The Power of Accurate Equipment Rate Calculations

The old adage, “If you can’t measure it, you can’t manage it,” holds true in the construction industry, especially when it comes to equipment rates. Breaking even on equipment at the end of each year is a goal, but how many actually achieve it? More importantly, how many actually know if they are achieving it? While setting equipment rates through recommended calculations is far from a new practice, too many companies either do not utilize it or have incomplete processes. The result is an inaccurate picture of expenses and, therefore, income, which not only adversely affects that company’s bottom line, but also affects its ability to bid competitively. According to TBR Strategies CEO Preston Ingalls, attaining that equipment rate equilibrium doesn’t always happen. Many companies are either under-applying their rates or the maintenance costs are too high, for a variety of reasons. The goal of reducing operating and ownership costs can be challenging for many companies that are looking to recover as much of that cost as possible, without becoming uncompetitive. There are many different ways to reduce those expenditures to become more efficient by ensuring more uptime, including better project manager and operator care programs. Still, there are many factors that influence equipment rental rates. One of the leading ways to track those cost factors is through recommended calculations to determine acquisition costs, yearly operational hours and a variety of individual equipment costs.

Rate Calculation Experience

For Louisiana-based Barriere Construction, its equipment division has had a strong equipment rates and reporting process that has served the company well for more than 16 years. As a heavy construction company headquartered in New Orleans, Louisiana, Barriere Construction is one of the state’s largest heavy civil contractor and construction firms, with six locations across five divisions. The fourth-generation, family-owned company specializes in highway and heavy civil construction, asphalt and concrete paving. The company has won the Fleet Master’s Award twice for fleet management excellence, presented by the Association for Equipment Management Professionals and Construction Equipment magazine. According to Barriere equipment manager Ben Tucker, an accurate equipment rate calculation can have far-reaching implications for the business overall. “While figuring equipment rates will enable a company to break even on the equipment side, it also is fundamental to building your budget on what you should be spending on your equipment at the same time,” said Tucker. “You’re building a budget on how many man hours, mechanic hours, parts and what you should spend at the end of the year, so you’re building your maintenance budget as well, which is one of the critical factors of rates.” While having a proper equipment rate for job bidding is not as much a factor for a company like Barriere, it is a big factor for thousands of construction companies across the United States. “What it comes down to is [that] you have two separate areas of costs and you want to be a low-cost producer and have the highest uptime on your equipment and the lowest rate possible so that you can get the next job,” said Tucker. “When I look at my equipment, I want to break even in terms of rate charges so that I make money with it and not lose money, so you have to look at from both sides of the ownership and operator (O&O) equation.”

O&O Calculation Factors

When providing some insight using the rates and reporting documentation that he created for Barriere, Tucker expounded on the data need from the ownership side and the operator side of the equipment equation. This is in addition to the basic requirements from ownership, such as original equipment costs, projected length of ownership, residual value and various taxes incurred throughout the year. Tucker also provided a more granular view with key data points that companies need to complete the picture, such as projected run-time hours for each piece of equipment and whether they will also track idle time. “If they have a piece of equipment on the job and it’s not being used, they either have to pay for it or they don’t have to pay for it,” said Tucker. “If they have to pay for it, then they should know what to charge for idle time, which helps to potentially lower your ownership rates, but it’s all on how you want to account for your equipment and charge.” When handling the operation side of the equation, Tucker explained that it’s more about knowing where the company is spending their money with fuel, for example. This can be calculated using gallon-per-hour fuel burn rate based on the meter, but it can also be calculated using a blend of the meter and recorded work rate. “It’s important to check these annually, but ideally biannually to assemble each category of your fleet by equipment type in order to know what you’re charging,” said Tucker. The next piece of the puzzle on the equipment side is the component costs, which come down to equipment repair time per component. Gathering and calculating this data makes it possible to break down costs per hour with the knowledge of parts costs and mechanic costs per hour. The same holds true for the preventive maintenance (PM) side of things for each PM level.

A 360-degree View

Tracking these things enables the business to know where its costs are going based on the different components of the machine and machine type. This facilitates a breakdown of where money is being and saved. “That way, you can work on where you are spending more money to find ways to decrease costs,” said Tucker. Other factors also play a part, such as residual value and whether you get guaranteed buybacks on equipment or are dependent on market prices with each classification of equipment. In addition, different job types, such as those in harsher environments, should be part of the calculations as they can affect operating costs. According to Tucker, knowing your utilization of equipment and knowing how much you use your equipment is crucial to accurately calculating rates and what the business’s utilization will be in the future based on the company’s job outlook. Ingalls, who regularly sees the effect on companies not accurately calculating their equipment rates, discussed how that inaccuracy is buried. “If we don’t have something pretty close to actual rates, it just means we are hiding the actual costs of running our equipment somewhere else in the profit and loss statement. When it is hidden, there is no incentive to address it,” said Ingalls. There are also the comparative standards with factors like The Blue Book Network, dealership rates and rental rates. Additional elements like recovery rate and internal economic drive are also key factors. “You may know your costs, but how much do you really need to recover from the use of the equipment,” said Ingalls. “The company must have a clear picture of what they are pushing to do from a sales and estimator perspective, which means an understanding of where you want to be more competitive, where you want to reduce rental rates and where that fits in against your competitors.” The overall objective is to be as competitive as possible, so equipment rates are part of the formula for how projects are bid. Both Ingalls and Tucker made it clear that since equipment is a key part of every job, the rate must be as accurate as possible. “Performing this function correctly can make the difference in winning a job, but if you win it, this can make the job more profitable,” said Tucker. “Ultimately, if you know your equipment, then you should be able to accurately calculate your rate.”