TWENTY-EIGHT PERCENT OVERHEAD. ZERO HOURS OF IRON.
Where you put fleet ownership cost decides whether your overhead rate can be used on a bid. Put it in overhead and the rate doubles, then gets charged to shovel-and-labor scopes that never ran a machine.
Excavation subs at $1M to $5M run 21 percent gross and 14 percent overhead when fleet ownership cost is charged to jobs. Move $420,000 of annual ownership on a $3M business into overhead and the same company reports 35 percent gross and 28 percent overhead at the same 7 percent net. The margins look better and the overhead rate is now unusable: a $180,000 shovel-and-tie-in scope with zero machine hours gets $50,400 of overhead loaded onto it, against $25,200 if the iron were charged where it runs. You lose the labor-only bids you should win, and you win the machine-heavy bids you should have priced higher.
Both columns show a 7 percent net, so nothing in the financial statements tells you which one you are looking at. The bid is where the difference gets expensive.
This post covers one cost that decides whether your overhead rate can be used. That page covers what excavation overhead runs by revenue band and what the target is. Read Excavation Overhead Rate for the complete treatment, worked figures included.
WHERE DOES FLEET OWNERSHIP COST BELONG?
Ownership cost is what the iron costs you whether it runs or sits: payments or depreciation, insurance, licensing, property tax, major component rebuilds. On an excavation business it's the second largest number after labor, and on some it's the largest.
There are only two places to put it. In cost of goods sold, charged out to jobs at an hourly or daily rate every time a machine works. Or in overhead, as a fixed monthly cost of being in business, recovered through the markup on everything.
Both are defensible bookkeeping. Only one of them produces numbers you can bid with, and most excavation subs at this size are using the other one because it takes no timekeeping to run.
TWO IDENTICAL SUBS, TWO SETS OF NUMBERS.
Take two $3M excavation companies with the same trucks, the same crews and the same work. Sub B charges $420,000 of annual fleet ownership to jobs at a machine rate. Sub B reports 21 percent gross, 14 percent overhead and 7 percent net, which is what the benchmark says an excavation sub at $1M to $5M looks like.
Sub A leaves the same $420,000 in overhead. That is 14 percent of $3M, so it moves out of cost of goods and into the operating expense block. Sub A now reports 35 percent gross, 28 percent overhead, and 7 percent net.
Read those two lines again. Same company, same profit, and one of them looks like it's running a 14 point better gross margin. A banker seeing Sub A's statements would call it the stronger operator. Sub A's own owner probably believes it.
THE $180,000 SCOPE WITH NO MACHINE ON IT.
Here's the bill for that choice. A GC asks for a $180,000 scope that's nearly all labor: shovel work around live utilities, a couple of tie-ins, backfill by shovel where the machine can't reach, flaggers and traffic control. Zero excavator hours.
Sub A prices it with a 28 percent overhead rate, because that's the rate the books produce. The bid holds $50,400 of overhead. Sub B prices it at 14 percent and holds $25,200. Sub A is $25,200 high on a scope where every dollar of that difference is iron the job will never turn a key on.
Sub A loses that bid and doesn't know why. He goes back to his numbers, sees a 35 percent gross margin, and concludes the market is buying on price. The market was buying on price. He was the one who put an excavator on a shovel job.
MOST SUBS MISS THIS: THE ERROR RUNS BOTH WAYS.
Losing labor-only bids is the half people notice. The other half is worse, because it wins.
Take a $300,000 mass excavation. At the 21 percent gross the benchmark reports, that job holds $63,000 of gross profit. It runs a 330 for 240 hours. At an internal rate of $150 an hour, which sits at the bottom of the $150 to $200 range for loaded operating cost, that's $36,000 of ownership and operating cost the job consumed. Fifty-seven percent of the job's entire gross profit, and under Sub A's coding not one dollar of it reaches the job cost report.
So the machine-heavy jobs report a margin they did not earn, and they're the ones Sub A chases, because his own history says they're his best work. He's bidding toward the jobs that are subsidised by every labor-only scope he still wins. Screenshot for the estimator: an overhead percentage is only honest when every job you apply it to consumes what is inside it.
THE MACHINE RATE, AND HOW TO SET IT.
You don't need a fleet management system for this. Take one machine and add up twelve months of what it cost you to own it: payment or depreciation, insurance, licensing, property tax, and the big-ticket repairs and rebuilds. Divide by the hours the meter says it ran last year, not the hours you hoped it would run.
Most excavation subs who do this the first time get a shock, because industry idle rates run near 30 percent and the denominator is smaller than the one in their head. A machine you thought ran 1,400 hours ran 980, so the rate is 43 percent higher than the number you'd have guessed.
Then put that rate on the daily report next to the operator's hours. Nobody has to change how they run a job. The machine hours are already written down, because the operator logs them for service intervals. All that changes is that they now attach a dollar figure to the job.
WHAT TO DO THIS WEEK.
Pull your income statement and find every fleet ownership line: equipment payments, equipment depreciation, equipment insurance, licensing, major repairs. Total them. Divide by revenue.
That percentage is how much of your overhead rate is iron. If it's over five points, your overhead rate can't be used on a labor-only bid and it has been understating your machine-heavy jobs for as long as you've kept books this way. The number to compare it against is on the excavation overhead rate page, which reports what the trade really runs by revenue band.
THE SHORT LIST.
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