True equipment costs
What to charge? Bidding jobs accurately is one of the most crucial, and often most difficult, aspects of new contractors.
There are many methods of number crunching, from job estimating software to the more “creative” guess-based formulas. Before you can be profitable, your job must recoup your three main costs: labor, equipment, and general and administrative. As is the case with most businesses, labor costs receive most of the consideration. However, without knowing what your true equipment costs are you will not be able to judge each job’s profitability nor will you be able to guarantee a positive cash-flow for maintaining and using your equipment.
Let me say that I have seen some contractors simplify their equipment costs by relying on heavy historical data and lumping that into an overall labor cost per hour. This can work well, but it requires at least 8 years of good record keeping to create a pattern of equipment spending.
Otherwise, the cost per hour method will give you the most accurate idea of what your equipment will cost you to acquire, operate, and maintain. There is another benefit to the equipment cost per hour method. Just as brick-and-mortar stores have to know which products are bringing in the best profit margins, landscapers should know which equipment is providing the best margins based on the bid.
Is your expensive zero-turn mower offering you the productivity and uptime that provides the most profit per hour? What margins are your trimmers, push-mowers, or rototiller providing you? How would you know? How do you know which sevices to upsell your clients? Understanding and utilizing the equipment cost per hour method will tell you if you should push for that install or just sell your client a restoration. If you bid a job at $55 per hour and it is costs you $58 per hour to perform than you are losing $3 every hour you work. You would actually save money by not taking the job! How would you know?
Note: this is a summary from a presentation given a couple of years ago by Ken Taylor, business segment manager for the John Deere Commercial & Consumer Equipment Division.
Cost per hour (CPH)
This cost method will help you bid more accurately and maximize your equipment purchases. In order to calculate your equipment cost per hour, you will have to calculate the three variables that make up your equipment’s true cost:
- the cost to acquire the equipment
- the cost to operate the equipment
- the cost to maintain the equipment
So here we go:
1. Let’s figure out your acquisition cost per hour by dividing the total purchase price of the equipment plus taxes and interest by the estimated life of the machine in hours.
We’ll use a 36 inch hydro-walk with a fifteen horsepower engine:
Purchase price including taxes and interest: $4,200.00
Estimated life in hours: 2,000
Acquisition cost: $4,200.00 ÷ 2,000 = $2.10 per hour
Note: to simplify this equation we won’t take into account any salvage costs. The goal is to recoup the cost of your equipment, and if there is anything to gain from salvaging than that will be a bonus.
2. Now let’s figure your operational cost. This is merely a fuel consumption cost per hour. That is, divide the cost of a gallon of gasoline by the number of hours your equipment runs on a gallon of fuel.
Fuel cost per gallon: $3.25
Operating hours per gallon: 2
Operational cost per hour: $3.25 ÷ 2 = $1.63
3. This may be the toughest part of the equation. The maintenance cost per hour is the estimated lifetime maintenance and repair of the equipment including parts, labor, repairs, tune-ups, blades, etc. divided by the machine’s life-hours.
Estimated cost to maintain: $1,500.00
Estimated life in hours: 2,000
Maintenance cost per hour: $1,500.00 ÷ 2,000 = $0.75
4. Now we can calculate the total true cost per hour of this mower by adding the three variable hourly costs.
Total cost per hour: $2.10 + $1.63 + $0.75 = $4.48
You now know what you have to add to your hourly labor cost just to do a job. If your labor rate is $12.00 per hour plus 15% in employment taxes then you have to add $4.48 + $13.80 = $18.28 just to do the job. Once you calculate your profit margin and general overhead you will know what you have to bid per hour to recover your costs and make a profit.
Now what?
Now that you have accurate equipment and a labor costs per hour your profit margin and general overhead are all that are left to figure and you can make better bids and sell better jobs based on your data. You can also work to improve your margins by lowering your equipment’s cost per.
This is where manufacturer choice, service shop choice, and operator traning come in. Now that you understand where the costs are derived, you can make better purchase decisions that will lead to better bidding decisions and ultimately a better business.
