Reveal the hidden price tag on equipment

Are you selling yourself short when it comes to the cost of your equipment?

When you own construction machinery, your costing process should factor in more than just the actual price paid per piece. Just as the total cost of owning a home is more than the monthly mortgage, there are ancillary costs associated with equipment ownership. These figures should be factored into an overall estimate when bidding jobs, or you risk losing money.

It’s a given that there are annual depreciation expenses, but many contractors neglect to consider running expenses. For example, fuel, repairs, insurance, registration fees, storage, lubrication, tires and loan interest all add up. There are also mobilization costs when you take equipment from your yard to a site, or from one job to another. Your line of work contributes to wear and tear.

You may have an in-house repair shop with laborers whose wages figure into the total cost of ownership. Abstract and fluctuating costs depend on economic conditions, such as fuel prices, tax investment incentives and interest rates. All of these numbers figure into a pool of costs. Your job is to properly allocate this pool of costs to each piece of equipment you own.

Ideally, you want to determine a figure that closely represents the actual cost it takes to run the piece of equipment. While most manufacturers supply estimates, manufacturer data should not be taken at face value. Use it more as a reference point. Determine a fixed rate per hour per piece of equipment. That’s the guideline for how you bid and cost the job.

There is art and science in the calculation, and you are never going to get the numbers exactly right. But you want to be reasonably close. One contractor, for example, was charging $10,000 worth of equipment costs to his contracts annually. When he looked back at the end of the fiscal year, he saw that all costs to run the equipment annually incurred $100,000. That represents $90,000 in under absorbed costs. He never considered this when preparing his bids!

The best approach is to look at all the factors that go into the total cost of equipment and compare those numbers to what you actually charged at the end of your fiscal year. It is also important to understand your normal volume of work in determining rates. While it’s not a bad thing to charge a bit too much, it’s bad to underestimate.

As long as you keep tabs on cost annually, you should be able to make adjustments. As a result, you can accurately reflect what you are spending, use that information to properly bid and have accurate accounting of the actual equipment cost incurred. Not knowing your cost of equipment is a recipe for disaster.

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Considering establishing an audit committee?