Underutilized Equipment
If you’ve been working two or three days and you’ve got two or three pieces of equipment that have not moved, and more than likely will not move for a while, then it probably doesn’t need to be on the project. That equipment is there to be used to make money. If it’s sitting still, it’s not making anybody money.
So a lot of it is just observation. Is your labor and your equipment being used?
If you see that you have too much equipment or too much labor for a job, then it’s going to cost you money. For one thing, you wasted money by having that equipment hauled in there. Now you need to get that equipment moved to a job so it can be used to make money. That means you’ve got to waste another mobilization to move the equipment back out.
If you don’t have anywhere for it to go, your equipment could be in the way. At that point, it’s not making money one way or the other, so you should have it moved back to your shop, yard, or wherever you keep your equipment sitting when it’s not being used.
If it turns out that you don’t have enough equipment to do the job, then you will need to pull in resources from other available equipment from the company, if it is there. If it’s not, then at that point you need to look outside the company.
Over time you will notice certain leaders in your company – your crew leaders, your foremen, your superintendents – who will call you and say something like, “Hey, I’ve got too much labor. I’ve got too much equipment,” or vice versa, “I don’t have enough.” Those are the managers you’re going to recognize. Those are the ones who you’re going to want to make long-term people for your company, because they’re watching out for the best interest of the company.
Rental Equipment
Rental equipment can play a big role in the success of a job. You get to the point to where, as an estimator or project manager, you should know what your company’s resources are, what’s available, what equipment is coming in, what is currently being used and not being used. If you’re running at seventy to eighty percent capacity and you’re still bidding work, there’s a pretty good chance that you need to start figuring in rental equipment rates for your bids you’re turning in.
If you have a rental equipment company you work with primarily, or multiple rental equipment companies you work with, every so often you should call them and ask for updated rental rates on certain pieces of equipment, or even all of their equipment. I like to do this every 90 days. It doesn’t matter if you use the smallest piece of equipment or the largest piece of equipment, you should have those rates and know at all times what it is going to cost you to rent what you need.
You need to break the rental rate down into hours for bidding and job costing purposes. Most of the time, you’re going to be working a twenty-two day month, or roughly five days a week, and if you’re working eight hours per day, or nine hours per day, it’s just simple math. You figure out what that rental rate is plus tax plus insurance.
And another thing: Either you can add that equipment onto your insurance rate, which is a cost, or you can use the rental company’s insurance rate, which is usually higher than what you’re paying. You figure those costs and you divide it by your number of days and by your working hours, and that gives you an hour rate to use.
You also have to put some kind of mark-up on there. If you generally like to use 10% profit, or 15% profit – whatever your profit margin is – you need to add that onto the rental equipment rates because you want to make money off of it as well.
Another important thing to remember is that your insurance company does not know when you turn that piece of equipment in, so it is very important that your project manager knows when you send a piece of rental equipment back. He (or you) will need to call your insurance company and say we no longer have these pieces rented, so I need to take this off of my premium. If you don’t, then you’re going to continue to pay for that insurance. It may be two, three, four months down the road before you realize it. That is money wasted.
What type of equipment you will need to rent depends on the nature of your business. If you’re in the landscape business, you’re going to need skid loaders and mini-exes. That’s equipment you’re going to be looking at and can rent from any rental company. If you’re doing mass excavation, you’re going to want big equipment. You’re going to have to pretty much skip the rental stores and go to your Caterpillars and your Komatsus – your bigger equipment companies – the actual dealers that also have rental equipment.
If you see your company growing and can use this equipment down the road, or you’ve got a year-long or longer project, then a lease purchase might be a good arrangement for you. On a lease purchase, most equipment companies will give you 90% to 100% of what you paid on that equipment in rental payments as a down payment. At that point, it becomes your own piece of equipment. Your payments go down, and you can utilize it at a cheaper rate.
Getting the best rental rates is another relationship situation that you build over a period of time, but again, it’s always good to get multiple quotes. You never want to get just one quote. You want to get two or three quotes so you can make the most money by getting the best rates. That’s the name of the game – to be able to utilize your resources and to get the most out of your project that you possibly can.
If you know that your company is running 80% or better as far as equipment and manpower that you have, and if you think you’re going to stay there for a while or you possibly could be growing larger, at that point I would recommend that you go ahead and make the purchase, even if you have to finance it. Your finance charges are going to be fifteen, maybe even twenty percent cheaper than what you’re paying in rental rates.
The caveat, obviously, is that once you sign that note, you can’t really turn that equipment back in. With rental equipment, if you get into a tight situation, you can just send it back and stop those payments. So it’s a matter of weighing getting the best rate (buying) versus having more flexibility (renting). You have to make that call based on where you are as a company and where you expect to be in the future.
Equipment Risk
There is also risk in buying equipment. If it’s a job that’s going to be long term, say 1 to 2 years, or it’s a big project, you might be safe to make that initial purchase. But if you don’t see your company growing or keeping that work load, or you’re not sure if you will be able to pick up another job to move that equipment to when that job’s done, I would recommend renting.
If there’s a question in mind, most all of your equipment companies will do a lease purchase. That’s the way I set most of mine up. I’d lease it with an option to buy. Most of them will work a deal with you. You lease for 9 months and at 9 months you either turn it in or buy it. Most of them will let you take 90% to 100% of what you paid on that lease towards a down payment on a machine.
That’s a way to cover yourself because you can lease the equipment to cover the work you have and if it looks like this is going to turn into more of a long-term relationship, then you can go ahead and buy it. Or if the job ends and you don’t need it any more, you can just turn it back in.
Another good thing about a lease conversion is that when you roll that over and finance it, your payment usually goes down somewhere from 15% to 25% to purchase versus what it was costing you to rent.
What to Charge For Your Equipment
There are a couple different ways to look at charging for your equipment, but I will tell you how I like to do it. Most of the equipment that you purchase is going to depreciate in four to five years, or it’s going to get to the point where it’s going to need some major maintenance or even be replaced. What I’ve always done is take the brand new cost and add 15 – 25% to that amount because that is what it will cost to replace in five years. So knowing I’ve got to account for future replacement at a higher cost than today, I figure that higher cost into my rates.
Another thing you’ve got to account for is maintenance. If you need an undercarriage or your engine fails, you need a new transmission – it could be a lot of things that could cost you a lot of money. There are 2080 working hours in a year, so that’s a good place to start. You take that equipment cost and you divide it by five years and then you divide it again by 2080 working hours. That tells you what you’ve purchased that machine for, per hour.
Another thing that you’ve got to figure in is the cost of fuel. If that D6 dozer burns 80 gallons of fuel in an eight-hour day, and your fuel is costing you $2 a gallon, it’s pretty simple math to see what your spending in a day on fuel. Divide that total by eight and that will tell you your hourly fuel cost – your fuel’s costing you $30 an hour, or whatever it may be. You’ve got to add that to your equipment cost.
Once you’ve added the cost of your operator in there then you’ve got your margins set for your markup. Using a bidding and costing application like ProfitDig will automatically mark up the items in your bid for your overhead and profit. If you’re not using an application that applies your markups for you, then you will need to do it manually.
So with equipment, just like with your employees, your actual expense is way more than just what you are paying the bank or equipment company. There’s a lot of stuff that has to be stacked on top of that to really have a true cost of what your equipment is costing.
Here’s an example of the kind of thinking you should apply to the decision of how to cost your equipment. Some companies use this strategy all the time.
Say I just closed a job for which I know I’m going to rent equipment. Well, we’ll go back to our CAT D6 dozer for this example. I go to my local CAT dealer and I say, “You know I’m going to need a D6 for a month. What’s it going to cost me?” He may tell me $8,000 a month, plus tax. Well I know I’m going to be working roughly one hundred and forty hours a month so I just take that amount plus tax and divide it by my hundred and forty hours, which gives me a per hour rate I’m paying for that machine.
At that point I’ve just got to figure in my fee and my operator time, and put a mark up on it. If I end up using my own equipment, I’ll be making really good money for use of the equipment because my actual expense is going to be at a lesser rate. If I still have to rent the equipment, I’m covered because I have based my rate on the rental rate.
If all of your equipment is being used, and you know you’ve got to rent, I suggest a pricing strategy like the one above. If you’ve got equipment sitting in a yard, you’re going to go with the lesser of two evils. If you are using your own equipment, you can use your actual hourly rates for your equipment and have a better chance of getting a job. That’s the only downfall I see to using rental rates as your basis for your hourly equipment rates. It may limit the jobs you can pick up because your bids will be higher. Where you might get five or six jobs out of ten you bid using the lower rates, you now might only get one or two out of ten because you’re bidding at a higher level. You’re also going to make more money on each job. It just depends on what your strategy is, and how much work you’ve got on the books.
If you have equipment sitting in your yard that you can charge a rental rate for on a job, you’re going to make a lot more money on that equipment.