A Case Study in Equipment Costing

In the first in a two-part series, we look at a real-world situation a contractor is facing and offer recommendations on how to address it.

In a recent column, my comments covered the need for contractors to do their homework, including determining machine and crew rates, tech rates, burden rates, profit margin, etc. I discussed the analysis required to determine both machine and tech true annual costs, along with utilization rates, to see if it makes sense to own the units and have techs on the payroll, or if it’s better to rent the units.

I believe a lot of contractors would be surprised when they compare the internal vs. external costs. For some, the answer may be to optimize the equipment fleet to keep only those specialized, highly used units, and sell off the rest and rent as needed for a net cost savings.

After my comments appeared in Equipment Today, I received the email shown below. Take a moment to read it and see if you have any similar issues to deal with in your business.

Dear Mr. Bartecki,

I read your article that was published in Equipment Today and in it you mentioned some homework and expressed your interest in discussing rental equipment rates with people who have their boots on the street. Well, I have my feet in the mud.

I am a small excavating contractor. We do all kinds of site work including:

• General excavation for houses and additions

• Water sewer and fire pipes

• Drainage improvements, grading and driveway prep

• Retaining walls

• Waterproofing

• Building parks and playgrounds

• Marine ramps and parking lots

• And anything else involving big yellow equipment (sometimes white equipment, too)

Because of the tough economic times, we have shifted into more labor-intensive jobs, while using our extensive fleet to give us an efficiency edge over our competition. Because of our operations, I find that we are jumping from site to site and the jobs have been difficult to price. It is only after we have completed the work that we find out if we made or lost money. This is a practice that I have to move away from.

Many of the jobs we have been looking at, and doing, are all on difficult and tight sites. I first took the approach of bidding my jobs on a time and materials basis, figuring what my equipment costs and charges should be. I did research on hourly rates and machine utilization and soon came to the realization that sometimes I would have a machine that only actually worked for three hours in one day, but was on standby for eight. I also had to pay my operator for a full day whether he was running a “bobcat” or pushing a broom. (I am lucky that my operators are willing to push the broom.)

I then took the approach of charging a daily rate per piece and found that many of my customers were scared of entering into a contract where the end price was unknown. I then resorted to where I am today, which is I figure out how long the job should take using which piece of equipment; how much labor is needed; how many supplies [are needed]; and add to that fuel, insurance, tolls, consumables, etc. — and I have made quite a mess. I have also been having difficulty pricing out my older equipment. It is not quite as productive, but does it matter if my mini-excavator and my old dump truck are the limiting factor or is it the city traffic that is slowing me down?

The job costing site books have been no help because they address large, open production jobs and are nothing like what I encounter. It is different every day, unfortunately. Labor rates are a whole other dilemma, with the hourly rates, workers comp insurance, health insurance, transportation costs, etc.

Are there any resources or recommendations that you can suggest to help me weed through these vast issues and help me properly price my jobs so I am not only fair to my customers but am fair to myself and my employees?

The bottom line is how much should I be charging for the equipment that I provide?

I contacted the sender (we’ll call him “Mr. X”), thanked him for his email and asked how I could help. We had a nice long chat and he explained his background, the type of work he is doing, the type of equipment he owns, the makeup of his work crews and his overall goals to pay his bills and make a buck.

Here are some key points he noted:

  • He has a substantial fleet of equipment and trucks for his size business. Most of it is paid for so he only has to maintain what he has to keep them running.
  • He has a good crew and he wants to keep them, and thus feels the need to keep bidding jobs just and keep the crew busy.
  • He has trouble pricing out jobs because he is not comfortable using the equipment rates and crew rates he calculates.
  • He also noted that most of his contractor friends have similar issues.

After we talked, the creator of the email suggested I include it in Equipment Today and use it as a case study to help him out and have him report back. I said, “Great idea. Let’s do it.” So here we are.

Case Study Q&A

While I have experience in construction, equipment and rental, I know enough about Mr. X’s issues to be dangerous. What I am really good at after all these years is “knowing who knows.” Consequently, I have asked Ken Hedlund, the principal in charge of the Construction and A/E Team at Somerset CPAs, to offer up his expertise on this project, as well. I have worked with Ken for many years and can vouch for his contractor expertise. I encourage you to look him up at SomersetCPAs.com to get a feel for the services his company provides to contractors. I think you will be impressed.

So I am going to offer up some comments to Mr. X this month and have Ken share his comments next month. Then we will see how Mr. X reacts, find out what other suggestions you readers may have and see if we can bring some value added to the process. Needless to say, feel free to jump in. You can send your suggestions to me at gbartecki@comcast.net.

During our discussion, my initial questions for Mr. X were:

  1. Do you have an accounting system geared to your line of work?
  2. What percentage of the equipment do you own?
  3. What are your utilization rates on the equipment?
  4. Do you have a burden rate calculated for the work crew?
  5. What is the utilization doing construction vs. maintenance?

Here are his responses:

  1. No, the checkbook is maintained by a family member. No contractor package of any kind is used to track costs or accumulate costs to calculate equipment and crew rates for bidding purposes.
  2. A big chunk of the equipment is owned, which creates a dilemma because if the unit is paid for, the costs to consider are the maintenance, repairs, storage, transportation and insurance. Equipment costs have to be charged to jobs at a rate that recovers 100% of the costs. Mr. X does not recover 100% because time utilization is low for many of the units. Bottom line, he is not covering the equipment costs even if he owns them.
  3. As noted above, the equipment is not aggressively managed.
  4. Mr. X is not comfortable with burden rate because he is not comfortable with the costs to calculate the rate.
  5. The work crew is used to do what is needed, whether it is construction related or clean-up. A blended rate is used to keep the crew working.

In the end, Mr. X is asking how to calculate equipment and labor rates to properly bid jobs; how to calculate profit/loss on jobs; and how to manage the equipment fleet for maximum efficiency.

Mr. X needs to compile historical costs and estimate 2014 costs to be able to calculate machine rates and burden rates for the work crew. He then has to get comfortable with his bidding process and review the process as the work proceeds so he can adjust the job cost for change orders, etc.

This is my take on the issue at this point, which is limited because I have not reviewed the books of the company.

Let’s see what Ken has to say next month.

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 gbartecki@comcast.net.