March 25, 2004

Equipment costs don't have to break the bank

  • An accounting system is needed to track costs
    Benson & McLaughlin

    Equipment costs are among the most challenging for contractors to quantify. Just when things seem to be running smoothly, an engine blows, a cable breaks or a crane tower cracks, significantly affecting your bottom line.

    Whether you own or rent equipment, you should develop a system to accurately account for equipment costs. In addition to the initial capital outlay, these costs include usage, repairs and maintenance, fuel, shop costs, insurance, taxes and storage.

    Many construction companies use accounting systems that have equipment-costing modules, while others use separate methods and spreadsheets to account for the actual costs incurred.

    Ownership costs

    In determining ownership costs, start with each piece's initial price and calculate an annual, monthly and even hourly depreciation charge. To do so, take the actual cost of the equipment and subtract the salvage value you expect that equipment will have at its useful life's end. Then divide the result over its useful life.

    Don't forget to factor in your capital equipment costs. Even if you didn't borrow money, a capital cost still exists because you could have been earning interest on the dollars you invested.

    Do the same type of calculation with your insurance premiums. Add the initial price you paid for the equipment to the insurance costs and finance charges you expect to incur during its useful life. Divide that figure by the total number of hours you expect to use the equipment and you'll have the hourly ownership cost.

    Developing budgets and ownership costs for each piece of equipment will enable you to answer many questions about purchasing and usage. For example, this data will allow you to compare the high cost of maintenance on an older pierce of equipment with the cost of buying a replacement. A new backhoe may be cheaper than the cost of maintaining the one you have now.

    Operating costs

    Unlike ownership costs, which occur whether you use a piece of equipment or not, operating costs accrue only when the gear actually functions. Make sure you account for everything, including scheduled and unscheduled maintenance, supplies, repairs, tire replacement and regulatory compliance costs.

    But don't add major repair expenses to operating costs; instead, capitalize them over the equipment's remaining life. And if you rely on a dealer's estimates for operating costs, consider any special circumstances you may face on your jobs.

    The key to controlling equipment costs is to recover expenses through accurate rental rates. View yourself as a third-party lessor and allocate equipment costs to specific projects. The usage is charged at standard rates based on the hours or days in service.

    Add the cost of moving equipment on and off the site. Allow for unproductive time when equipment can't be used and monitor operating performance, such as miles between tire changes.

    To properly manage equipment expenses, keeping good records will be imperative to develop and assign efficient rental rates. Those records will also help you review and modify rental rates regularly.

    Sound practices in controlling equipment operations will allow you to take advantage of the busy times and withstand the pressure when business is slow. In turn, you'll improve your bidding and profitability on each job you undertake.

    Mark Hanson, CPA, is an audit shareholder with Benson & McLaughlin, a CPA and consulting firm in Seattle.

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