Avoid Buyer’s Remorse, Know the True Cost of Equipment

Posted on Monday, December 10, 2018

All construction companies store equipment, from a garage full of tools, to a scissor lift, from something as simple as an auto trailer, to something as complex as a hightower crane.

These items represent costs that must be recouped or they simply absorb cash every time you call a mechanic, or they sap net profit whenever you get that depreciation deduction at year end.

Know the True Cost of Your Equipment

The cost of your equipment is not just its price or the cost of fuel to operate it or the payroll of the operator on site. To gain perspective on the financial burden of owning equipment, ask your accountant to calculate a table similar this:

Initial Purchase Amount ($)
Purchase price, includes total of interest if financed 47,000.00
Payroll costs of workers (initial set up receipt/ operation)  1,240.00
Payroll taxes on payroll, above    127.00
Benefits on workers, above     257.00
Workers Comp, liability, unemployment ins. on above     402.00
Delivery charges  1,495.00
Cost of training employees on use and safety  2,450.00
Cost of outfitting other vehicles to accommodate use  1,770.00
Total initial purchase 54,741.00
Cost Allocations Amount ($)
Annual Costs Associated with the Equipment  
Storage, at $750 per month 9,000.00
Property insurance 1,613.00
Routine maintenance 2,160.00
Unplanned maintenance (specialized estimate) 2,250.00
Total Annual Costs Associated With The Equipment 15,023.00
Budgeted hours of use, current year divided by 850
Annual costs per hour, standard hours 17.67
Depreciation Calculation Amount ($)
Total initial purchase amount, from above 54,741.00
Expected total lifetime hours (specialized estimate) divided by 13,660
Depreciation amount per hour, hour as unit of production 4.01
Total Job Cost Allocations, per hour 21.68
Jobbing Charges (per use)
Amount ($)
Fuel charges for operation 3.45 / gal
Payroll, taxes, benefits, insurance on operator Incl. in std. job costing
Cost of delivering to site (specialized estimate) 1.45/ mile
Payroll for transport/ delivery to site Incl. in std. job costing
Payroll or removal from site, back to yard Incl. in std. job costing

Know Your Hourly Cost For Equipment Use

The chart shows the basis for hourly and per-job calculations on a piece of specialized equipment. Here the insurance and maintenance costs add $17.67 an hour, which is about $700 a week, plus fuel costs to operate it, along with the payroll and transportation costs needed to get the machinery to the job and back. And the payroll of the men who operate it all week long. Don't forget to code those to the job!

All costs should be considered when forging your hourly cost allocations for equipment, even if these are for internal job cost accounting purposes. And whenever these costs have not taken place yet, call upon your accounting, finance or tax professional to make sure they are estimated with precision by someone with knowledge of construction industry best practices.

Many business owners consider equipment as simply a capital outlay — they just want to spend the money once and get it over with. CFOs may view a purchase as a pure balance sheet transaction: another debt payment on a financing plan.

In reality, the price of a fixed equipment asset has a job cost component to it as well. This is true even if the actual payments are booked to the asset or liability, and there is no general ledger expense account involved.

If you are not expecting your jobs to carry the initial and ongoing cost of the equipment you own, you are shortchanging yourself on profitability by not aiming to recoup costs.

Bill for Your Use of Equipment, Even If You Own It

Never mistake the fact that your equipment is costing you to use it, even if you already own it. Your customers really rent the equipment from you for short periods of time on their jobs. As with a tenant, you need to set a rate for them to pay to use the equipment. The rate should not be arbitrary.

In fact, you can put an "equipment rental" line item and a number of hours on your bids and invoices. Customers need not know you own the gear. Just be certain you know exactly what the equipment costs to run per hour, per day, or per week.

If you are not sure, consult with a professional for a one-time analysis. Running equipment purchases by your accountant or tax advisor beforehand to produce something like this can put you in the driver's seat rather than looking back knowing that hindsight vision is always 20/20.

Posted in Construction Industry

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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