In response to the June 2014 Running the Business column (“A Case Study in Equipment Costing”), I became involved in an email correspondence with John at Buelow Excavating. Like our Mr. X, John is a small excavating contractor, with a lot of equipment, who is paid for doing similar work. He gave us permission to share his comments:
About 30 years ago, I started writing down my experiences on the job. These notes have turned into an estimating and experience book of over 100 pages.
When I started in business, I would track costs. The problem with this is you will only have a small picture of what is going on. It works for a big company but not us. I had a competitor who was charging about 60% of what I was for a similar machine. I told him to raise his rates. He said he had more money than he [really] had. About a year later, he had two major breakdowns on his machine. I then heard how broke he was.
Equipment dealers put a lot of time into arriving at their rental rates. Rental houses have a lot of equipment owning and operating costs. So I take their daily rental rate and divide it by eight hours to get my ownership costs. I then add my costs, such as operator, fuel, insurance, overhead, risk factor and profit. I believe I get an accurate equipment cost.
It doesn’t matter if you have a new machine or an old one; the hourly operating costs are the same. The difference between a new and old machine cost comes in the utilization rate. If you [have a] $100,000 machine and use it a few hours a month, the hourly rate would be very high. If you have the same machine that is old and used only a few hours a month, the costs are low. If your utilization rate on the old machine is 70%, the operating costs will be about the same as it would for the new machine.
I had two competitors in the area. One ran vintage equipment and he spent $25,000 per month on parts (plus four mechanics) to keep his equipment running. The other had all new equipment. They both made a LOT of money. The management of the company determines if the company makes the money, not the age of the equipment.
I had a job last year that ran about six months. My 30-year-old equipment did not miss one hour of work during that time. The other contractor’s equipment was about two years old, and he missed about three weeks of work due to pollution [system] and computer failures on his equipment!
I have a 1992 Cat D4C. Today’s new cost is about $100,000. The rental rate is $37.50 per hour. My cost is $62.50 per hour. I charge $110 per hour for the machine.
Transportation costs are added separately. We do jobs across the street or out of state where transportation can run into the thousands. The out of state jobs are less common, so adding those costs would skew my numbers. The way you suggested is about the way I am computing my rates.
John makes some excellent points. Having data is a must if you plan to properly price out a job. His equipment is all paid for so he doesn’t have a monthly nut for depreciation and interest to figure in.
Based on my experience, a new $100,000 unit would cost about $67,000 over 72 months (cost at 50% plus interest). The machine is worth 50% of cost after 72 months or $930 a month (prorated over 21 work days = $45 off the P/L). This method will not cover the cost of a new unit; it only provides an example of the rental rate for a fully paid unit vs. a rental company unit. You would, of course, have to cover the full $117,000 with a rate to cover P&I, maintenance, transportation, etc.
A $100,000 unit at 70% time utilization would rent for about $2,800 to $3,000 per month (P&I about $19,500 year), with a weekly rate of $840 and daily of $250. Add the operator cost, admin and profit and compare to your rate.
As a part-time CFO for an 800-unit rental company, my rates — running at 75% time utilization — include the cost of owning and operating equipment and wind up with a 35% gross margin before occupancy costs and all other costs of managing the business. My costs include technicians but also a significant amount to transport the equipment.
So I suggested to John that he try to use a monthly rate and prorate that into a daily rate using a 21-day month. He can probably discount that a bit to back out of the rental company’s occupancy and G&A expenses, and then add in his costs on top of that. My costs to operate do not include interest expense.
I suggested he play around with this and see if it will give him a more competitive rate. But if he is getting the rate he is currently using, then go with it because that should work out pretty well from a profit standpoint.
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or email@example.com.