The Equipment Equation
Bidding a maintenance job is an art for some and a science for others; a customized trade secret derived from years of historical data, experience and some costly lessons learned along the way. Although there are all sorts of methods to crunch the numbers, from estimating software to homegrown “guesstimate” formulas, accurate bidding remains one of the most crucial — and confusing — aspects of a startup landscape company's financial performance.
There are three main cost areas that a landscape contractor must recoup to be profitable: labor costs, equipment costs and general and administrative (G&A) overhead expenses. Many startup landscapers tend to focus on their biggest cost consideration — labor — without also accurately gauging their equipment operations rates: what it's really costing them, per hour, to have each piece of equipment out there mowing, mulching and moving dirt.
Equipment costs per hour will depend on the lifecycle of your equipment, your preventative maintenance schedule and, of course, those ever-rising fuel costs. And unlike G&A overhead expenses, which can be applied evenly as a percent markup or per-hour charge, equipment costs will vary by the amount and types of equipment used on each job site.
One of the more popular estimating methods for landscape contractors is the “overhead bucket drop,” where all annual equipment purchases and maintenance costs get dumped into a general overhead category, which is then broken down into a single per-labor-hour charge and distributed across every job throughout the year. This is a simple way to cover the equipment operation costs on most maintenance jobs, provided the landscape contractor keeps good historical records and updates the labor-hour rate as needed to maintain a steady net profit markup.
Ted Baker has been estimating maintenance jobs for almost 20 years, so he can step on almost any commercial property and generate that “magic number” within minutes. As the president of Baker Commercial Landscaping in Orlando, he'll estimate the monthly maintenance charge based on a per-labor-hour rate, which covers everything from labor, equipment and vehicle expenses, fuel costs, administrative office payroll and net profit markup.
“Any of my top employees could cost it out just as well,” says Baker. “It requires a good feel for how many man-hours will be required to maintain the property every week, which you can only get from experience. Then our account managers select the equipment that can handle the job in that amount of time.”
Most estimating systems and software programs also place equipment and vehicle costs (mowers, tractors, pickups, etc.) into the overhead category. This method works well for seasoned landscapers like Baker, who have a strong knowledge of the process and can tweak the individual cost components as they go.
But for other landscapers who might lack the decades of know-how and P&L statements to understand their operation costs, however, it's often difficult and unreliable to boil everything down to a single production or labor-hour rate. It's important to first understand all of the variables that affect operation cost — including equipment — before developing that “magic-number” formula that can be solidified through time and trial.
Calculating Equipment Cost-Per-Hour (ECPH)
The equipment cost-per-hour method is a great tool for understanding (and eventually recouping) the equipment costs for each mower, tiller or tractor used on a job site. When put together properly, it also helps you improve bidding accuracy and identify ways to maximize equipment expenditures throughout the year. Equipment cost-per-hour rates can be derived by adding together three variables:
- What it costs to own or lease (acquisition cost-per-hour);
- What it costs to maintain (maintenance cost-per-hour); and
- What it costs to run (running-time fuel consumption cost-per-hour).
1. To calculate acquisition cost-per-hour, divide the total price paid for the equipment (including interest) by the projected lifetime hours.
Using a walk-behind mower as an example:
|21-inch rotary mower purchase price:||$1,100|
|Interest:||None (if paid for in cash)|
|Lifetime hours:||750 hours (2.5 hours/day, 5 days/week, 30 weeks/year for 2 years)|
|Acquisition CPH:||$1,100 ÷ 750 hours = $1.47|
Note: Cost out leased equipment the same way, simply adjusting the life expectancy, lifetime maintenance and fuel costs to account for the shorter term.
2. To calculate maintenance cost-per-hour, divide the estimated lifetime maintenance costs for that piece of equipment (repair, parts, labor, blades, spark plugs, oil changes, filters, etc.) by the lifetime hours. Your equipment dealer should have such data available. For this example, assume lifetime maintenance costs will be $600.
|Maintenance CPH:||$600 ÷ 750 hours = $0.80|
3. To calculate running-time fuel consumption cost-per-hour, determine how long one gallon of gas lasts for this piece of equipment. If all day (for two and a half hours used per day), divide the current price of a gallon of gas by 2.5 hours. You could also fill up the tank and divide the fill-up cost by the total running hours; either method will give you a fuel consumption rate.
|Fuel consumption CPH||$2.50 per gallon ÷ 2.5 hours = $1.00|
4. Now calculate total ECPH for the rotary mower by adding your costs together:
|Total ECPH||$1.47 + $0.80 + $1.00 = $3.27 (round to $3.50)|
Now let's find the ECPH for a compact tractor:
1. Calculate acquisition cost-per-hour by dividing the total price you paid for the tractor (including interest, minus the anticipated salvage value when you replace it) by the projected lifetime hours.
|Compact tractor purchase price:||$23,000|
|Interest (listed in the contract):||$5,520|
|Estimated salvage value:||$8,000|
|Life expectancy:||3,000 (300 hours per year for 10 years)|
Divide purchase price + interest — salvage value by projected lifetime hours:
($23,000 + 5,520 - 8,000) ÷ 3,000 hours
|Acquisition CPH:||$20,520 ÷ 3,000 = $6.84|
Note: Even if you buy used equipment, cost it out using the “new” purchase price. The CPH will generally be the same for new and used equipment, and useful life, repair and maintenance costs are easier to determine for new equipment. Using the new purchase price also automatically adjusts your equipment rates for inflation and price increases.
2. Calculate maintenance cost-per-hour by dividing the estimated lifetime maintenance costs for the tractor by the lifetime hours. Again, your equipment dealer should be able to provide this if you have no historical data. For this example we'll estimate the lifetime maintenance for the tractor to be $18,000.
|Maintenance CPH:||$18,000 ÷ 3,000 = $6|
3. Determine the running-time fuel consumption cost-per-hour. Let's say the cost of fuel and oil consumption is $3.75 per hour (1.5 gallons per hour at $2.50 per gallon).
Fuel consumption CPH $3.75
4. Now calculate total ECPH for the compact tractor by adding your costs together:
|Total ECPH||$6.84 + $6.00 + $3.75 = $16.59|
Even if you prefer to base your estimate on a per-labor-hour rate, the ECPH method prevents you from understating or overstating the actual equipment costs for the job being bid.
There are several ways to verify your ECPH figures:
Compare your hourly rates to those of your local equipment rental company. Reduce rental rates by 40 to 50 percent to remove their G&A overhead and net profit markup. Your CPH rates should be reasonably close to theirs.
Contact your local equipment dealer to verify maintenance costs, production rates, fuel consumption, lifetime hours, etc.
Contact the offices of your local Department of Transportation (DOT). They have manuals that contain CPH data for maintenance equipment, and will often share these figures for comparison purposes.
Reducing Your ECPH Rates
Armed with a better understanding of what your equipment really costs to operate every day, you can start finding ways to reduce this cost over time.
“Equipment expenses are built into our labor-hour rate, but we still track those costs very closely,” says Mariano Cardozo, who handles equipment purchases and facilitates in-house equipment maintenance for Baker Commercial Landscaping. He recommends taking advantage of multi-unit discounts offered by some manufacturers. “This year we used [a] multi-unit discount program for commercial landscapers; so our zero-turns, walk-behinds, trimmers, and even the big stuff [compact tractors and skid steers] can be leveraged through the same dealer for a significant discount.”
Although his equipment acquisition cost is now lower, Cardozo notes that the real savings comes from reduced maintenance costs. “It's a huge time and money saver for our mechanic to maintain a single line of equipment for our fleets. He has one phone call for service or overnight parts, and I have a single monthly invoice to track equipment costs. That's less downtime for our equipment, and less office time for me.”
For fuel consumption savings, check with your local equipment dealer about new engine technologies such as Digital Fuel Injection (DFI) engines for zero-turn mowers, which optimize the fuel/air mixture to increase fuel efficiency by up to 20 percent. As with diesel engines, which also offer greater fuel economy, the initial price tag is higher for more efficient equipment.
You can also use the ECPH method to develop a better understanding of which equipment will lower your field operation costs over time. By matching up the purchase price of several products against long-term variables such as annual maintenance costs and serviceability, production rates, fuel costs, etc, the ECPH will confirm an ancient truth in the landscaping business: You get what you pay for.
Now you can be sure your customers get exactly what they pay for when it comes to equipment costs.
Ken Taylor is a business segment manager for the John Deere Commercial & Consumer Equipment Division (Cary, N.C.).
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