Executive Summary: Equipment cost within an estimate is one of the most common areas to make large scale adjustments in a bid’s price. It is also a large component of a heavy/civil construction company’s bid and balance sheet. Because of these reasons, it is vital to know what your fleet is costing you. Start to take action on better estimating these costs.
Why companies own equipment. A lot of construction companies own their own fleets of equipment for several reasons:
- brings a competitive advantage to them at bid time
- instills confidence in their clients that they are financially stable
- to maintain project schedule since there is no dependency on the availability of gear from a third party rental house
- “yellow fever” or “iron fever” – a term describing a company’s owner to continue to buy gear because of because it’s fun to have toys (yellow referring to Caterpillar and iron referring to what equipment is made of)
How companies calculate equipment costs. I’ve heard it a hundred times from companies – we do that “differently”. “That” could mean a lot of things and it definitely includes the calculation of rental (internal cost to a company) and its associated operating expense.
Some companies use “what the owner gives them” which is often times based on historical costs that have won projects but have no direct correlation to actually incurred maintenance costs.
Many companies use a set rate for hourly rental and do not have a rate for operating costs. The proper way to account for the true cost of equipment is to include:
- ownership cost – the cost to pay off the lending institution on a monthly basis
- equipment operating expense – the cost of ground engaging components (tires and tracks), fuel, lubrication, mechanics’ time, and parts
The benefit of having a two-component cost at bid time is to permit the estimator to incur a daily/monthly rental but to only incur operating expense when the gear is actually operating. So, as an example, if you have a dozer on your job for six months, but it is sitting for two of them, the true cost of the equipment is the full six months of rental plus only four months of operating expense.
I ran into another company that set the operating expense to 50% of the rental rate.
Suggestion. Be consistent. Pick a measure and make it consistent. A lot of people shun using Blue Book Rates, but I disagree. Yes, using these rates can make it hard to win work (they’re too high). However, the advantage is consistency. Starting with a base value which is traceable over time and somewhat predictable will allow you to more easily maintain your database of equipment costs. Also, like it or not, it may actually be correct since there’s a team over at equipmentwatch.com that is living and breathing the generation of, and defense of, all the numbers they publish.