Whether you are a general contractor, builder, specialty contractor or subcontractor, it takes labor, equipment and materials to complete a contract’s scope of work. Therefore, when pricing and estimating projects, you must include the time and money required for each in your bids.
Equipment Isn’t Free
The contractors who make the most money always job-charge for labor and equipment at the right rates—rates that compensate the company for the actual cost of owning and using the equipment, while providing a fair return on investment (ROI). Too often, owners treat their equipment investments as insignificant.
Every piece of equipment owned, whether fully paid for or financed, has value. And to not charge for valuable equipment is bad business. In fact, if you don’t charge, you’re giving customers free equipment, vehicles and tools, which causes your prices to be lower than your cost of doing business and your long-term survival to be doomed or significantly hindered. If you don’t give customers free materials, why wouldn’t you charge them for equipment?
Know Your Minimum ROI
In real estate development, it takes a combination of equity and financing to put together the entire transaction and deal. To attract equity investors, the project proforma must propose to generate a minimum of 10% to 15% ROI for the investors—after all expenses, including mortgage, management, maintenance and upkeep. Without a minimum ROI, investors won’t be tempted to invest and will seek other higher-return investments.
As shown on their balance sheets, many contractors have significant equity and investment in equipment and vehicles. If your company has $250,000, $500,000, $1 million or more invested in equipment, you want a minimum annual ROI of at least 15%. And if you are not making a reasonable ROI in equipment, you should rent equipment as needed and invest your cash into apartments, commercial property or other higher-return opportunities. In other words, your equity is valuable and must generate a return.
Charging for Your Equipment
When you estimate projects, include the right price for using company-owned equipment. Think like you are a rental company that sets its rental rates based on what it takes to own and manage a fleet of equipment, while also making a profit. The right rental price is the total cost of ownership, including insurance, tires, maintenance, repairs, mechanic, shop, gas, transportation to jobsites, GPS, depreciation and a 15% ROI.
Each piece of equipment or vehicle should have a rental timecard and be charged daily to the correct job and at the same daily or hourly rate at which it is bid. Like rental companies, you should charge for your equipment by the day, rather than the hour, to simplify the tracking process.
Assign someone in accounting to be the equipment bookkeeper, whose daily job is to track and charge each piece of company-owned equipment to the correct job and cost code. At the end of each project, review the actual equipment hours job-charged against the estimated hours to determine if your bid was accurate or if it needs to be adjusted in the future.
The Real Cost of Ownership
Can you generate enough revenue to pay for your company equipment? Do you know what it really costs to own a heavy-duty pickup truck for use on jobsites?
To determine the cost of owning and renting equipment and properly charging it to your jobs, start by estimating the life of the machine until it must be replaced. Then add the total cost of ownership over the lifetime.
Smart businesspeople work to add return to their rates. Remember, owning equipment requires a down payment, which ties up working capital, reduces your bonding capacity and makes it harder to grow your company. To verify an accurate pick-up truck rate for use in bidding and job costing, shop for a truck to rent by the month. You’ll find quotes from $1,150 to $1,350 per month.
Then, you must add insurance, gas and oil to your budget, but not tires or maintenance. Renting a truck requires no down payment. And when you don’t need it, you can turn it back in for a few weeks, as well as during the slower winter months.
Own or Rent?
Depending on who you talk to, you’ll receive different answers to this question. Start-up companies trying to grow quickly need to conserve cash to expand, hire and outlast their cash flow. More established contractors with lots of available cash can make additional money by investing in equipment that is well-utilized and required for unique jobsite conditions. In turn, they increase productivity and gain the competitive advantage.
Deciding whether to own or rent is a financial versus an emotional decision. I have witnessed too many contractors’ yards filled with underutilized or idle equipment rusting and taking up time, energy and capital that could be invested in appreciating assets that provide a steady return.
When it comes down to areas of specialty, many contractors require different types of equipment, such as skip-loaders, excavators, forklifts, mixers, pumps, scaffolding, generators and scissor lifts, to perform their work on specific projects. Whether you should own or rent these is a decision tied directly to your project workloads. When schedules are busy, will you keep these types of equipment moving? When work is sporadic, will these machines be working enough to pay for their total cost?
Do the Math
You’ll have to determine if it is worthwhile to own, maintain, store, deliver, service, secure, insure, finance and deal with the duties of equipment ownership, while trying find enough jobs to keep your machines busy. Generally, the decision must be based on how many hours you can use it on the jobsite annually. When you can keep equipment working enough billable hours per year at the rates you need, it makes sense to own.
After making your calculations, call local rental companies to compare your cost of ownership to their rates. Consider selling your unprofitable, underutilized equipment and using the cash to boost your bottom line. You might invest in a stronger management team, better technology or build on company assets, like your office or real estate properties that produce a steady yearly income and grow in value.
Also think about what equipment doesn’t require a lot of maintenance and offers a larger ROI. For example, used project trailers only cost $5,000 to $7,500 to buy, and you can rent them to your projects at $350 to $450 per month, which produces a 75% annual ROI.