01 November 2014

Is that New Bulldozer Making Money? How to Find Out

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Heavy equipment purchases are on the rise. Following a lackluster economy during the past few years, many U.S. construction companies are investing again in new and used construction equipment. According to the 2005 Construction Industry Forecast’s survey of more than 900 U.S. construction executives, contractors planning equipment purchases this year expected to spend nearly double what they budgeted in 2004.

Construction equipment represents the largest capital commitment that a general contractor or specialty contractor can make. Soaring fuel prices, higher costs for imported products and the threat of rising inflation can add to the risk.

Now, more than ever before, contractors must determine if each piece of equipment is making or losing money for the company— and technology can help.

Step 1: Buying

Selecting the right piece of equipment that meets the specific needs of the company is just the first step. Next comes the job of determining the equipment’s expected return on investment. This procedure requires careful analysis of the company’s financial situation, as well as a fair amount of guesswork.

After selecting that perfect piece of machinery or equipment, contractors must decide whether to buy, lease or rent. Advice from accountants, banks and surety professionals can help to determine cash flow and tax considerations, as well as available financing and leasing options. Comparing the projected costs of each financial alternative will help in selecting the option that promises the lowest net cost.

Step 2: Tracking Costs

A company needs many pieces of equipment simply to stay in business. But how much does each piece contribute to profitability? Has any piece outlived its usefulness? Without a system for tracking the asset, it is impossible to determine if the equipment has generated any income (or savings) over its lifetime.

More and more fleet managers are finding out that keeping tabs on equipment can cut costs significantly. Sales of GPS devices and wireless technology have exploded in recent years because of their ability to track both the location and use of heavy equipment.With the ability to move equipment from job site to job site based on availability and need, contractors are better utilizing and making more money from their heavy equipment purchases.

Construction owners who put off purchasing new equipment in recent years also are realizing some exciting bonuses with their new heavy equipment purchases. Thanks in part to the Environmental Protection Agency’s regulation of diesel fuels, the technology driving today’s mobile machinery includes sophisticated under-the-hood electronics. Heavy-duty construction machinery and trucks are now fitted with electronic control modules (ECMs) to monitor and optimize diesel combustion and power transmission. The vast information provided by this technology represents a gold mine for equipment managers, giving them a clearer view of the real cost of owning and operating equipment.

Many construction-specific accounting systems also offer ways of recording detailed equipment information, usually through add-on modules. The best options integrate information as tightly as possible and eliminate repetitive data entry. For example, when payroll timecards of equipment operators are entered into a payroll module, usage hours for each machine can be updated as well. With job site information included on the timecard, the system automatically updates the current location of each piece of equipment.

In addition to maintaining records such as make and model numbers, warranty information and other detailed product information, some accounting systems can track and schedule maintenance and repair work for equipment. The tracking is done through odometer readings, lapse of time or—even better—actual usage hours of the equipment. With systems that also track fuel usage, insurance, service and repair costs and taxes, owners can maintain a complete history of costs for each piece of equipment.

Finally, in order to have accurate information about the total cost of a job, equipment costs must be calculated and added to each job’s figures. By assigning job-costing rates as well as idle and down-time costs to equipment, an integrated job-costing software package (with equipment module) can easily break out equipment costs and usage data per job. At any given point in a job— monthly, weekly, daily and even hourly—a contractor can produce reports that show how many billable or idle hours the new dozer spent at each job site.

Step 3: Analyzing

Looking at equipment expenses not just from the perspective of a job but from the perspective of each equipment item can determine if that particular item is making or losing money. Each piece of equipment should be viewed as its own “cost center.” Just as any contractor worth his salt looks at the profits made on each job, he also should analyze the profits made on each piece of equipment.

Purchasing a more sophisticated, equipment-specific job-costing program gives the contractor the ability to compare the costs of owning and operating a particular item to the income it generates and to look at the equipment’s profitability per-job or across all jobs.

Many programs provide options for recording equipment income, such as using standard billing rates, assigning job-costing rates or entering income on receivable invoices. Regardless of the income system a contractor uses, the program should produce timely, equipment-specific profit reports.

Considering that equipment often represents a “lion’s share” of assets for many companies, it’s no wonder that contractors are placing a greater emphasis on their equipment fleet.

Cutting-edge technology can take much of the credit for this renewed focus on equipment. More and more machines come standard with on-board data loggers capable of recording massive amounts of information. Sophisticated software is available to manipulate and report this data. Owners of construction equipment, having emerged from “guestimate” accounting, now have the tools to improve productivity, increase profit and minimize operating costs.

*Published in Construction Executive