Whether you are a general contractor, builder, specialty contractor, or subcontractor, it takes labor, equipment, and materials to furnish and install the scope of work included in your contract. Therefore, when pricing and estimating projects, contractors must include the time and money required for labor, equipment, and materials in their bids.
I have reviewed hundreds of contractors’ estimates. The contractors who make the most money always charge their jobs for labor and equipment at the right rates. Many others, however, do not charge their jobs for the use of company-owned construction equipment, vehicles, and tools at a rate that compensates the company for the actual cost of owning and using the equipment, plus a fair return on investment (ROI). In this scenario, the owner treats their investment in owning equipment as insignificant or irrelevant. To me, equipment is a declining asset; it is only necessary if it makes financial sense, and you can get a positive ROI.
Every piece of equipment owned, whether fully paid for or financed, has value. And not to charge for valuable equipment is not good business. In fact, if you do not charge, you are giving customers equipment, vehicles, and tools for free. This causes your prices to be lower than your cost of doing business and your long-term survival to be significantly hindered or doomed. If you do not give customers materials for free, why would you give them equipment for free?
The ROI
As a real estate developer, when you buy land, develop, and build new projects, it takes a combination of equity and financing to put the entire transaction and deal together. To attract equity investors, the project, pro forma, must propose to generate a minimum of 10 to 15 percent ROI for the investors after all expenses—including the mortgage, management, maintenance, and upkeep. Without a minimum return, investors are unlikely to invest and will therefore seek opportunities with higher returns.
If you were asked to invest in purchasing and owning construction equipment, what ROI would entice you to risk your hard-earned money into this opportunity? As shown on their balance sheets, many contractors have significant equity and investment in construction equipment and vehicles they own. If your company has $250,000 or more invested in equipment, you will want a minimum annual return of at least 15 percent ROI as well. And, if you are not making a reasonable ROI in equipment, I would recommend you rent equipment as needed, and invest your cash into apartments, commercial property, or other higher-return opportunities. Your equity is valuable and must generate a return.
Charge the right price
When you estimate projects, include the right price for using company-owned equipment in your estimate. A rental company sets rental rates based on what it takes to own and manage a fleet of equipment, plus make a profit and ROI. Approach your equipment in the same way. The right rental price is the total cost of ownership, including insurance, tires, maintenance, repairs, mechanic, shop, gas transportation to jobsites, global positioning system (GPS), depreciation, and a 15 percent ROI. Each piece of equipment or vehicle should have a rental timecard and be charged daily to the correct job it is working on at the same daily or hourly rate at which it is bid. Like rental companies, charge your equipment by the day versus by the hour to simplify the tracking process. Assign someone in the accounting department to be the equipment bookkeeper whose job it is to track and charge each piece of company-owned equipment daily to the correct job and cost code. At the end of each project, review the actual equipment hours used versus the estimated budgeted hours to determine if your bid was accurate, or you need to adjust your bid production rates on future bids.
The cost to own
Can you generate enough revenue to pay for your company equipment? Do you know what it really costs to own a heavy-duty pickup truck to send out to construction jobsites? To determine the cost of owning and renting equipment to your jobs, estimate the life until you must replace it, then add the total cost of ownership over the lifetime. Smart businesspeople want to make an ROI and add return to their rates. Remember, owning equipment requires a down payment, which ties up working capital, reduces your bonding capacity, and makes it harder to grow your company.
| Pickup Truck Ownership Cost – 5 Years’ Life | |
| Purchase cost + Fit-out | $75,000 |
| Less salvage value @ End of life | $0 |
| Finance cost/Depreciation | $10,000 |
| Insurance @ $1,500/year | $7,500 |
| Maintenance & tires @ $1,500/year | $7,500 |
| Gas @ $10,000/year | $50,000 |
| Total cost over 5 years | $150,000 |
| Cost/year | $30,000 |
| Cost/month | **$2,500 |
** Job Billable Rate @ 2,000 hours/year utilization = $15/hour = $600/week = $120/day
** Job Billable Rate @ 1,500 hours/year utilization = $20/hour = $800/week = $160/day
** Note: These rates are at cost and still need to be marked up for overhead and profit.
To verify your company pickup truck rate to use when bidding and job costing, shop for a truck to rent by the month. You will find quotes from $1,350 to $1,750 per month. You obviously must add an allowance of roughly $950 per month for insurance, gas, and oil to your budget, but not for tires or maintenance. Renting a truck requires no down payment, but it will cost more per month to operate. But when you do not need it, you can turn it back in for a few weeks or over the slower winter months.
Own versus rent
So, should you own or rent equipment? It depends on whom you ask. Start-up companies trying to grow quickly need to conserve cash to expand their business, hire people, and outlast their cash flow. Older, more established contractors with lots of available cash, on the other hand, can make additional money by investing in equipment that is well utilized, required for specific specialty jobsite conditions, can increase productivity, or give them a competitive advantage. The best answer is a financial versus an emotional decision. I have witnessed too many contractors with yards filled with underutilized or idle equipment rusting and taking up time, energy, and capital that could be invested in appreciating assets that provide a steady return.
Specialized equipment
Most contractors need certain types of equipment like skip loaders, excavators, forklifts, mixers, pumps, scaffolds, generators, or scissor lifts to do their specific work. Should you own or rent? When times are busy, you can keep these types of equipment active and make money on them. When work is spotty or sporadic, you cannot keep them working enough to pay for themselves. It is all about the math. Do not forget the down payment cost or cash investment on the purchase, getting an ROI, and how this will affect your cash flow. Follow the template above to calculate your internal company job rate.
Do the math
By doing the math, it is easy to determine if you should own or rent equipment. You will have to determine if it is worthwhile to own, maintain, store, deliver, service, secure, insure, finance, and deal with the hassle of ownership or trying to find enough jobs to keep your equipment busy. The deciding factor is generally how many hours you can use it on the jobsite annually. When you can keep equipment working enough billable hours per year to make money and you can get the rates you want, it makes sense to own.
Call the local rental companies to compare your cost of ownership to their rental rates. I am sure you will discover which equipment you should or should not own. Sell the unprofitable underutilized equipment, take the cash, and boost your bottom line by investing in a strong management team, technology, or assets like your own office and yard, or real estate properties that produce a steady net income flow and grow in value every year. Also think about what equipment you can own that does not require a lot of maintenance where you can get a big ROI. For example, used job office trailers cost only $5,000 to $7,500 to buy. You can rent them to your projects at $350 to $450 per month, which produces a 75 percent annual ROI.
Remember to carefully review your equipment program to avoid providing equipment for free. Do the math, charge the appropriate rates, and dispose of underutilized equipment. Always ensure you get an ROI.
George Hedley, CPBC, is a certified professional construction BIZCOACH and top industry speaker. He helps contractors achieve their goals, increase profits, grow, get organized, develop accountable talent, improve field production, and get their companies to work. He is the author of Get Your Construction Business To Always Make A Profit—available on Amazon.com. To get his free e-newsletter, start a personalized coaching program, attend his webinars and workshops, or get a discount at HardhatBIZSCHOOL.com online university for contractors, visit his website @ HardhatBizcoach.com, watch his videos on YouTube, or email GH@HardhatBizcoach.com.
