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Regardless what type of construction work you do, you will have some sort of equipment you need to charge to the job as part of the bid process or the actual accounting for the project. Some of the equipment you will own, some you will rent and some will just be 100% charged off to the job.

How much of your typical job costs are equipment related will determine how much time and effort you put into managing and calculating costs used for bidding and accounting. The more equipment you use, the more accurate equipment cost recovery techniques must be for bidding and reporting purposes.

In previous columns, we have discussed using a "rental" method to allocate equipment costs for bidding and accounting purposes. (Visit www.ForConstructionPros.com to view previous articles on this topic.) To calculate a rental, you would multiply the total cost of a piece of equipment x 5%/month x 13 x 80% to arrive at the estimated annual rental dollars a rental company wants to achieve. By doing this, they would generate a 35% to 40% gross profit, which includes maintenance, insurance and the limited fuel they fund. Consequently, you would have to reduce your results by at least 40% to arrive at a "true" rental cost for a year.

On the surface, it may look like that 40% gross profit is a lot, but it really isn't. All office and administration expenses have to come out of that, along with interest expense. Believe me, it doesn't take much of a decrease in rental revenues to turn a profit into a loss. With the big fixed costs a rental company has on each rental unit, it is quite understandable. A 20% drop in rentals can cause a 50% drop in cash flow.

A specific example

In the box below is an example of how the formula cited above can be applied. The $31,000 represents what you need to recover to break even in the rental business with this unit. Keep in mind, however, that a rental company would sell the unit off before they reached this position. Also note that the depreciation rate they use is factored into the gross profit number, and interest cost must be added to the cost figure, as well.