I have run into about as many theories of equipment costing as there are companies, but one of the major decisions an equipment-intensive company faces is the decision to attribute costs to the piece of equipment, or to the jobs where the equipment is used. There are three basic ways that I have seen this done in the industry.
- Some companies, especially those with software systems that do not provide equipment costing functionality, attribute equipment costs to their jobs via overhead and not on an individual equipment basis. For example, they will add, say, $50 per labor hour to the job to cover the costs of their equipment used. Most often in this case, as a result, these companies rarely know exactly what “revenue” an individual piece of equipment generates. This inexact approach keeps companies from taking advantage of one of the most important reasons to know your construction equipment costs in detail—namely, allowing your estimators to make an accurate prediction of equipment costs on the job. Using this method, there is nothing but anecdotal evidence regarding your fleet’s contribution to a job, or which parts of your fleet are solid and which need to be replaced. If you tend to over or under estimate that contribution, it is very difficult to keep from making that same mistakes over and over again.
- Many companies will attribute some of their costs for parts and labor to the equipment, and other costs to the job. Fuel, for example, is often costed to the job while maintenance and repairs are costed to the individual pieces of equipment. Sometimes, a value judgement is made regarding a repair. If it is deemed that an equipment breakdown was caused directly as a result of the job, then the job bears the cost. This is often a difficult decision, because unlike job costs which accrue in an orderly and predictable fashion, equipment repair costs come unexpectedly and in large chunks, and are generated by the preceding wear and tear over many jobs. It is therefore problematic to cost the repairs to the job because it skews the actual cost of operating the equipment.
- Best practice in the industry, according to Dr. Mike Vorster, head of the Construction Equipment Management Professionals group (www.cempcentral.com/, is to cost all expenses to the individual piece of equipment and then spread this cost to jobs by charging them an hourly rate for use of the equipment. Arriving at accurate hourly rates for the different machines in your fleet is then the challenge, but doing so carries many benefits. Fortunately, there are software packages now available that help solve for this challenge by providing easy-to-use mobile data collection systems. By using this method, you can determine to a very fine level of detail where your fleet is underperforming. It also opens the door to address a host of more sophisticated equipment management concepts like fleet average age management, and helps inform the “repair or replace” decision process.
Working toward a true equipment costing system, where all expenses for owning and operating a piece of equipment go directly to the individual piece of equipment, is the direction that I’ve seen being adopted by the best managed companies in the construction industry. Knowing your real equipment costs helps you create more accurate estimates, report more effectively on true job costs, and optimize the operation of your fleet.