implement to ensure fewer financial ups and downs in their snow business.

The first is the type of contracts to sell. There is always good debate as to the best overall type of contract to have. The market you’re in will have as much influence over what is sold as any other factor, so there really isn’t a best answer for everyone.

No matter your market, your contracts can influence the financial stability of your organization - more so than the weather sometimes. It’s important to have a good understanding of how to structure agreements to help you take control over winter’s outcome. 

Common contracts in the industry as defined in SIMA’s Glossary of Terms include:
  • Per-Event Service: A fee structure where agreed-upon fees are assessed for a defined set of services each time an event has occurred. In this case, parameters of an event are outlined in the contract and are typically restricted by specific timeframes and specific conditions, typically including amount of accumulation (range of inches/centimeters), ice events and extreme conditions.
  • Time and Materials (T&M): A fee structure where agreed-upon fees are assessed based on amount of time (labor and equipment) and materials (deicers, sand, stakes, etc.) used, and any other contractually agreed-upon services. The most basic type of agreement, T&M is widely used across many markets and types of work from retail to commercial and residential.
  • Per Occurrence: A fee structure in which agreed-upon fees are assessed each time a salt application, snow clearing or both is completed. This fee structure can result in multiple billable services performed during one event. Usually a set price is agreed upon for each occurrence rather than fluctuating charges for man hours and materials used.
  • Per-Season Service: A fee structure in which agreed-upon fees are assessed as a standardized fee (typically monthly) paid over the period of the contract for a defined set of services. These vary quite a bit and often will have fee modifiers such as caps and floors that may modify specific service fees.
Other agreements exist, but this article will focus on the notion that these types of agreements are sold by the majority of service providers.

When this article was written, this winter had seen below-average accumulations, so having the majority of your contracts written as seasonal agreements would have been a great outcome. Two years ago, we would have said the opposite. With one-and-a-half to two times normal averages hitting most markets, we would have wanted the majority of our book of business to be T&M or per-occurrence agreements to net the most income.

Since we can’t absolutely predict a season’s outcome before it happens, we must have a balance in agreements to cover our bases and ensure we have a steady and hopefully profitable winter season.

Achieving balance
Know overhead costs. You never want winter to be about survival, but for many of us it is. A good understanding of how much fixed overhead you have is essential to seeking the right mix of contracts.  

For example, if you know you need to recover $350,000 in any given year to provide overhead contribution to your fixed cost, as well as your cost of being prepared to do business, selling a portion of seasonal contracts to cover overhead is a good way to diversify risk. Contract mix helps us hedge our bets on what happens from season to season. If your dependency on snow revenue contribution is lower, then the need to diversify your contract mix goes down.

Match clients to contract types
. Diversifying your portfolio of business is important, but choosing the right type of accounts to fit this mix is equally as critical to your success.

For example, high-volume zero tolerance accounts (for example, hospitals) aren’t ideal for seasonal agreements. Statistically, over a five-year run this type of account will throw off much more income with a variable billing agreement versus a seasonal agreement.

Plan for growth
. Another way to protect yourself from weather dependency is by planning for significant annual sales growth - say 15% to 20% each year. That will afford you a hedge by nearly that amount from year to year. You won’t feel a lighter winter as much with the larger book of business. Having a good marketing plan and salesperson to find and negotiate good work are critical factors.

Analyze your 2016-2017 mix
Do your homework for next season to outline your strategic blend for your 2016-2017 season. Create a plan to target properties that will fit the mix you seek. Don’t take on another seasonal agreement if you really need more variable-based agreements to create balance.

If you’re going to be in the snow business for decades, taking some of the highs and
particularly the lows out of Mother Nature’s hands and into your own just makes sense.

Solutions
  • Know what types of contracts you need to weather winter’s ups and downs.
  • Carve out time now to develop a strategy to prepare for the 2016-17 season.
  • Track your weather (number of events, inches of snow, ice vs. snow occurrences, etc.) so you have historical averages to weigh when you consider portfolio balance.
  • As you begin to sell for next season, do not take on business that is easy if it doesn’t fit your contract mix.
Mike Rorie has been a participant in the snow
and ice industry for over three decades. He is now a supplier to the industry as the CEO of GIS Dynamics, parent company to Go iLawn and Go iPave. Contact him at sales@gisdynamics.com.
 
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