Software helps contractors establish accurate rates and track utilization for a true assessment of profitability
How much money they make – or lose – on each project may be the single most critical piece of data contractors need to know, but many never get an accurate picture. One reason is, they cannot or do not factor in the cost of owning and operating the specific equipment used on each individual job.
Doing so requires two things. Contractors need an accurate calculation of what it costs to own and operate each asset on an hourly basis and an effective way to track utilization time on the job. Specialized software helps to solve both challenges.
“In my consulting practice, I have been amazed to learn how many contractors operating heavy equipment do not cost it to jobs,” says Herb Brownett, a former CFO for a site development contractor who also served as national chairman of CFMA (Construction Financial Management Association). “This is a key element of job cost. Without it, determining accurate profitability by job is just not possible.”
Step 1 in job costing equipment is establishing an accurate hourly rate. The ownership costs, including lease payments or depreciation, insurance and other fixed expenses, are relatively straightforward. Establishing the cost of operating and maintaining each individual asset has proven to be a bigger challenge in setting that rate. This is especially true for contractors relying on paper processes or spreadsheets instead of specialized maintenance software.
Instead, many companies pool all the maintenance costs and allocate this out across all the pieces of equipment by some general formula. This is an easier alternative to job costing. However, it hides the actual cost of operating and maintaining each piece of equipment and, potentially, the true financial outcome of the job.
“This is far from accurate,” says Brownett. “More critically, it will mask the fact that some individual pieces of equipment might be much more expensive to maintain than other pieces.”
“We used to just charge all equipment costs to the maintenance department,” explains Glen Howard, service manager for NUCA member company J. Fletcher Creamer & Son. Now, with coding set up in its maintenance management software program, the diverse New Jersey-based contractor can appropriate those costs directly to individual pieces of equipment.
“This creates a strong incentive to manage equipment efficiently,” says Howard. “Our management team also gets a more accurate view of maintenance costs and the profitability of each job.” Capturing those accurate equipment rates provides an additional benefit, according to Howard, allowing the company to be as competitive as possible in its estimating.
Maintenance software brings higher levels of automation, coordination and proactivity to the preventive maintenance programs at companies like J. Fletcher Creamer, leading to increased uptime and lower costs. With regards to job costing equipment, the software also puts all of the historical data on maintenance in one place. This makes it easy track and report on those costs to establish an accurate rate. With work orders, invoices and mechanic hours scattered on paper, spreadsheets or various software systems at many companies, extracting that data can range from extremely labor intensive to impossible.
Contractors with maintenance software will often develop their equipment cost rates based on the average of equipment groupings, according to Brownett. As an example, they may group excavators by large, midsize and small.
Once a rate for each piece of equipment or grouping is established, capturing how many hours an asset is used on the job and posting that data to the construction accounting systems is the next challenge. Again, specialized software offers considerable advantages over paper and spreadsheets.
For contractors that rely on the latter for field data capture, including equipment hours, getting accurate information in a timely manner can be a struggle. The information from the field must then be reentered into the accounting system, leading to further delays and opening up opportunities for additional errors.
With specialized software for field tracking and analysis, operators, foremen or supervisors can enter equipment hours into the electronic field log on a daily basis with either a laptop or a tablet. Capturing that information immediately and at the source improves accuracy. The information can then be transferred seamlessly into industry accounting systems, without redundant data entry.
Brownett says telematics technology and equipment inspections often provide equipment hours to supplement and validate the data recorded in the daily field log.
Heavy construction is an equipment-intensive business, and knowing the actual cost of owning and operating that equipment relative to each job is critical. With specialized software for maintenance and field tracking, contractors can establish accurate equipment rates, track utilization and get the full picture of job profitability that they need to make more informed decisions.