| Tue, 10/18/2011 - 3:20pm | |
| Jerry Romagnoli | We're trying to update our in-house equipment rates for our estimating program. In the past we've used pricing close to rental rates since we didn't own much equipment at the time. Now that we've aquired more pieces, I'd like to gain an understanding of how other contractors estimate the cost of their own heavy equipment in their bids. |
| Fri, 10/21/2011 - 10:34am | #1 |
| David Womack | Jerry You are venturing into one of the great unknowns! There are two prevailing philosophies on equipment management. One is to fully cost equipment to the job, and to develop rates and costing policies that accomplish this. The second is to operate the equipment as a profit center and manage accordingly. The philosophy for development of the rate for bidding purposes is directly related to the costing philosophy. Most heavy equipment companies want to utilize an hourly costing model to charge equipment to the job. This sounds reasonable and practical, but there has to be consideration for both the up side and the down side. Does idle equipment get charged to the job? Does equipment which is operating two shifts per day get charged out for more than an 8 hour day? The problem with equipment is that you have both fixed and variable costs. Depreciation, insurance and taxes are fixed and incurred whether the equipment is running or not. Fuel, wear and tear are only incurred when the equipment is running. Using a straight hourly rate doesn't account for the potentially large difference in cost for these two scenarios. So what do you do from a cost perspective? There are three workable options. First, you can use the hourly rates and not worry about it. Turn in hours with your payroll and assume that all will work itself out. This is the easiest way, but not necessarily the most accurate. Alternatively, you can utilize an hourly 'working' rate and a separate hourly 'idle' rate. Fixed cost need to be accounted for even when the machine isn't running. Charging an 'idle' rate seems to remind the Supt or PM that the machine isn't 'free' when it is parked on the job. Supt's can get awfully comfortable with lots of iron sitting on the job! Idle time needs to be proactively managed with a big picture oversight. The other philosophy is to use a 'rental' philosophy in costing. This requires breaking the rent into daily, weekly, monthly rates, and costing accordingly. This method most closely resembles the 'market' cost, and in the long term may result in the best comparison to rental options. If the equipment is on the job, 'rent' gets charged. The Supt can't simply keep a tractor for convenience and only 'cost' it to the job a couple of hours each week. It is only when you know your 'costing' methodology that you can truly understand how to bid the equipment. The goal is to fully cost all of your equipment cost as direct cost. If you don't do this, it becomes an overhead expense. However, you also want to ensure that you don't hit a job with more cost than it would take to rent the same equipment, otherwise you are owning the wrong equipment, too much of it, or your costing methodology simply isn't working. I've actually had guys turn in actual time on machines that resulted in 70 hours of cost in a week. Think about what this does to the costing model... If you are not fully costing your equipment to jobs, you really have to then look at the circumstances. For a short term slow down, you simply have to eat the excess cost, either within your jobs or as an unallocated overhead expense. If this problem persists for more than a few months, you really have to look at reduction of the fleet or other maintenance expenses. From an overall fleet management perspective, owning equipment is supposed to save you money. Analyze the total cost of ownership of each piece of equipment on an annual basis and if possible, track the utilization (total in house 'rent' costed to job) separately for each piece. When you compare ownership cost to revenue to the alternative cost to rent on a piece by piece basis, you may be very surprised what you learn. I'd be happy to discuss with you at any time. Email is davidw@standardmechanicalsystems.com DW |
| Wed, 10/19/2011 - 7:50pm | #2 |
| Jerry Romagnoli | Thanks Kyle. I may give you a call tomorrow to discuss. Jerry |
| Wed, 10/19/2011 - 7:48pm | #3 |
| Jerry Romagnoli | Thanks for your input Michael. I'll look up Mr. Vorster's book. In this economy we're trying hard not to "give away the farm" just to keep a backlog. It's tempting to cut our equipment rates as a way to reduce our bids, but I know that is a dead end street. appreciate the advice Jerry |
| Tue, 10/18/2011 - 6:11pm | #4 |
| Kyle Walter | Jerry, We work with dirt contractors on the west coast although I doubt the costing methodology is different. We've had contractors pool their own internal equipment costs and develope rates off of that but what that doesn't rate or show is how efficient their use of equipment is compared to industry averages. We prefer to benchmark off of published rental rates which allows our contractors to see if they are making/losing money on their equipment when compared to what they could have rented it for. This is even more relevant in this economy where there is greater desire to rent and not invest in equipment. Give me a call (503) 428-3098 if you have additional questions. Kyle Walter, Kuenzi & Company |
| Tue, 10/18/2011 - 3:40pm | #5 |
| Michael McClay | Even though we have a fairly large equipment fleet, we too use rental rates for most bidding applicatons. The 2010 AGC/CFMA conference had Mike Vorster as one of the speakers on equipment costing. His material is very good regarding proper costing and analyis of fixed and variable equipment costing. I believe he is a professor at Virginia Tech. I think he also has a book on the subject. I use some of his formats from the conference for analyzing our equipment/shop results, although primarily on an annual basis. |