Equipment is one of the big three for costs on any construction project, right up there with labor and materials. So finding ways to better manage your equipment can have a definite impact on your profitability. We talked with a few construction industry experts to see what practical strategies they had for managing equipment. The following tips are based on our discussions with Leslie Shiner, owner of The Shiner-Group and Dennis Feidner CEO of CFO on the go:
Consider renting instead of buying
Always perform a lifecycle cost analysis when contemplating an equipment purchase. You may be better off renting. Many contractors are making payments on equipment that’s sitting idle in the warehouse. To accurately determine your return on investment, you must weigh the rental rate against the ownership and operational costs (cost per hour or day) and how much you will use the equipment. Go with whichever is most cost effective.
Allocate your small tool cost to projects
You can allocate small tool costs to projects by adding an additional calculation to project labor. Simply divide the total hours of project labor into the small tool costs (purchase and repair) for the same time frame. The result will give you an hourly amount to charge to projects when payroll is done. The same rate can be used when you are estimating a project. While your actual costs may be higher or lower on individual projects, your estimations should, on average, be much more accurate.
Allocate your equipment costs to projects
When you allocate equipment costs to projects using a reliable cost recovery rate for each piece of equipment, your billings will be more accurate and your accounting will reflect the true cost of performing the work. Use these same rates when estimating the work. In this way, you can improve your estimating by comparing the actual costs to your original budget for every cost item.
Upgrade your equipment
Review all your equipment for productivity improvements at least once a year. Replace equipment that breaks down and delays projects. If new equipment could improve employee productivity, consider making the investment. To determine whether the cost of new equipment exceeds the productivity gains it will produce for your business, compare the equipment’s cost recovery rate with the payroll savings from improved productivity.
Bill your equipment on time and materials contracts
When you perform time and materials work, don’t overlook the costs of equipment or assume you’ll recover the costs in the overhead markup. It is better to bill equipment separately, and using an hourly or daily rate enables you to bill in excess of what you have to pay out. You can charge overhead and profit on equipment listed as a separate line item on the invoice, which is not the case if you include equipment in your overhead rate. Customers generally accept this practice because your cost rate is normally lower than the equipment rental yard rate, which is their only basis for comparison.
Many contractors also use equipment management software to help them keep track of, calculate and better manage their equipment. For more information about Sage 100 Equipment Management check out this information sheet.