Construction Business Owner, June 2006

Fleet equipment is normally the single largest asset for construction companies. If operated and maintained efficiently, the fleet provides quality service and output to meet the needs of customers within reasonable costs. If operated or maintained inefficiently, the quality of service degrades and cost rises.

What causes the difference? How do business owners ensure the maximum return on our investment? How do we know if our equipment is maintained well? How do we know if we are spending too much or too little maintaining that equipment?

As business owners, we assume that the people we place in charge of managing those assets will perform those duties in the most effective and cost-efficient manner. However, this may be only an assumption.

Obviously, ROCE should always be higher than the rate that the company borrows at; otherwise, any increase in borrowings will reduce shareholders' returns and earnings. It is a measure of the returns that a company is realizing from its capital, therefore, capital employed. It is calculated as profit before interest and tax divided by the difference between total assets and current liabilities and represents the efficiency with which capital is being utilized to generate revenue. When external benchmark numbers are unknown to compare to, the owner can still examine the trend. The fact is, improving maintenance practices should indicate a positive trend of an increasing ROCE over time.

One common measure to assess whether we are spending too little or too much on maintenance is to look at the ratio of maintenance expenditures as a percent of Estimated Replacement Value (ERV) or Fleet Replacement Value (FRV). ERV is the cost to replace, in kind, your total fleet. In some cases, it is referred to as the insured value of the equipment. Maintenance expenditures include all maintenance labor, parts and materials and cost of maintenance overhead. It excludes fuel which is a production consumable. 

The industry average of maintenance expenditures as a percent of ERV ranges from 9.3 percent for small fleets (less than $1 million in value) to 13.1 percent for medium fleets to 11.6 percent for larger fleets (over $25 million in value).  However, Best in Class (top 5 percent heavy construction and paving companies) average 5 percent while World Class (regardless of industry) average less than 2.5 percent. 

Putting this in perspective, if your company has a fleet replacement value of $20 million and you are fairly comparable to the industry average, you may be spending about $2.6 million a year on maintenance. However, if you are closer to Best in Class, you are spending $1 million a year, netting a savings of $1.6 million to the bottom-line. Better yet, if you have been successful at implementing World Class maintenance practices, you should be spending no more than $500,000 per year maintaining that $20 million fleet, a net savings of $2 million per year. Now, examining your current margins, ask yourself, how much more business would you have to run and capitalize to produce that same level of return?

Most see maintenance as merely the function or activities to keep the equipment functional.  To a good extent, that is true. The equipment division or shop is charged with enabling operations to do their job in an efficient and cost productive manner by providing equipment in a reliable state, when needed. Therefore, the equipment division or shop is charged with maximizing production capacity. In actuality, if all they do is "fix things," they may not be doing the right things to ensure that equipment is running well since fixing is reactive by nature.

 

Title
Comment
Name
Email
Write the displayed characters
	Add Comment