June 1, 2015
Equip your company for successBY MARK BRADLEY
Equipment is always a popular topic at any trade networking event or workshop. People love to see and share ideas for equipment, trailer configurations, and tools that improve productivity. But eventually, the conversation always goes in the same direction. “Sounds good, but I don’t know if I can afford it.” Contractors fear that more equipment would drive up costs, and potentially make the contractor either more expensive or less profitable.
Ultimately, the upfront cost of acquiring equipment should not be your biggest concern. The cost is certainly something that must be carefully considered, but for many contractors, it’s the starting (and ending!) point to any conversation about equipment. They are short on upfront capital, and there’s a genuine fear of risk when signing on to a finance contract.
But too many contractors worry that the cost of equipment will add to the Expenses side, and thereby reduce profit, but forget to think about the Revenue side of the equation. If your company’s revenues grow by more than (expenses + net profit), then the equipment is likely a great investment… even if you need to finance it.
To truly understand the cost of equipment, you need to make sure you understand the real cost of lost productivity, or in other cases, equipment downtime. Lost productivity is what professional owners really worry about, because with compact equipment, the most expensive cost is the operator in the seat.
In order to pin a real cost on productivity, we can use industry average rates for earned revenue per hour. Revenue per hour is not the rates you’re charging per hour for labour. Revenue per hour is the total value of all revenue a typical employee earns in one hour, including labour rates, equipment rates, materials installed, and overhead and profit earned.
Benchmarks for lost productivity
To put revenue per hour in a simple example, take the total selling price of a landscape job and divide it by the number of hours worked on the job. That number tells you the job’s average revenue per hour. It includes all materials, equipment, overhead and profit built into the job… not just the hourly rate for labour.
Design/Build/Install: Design/build/install work typically ranges between $75 and $125 per hour. We’ll use $100/hr as our benchmark for our examples below. Design-build work has a higher revenue per hour than maintenance work because of the volume of materials installed. Landscape construction companies could use, on average, a cost of $100 per hour of productivity lost.
Maintenance: Grounds maintenance work typically ranges between $50 and $75 per hour. There’s much less material revenue compared to design-build, and therefore the revenue per hour is significantly lower. On average, the cost of a lost productive hour in maintenance is around $60.
Some contractors accurately recover equipment costs in their estimates. But for every landscape contractor who does, there are eight to 10 contractors who price work having no idea what their equipment actually costs, and simply hope their guesstimates cover their costs. Or, even worse, because they own the equipment without any payments, it’s not even seen as a cost, and it’s never included in estimates. Years go by for these contractors. Their ‘paid-off’ equipment gets older. It requires more service and breaks down more often. The cost of repairs goes up, but it’s easy to convince yourself that the repairs on that old machine are still cheaper than a monthly payment. Until, that is, you consider the productivity lost.
Case study: Real cost of breakdowns
Casey runs his design-build equipment into the ground. He pays cash for his machines, doesn’t owe anybody anything, and works his equipment until it quits. It’s a low-risk strategy, but it’s low reward as well.
Casey’s (older) skid steer breaks down in the field while it’s supposed to be moving fill out of a backyard, and aggregates in. He sends one of his crew to bring the machine over to the dealer for repair. Just for a minute, ignore the cost of the wages paid to the employee while delivering the equipment. The real cost we need to worry about is this — while that employee is moving the equipment around, he’s not working on customer jobs and therefore not generating any revenue. COST: four hours of lost production time to transport the machine to the dealer, $400
The crew on site then has to work without the equipment, using a wheelbarrow and shovels to load and unload materials. What should have taken eight man hours with the equipment takes 28 man hours to complete by hand. They could have done the same work in far less time, had the machine been operational. COST: 20 man hours lost to reduced productivity, $2,000
The dealer then calls up and gives Casey a repair estimate for $1,250 to fix the problem. Casey’s got no choice but to get it fixed and, in his mind, his annual costs for repairs are still cheaper than a monthly payment. COST: Parts and labour for the repair, $1,250
The repair gets finished and Casey’s driver heads back over to the dealer to pick up the machine and deliver it back to the jobsite where it’s needed for work the next day. Cost: four hours of lost production time to transport the machine to the dealer, $400
When you look at the real costs of the breakdown, the parts and repairs were just the tip of the iceberg. The direct financial impact of the repair was $4,050 when you consider direct costs and lost revenue to due productivity loss. That one repair alone cost Casey the equivalent of six months payment on a brand new machine.
And that’s not all... Casey’s overhead stays the same whether he works at full productivity or not. So if he loses $2,800 in potential revenue (lost productive hours), the percentage of sales that he spends on overhead goes up. His overhead didn’t change, but his sales and production are that much less. The less revenue Casey’s company earns, the bigger his overhead percentage becomes. When his overhead percentage goes up, Casey’s profit margin goes down.
You can apply similar thinking to other equipment applications:
- Work tools and attachments for your equipment are investments that often pay themselves back in productivity in just a few jobs. A $3,000 auger could pay itself back in about 30 large trees, if it could save one man hour of labour per tree.
- Moving equipment from job to job is robbing your company of valuable production hours. While that driver is moving the equipment, he/she is not generating any billable revenue! If it takes four hours to get to the site, load the equipment, strap it down, inspect it, move it, unload it, and then return to shop (don’t forget the crew productivity lost in conversations every time the driver arrives on a new site!), if you’re moving equipment twice per month, you’d likely be better off just owning another piece.
- Don’t be cheap when buying equipment. Don’t sacrifice reliability for upfront cost. Spend the extra money to buy reliable, dependable equipment with fast and rapid access to parts and repairs. The downtime costs (lost productivity) of cheaper equipment will be far greater than any up-front savings.
- And finally, just think about the jobs and/or profit you could be missing out on if you don’t have the right tool for the job. A job that might take a three-man crew a full day to excavate could be done in a half-day with two people. The company doing work with the machine will have a significant cost savings (fewer man hours, faster job velocity, higher revenue per hour, faster overhead recovery), and the shorter job completion times will enable them to get more jobs done in the season.