Equipment Costs Add Up

Q:
Our contracting company does a pretty good job of tracking labor, material and subcontractor costs on a project basis, but we don’t capture our equipment costs.  I know we should be tracking these costs, but it’s just a lot of extra work.  Besides the headaches of getting daily, or even weekly, equipment data from the field, it takes a lot of time creating equipment reports that we can use. Can you recommend an efficient method of equipment costing?

Stan
A:
Understanding the importance of equipment costing represents a step in the right direction. As you know, equipment costs represent real (or direct) costs of doing business.  Without this information, you have a gaping hole in your total job cost estimate, which can lead to eroding profits.

I’m not sure I understand your exact situation, but I’ve heard this story before.  Lots of contractors fail to allocate equipment costs to jobs because:

1. Eestablishing a pricing structure for equipment seems complicated
2. Iit’s challenging to collect this information from the field
3. Generic accounting systems don’t handle equipment costs by job, so lots of time must be spent creating and maintaining spreadsheets.

Establishing Rates: Considering that you don’t have a lot of historical data for your equipment costs, the best starting point for determining rates is through equipment rate manuals (such as Blue Book). Later, when you have accumulated accurate data on operating expenses and utilization, you can adjust those rates for more competitive bidding.

Collecting Data: The easiest way to gather equipment hours from the field is to record the data with payroll timecards.  (For example, Joe Smith worked eight hours on Job 20, using dozer No.1 for six hours). Some contractors prefer to assign a foreman to collect equipment data on a daily or weekly basis.  In any event, it’s important to capture idle and downtime of equipment (which is billed at lower rates to account for less wear and tear) so that you see when equipment assigned to a job is not being used or generating full revenue.

Entering Data for Reporting Purposes:  Here’s where technology can help.   With fully integrated job cost accounting software, equipment cost data is entered just once (with timecard entry, for example) and flows automatically to update the equipment module and job costing (by job, phase, cost code or cost class). There’s no need for spreadsheets and duplicated data entry.  To help save time and reduce data entry error, most systems allow users to set up multiple billing rates and default settings for each piece of equipment.

That’s the long answer. The short answer is: Construction-specific accounting software is the most efficient way to handle equipment costing for better job cost management and higher profits!

Fred

Construction Business Owner, February 2009