Equipment Cost Setup
Equipment can be costly when not costed
Oddly, for equipment intensive companies, one of the last frontiers in cost development is accurate calculation of equipment costs. Apparently, many construction companies feel they have accomplished something by just tracking job costs. Since equipment cost can be as much as 50% of an equipment intensive job, it leads one to conclude that it may be better to get equipment cost in place as a first priority. There is however a distinct difference between the two types of cost.
While job cost can be used to monitor and control construction while in progress, equipment cost information is more of a long-range proposition as opposed to having a short-term value. The primary reason is that equipment costs don’t provide any immediate value in terms of controlling project costs. Rather, equipment cost data provides the long-term operating cost and the respective performance of individual pieces of equipment as profit centers unto themselves.
Much like historical job costs, historical equipment cost also provides cost data that allows for the preparation of more accurate bids, especially on equipment-intensive projects. Whereas, failure to track equipment costs prevents the inclusion of actual operating costs in a bid, a severe disadvantage on projects that are equipment-intensive. Without accurate equipment cost data the potential advantage of owning equipment is eliminated from the bidding process and the contractor is forced to place industry standard rental rates into the bid, thus failing to take advantage of in-house equipment that might perform at a substantially lower rate. Having equipment cost data available allows the estimating process to be more accurate, enables more competitive bidding, and results in more accurate overall job costs.
Another important aspect of equipment costing is that it provides a means to compare the cost performance of similar pieces of equipment in a fleet. Equipment of high operational cost can be eliminated from the fleet and replaced with equipment that is less costly to operate to reduce overall equipment cost. Without operating cost data, equipment can be misjudged. In construction, it is common for a manager to make a bad decision based on a poor sampling of information. For instance, a decision-maker might observe a particular piece of equipment down for repairs two months in a row and conclude that it is the most costly one in the fleet when actually several other pieces are regularly down when he hasn’t been present. Guess which piece will likely be sold or traded in? This type of flawed decision-making can only be rectified with equipment cost data, removing all doubt. Utilizing these costs to monitor performance and make important equipment decisions results in cost savings.
Highly equipment intensive companies require an even greater emphasis on equipment costing, and it is a necessity in order to establish the true job cost on a project. In cases where company-owned equipment is a major part of the job, the profit on the project is largely determined by the cost of the equipment charged to the job. If the hourly charge for the equipment is much higher than actual cost, then the job will carry an undo burden of equipment cost. The equipment itself may look as if it is turning a profit, but the job may not. The objective of course is for the equipment cost that is charged on the project to be in line with the actual cost of ownership. Incorporating accurate equipment costs into job cost reports provides a more accurate representation of job performance.
Not producing and utilizing equipment costs has its repercussions. Certain equipment might be down for repair repeatedly causing jobsite interruptions and associated inefficiencies, which will drive profits down. This difficulty being profitable will make it hard to replace the equipment, a downward cycle that can eventually cause an equipment-reliant contractor to be unproductive and uncompetitive.
However equipment cost implementation does not come without a price. There are complex issues that make implementation tricky, including the proper distribution of shop expenses to the cost of equipment, the handling of fuel expense, treatment of wear components, costing of repair parts drawn from inventory, the expensing of depreciation, the appropriate time lapse between internal equipment rate adjustments, the handling of equipment cost aberrations, treatment of idle time hours, and the uniform application equipment cost in the bid, budget and job, to name a few. Having all of these issues resolve and producing accurate equipment cost information requires an expert.
Druml Group has the expertise to establish your equipment cost system and to address all of the potential pitfalls. We design the procedures, implement the system, and train your staff to successfully develop the equipment costs you need in conjunction with any construction software package that you presently have, or we will assist you in acquiring a software package that will better meet your needs.