WHAT THAT MACHINE REALLY COSTS YOU.
An equipment rate is the whole cost of owning the machine across its life, divided by the life. Cost of ownership is what the machine costs to replace today plus every year of maintenance, insurance and other cost. If the unit meters hours, divide by the Hobbs hours you expect out of it and you have an hourly rate, with the day, week and four week rates following at 7, 35 and 140 productive hours. If it doesn't meter hours, spread replacement cost across the useful life, add one year of maintenance and insurance, and divide into 260 working days, 52 weeks or 13 four week periods.
The number that trips most contractors up is in the numerator. A rate built on what you paid, or on what the machine is worth now, recovers enough money to own a worn out machine. Building it on replacement cost is what puts the money there when the machine is finished, and it's the difference between replacing a dozer out of the rate and replacing it out of the line of credit.
ONE ROW PER UNIT. FOUR RATES OUT.
The sheet Josh uses with clients, out of CONTROL Chapter 2. Enter each machine once and it returns an hourly rate for anything metered plus daily, weekly and four week rates for everything, then totals the fleet so the whole equipment cost basis is one number you can put against overhead.
Two numbers in that workbook are doing more work than they look like they are, and they're the reason its answer differs from the one you would reach on your own. Both are below, in full.
REPLACEMENT COST, NOT BOOK VALUE.
The workbook has a column for current value, and no rate formula reads it. That's deliberate. Current value is there so a fleet list also works as a schedule for the bank and the insurer, and it has nothing to do with what a job should be charged.
Here is why. A dozer bought for $150,000 in 2016 and worth $60,000 today costs something north of $200,000 to replace. Bill the job off the $60,000 and the rate recovers $60,000 across the remaining life, which is roughly a third of what the next dozer costs. The other two thirds get paid, because the machine does get replaced. They come out of profit, or out of the line of credit, in one lump, years after the work that consumed the machine was billed and closed. By then nobody connects the two, and the business concludes it has a financing problem.
It has a rate problem. Every hour that dozer worked was sold below what owning it cost.
SEVEN HOURS, NOT EIGHT.
The metered path divides cost of ownership by Hobbs hours, then builds the day at 7 hours rather than 8. The hour that goes missing is work that happens and doesn't produce: fueling, greasing, the walk across the site, the morning meeting, and getting the machine back on the trailer.
Build the day on eight and the rate comes out about twelve percent light. That's small enough to survive every review it will ever get and large enough to hurt across a fleet across a year, and nothing in the accounting will ever flag it, because an under-recovered equipment rate doesn't appear anywhere as a loss. It appears as a gross margin that runs a point or two below what was bid, on every job, forever, with no single line item to blame.
Same reasoning behind 13 periods a year instead of 12 calendar months. Four week periods are the unit the work runs in, and there are thirteen of them in a year. Dividing by twelve produces a monthly rate about eight percent low. An equipment rate should never be the optimistic number in a bid.
METER IT OR CALENDAR IT.
A machine with an hour meter is priced from the hour up. Cost of ownership over the life, divided by the hours in that life, gives an hourly rate, and the day, week and month follow from it at 7, 35 and 140 hours.
A pickup, a trailer or a shop truck has no meaningful hour meter. Those are priced from the year down: replacement cost spread across the useful life plus one year of maintenance, insurance and other, divided into working days, weeks or four week periods.
Both recover the same cost of ownership, and the mistake is mixing them. Price the pickup by the hour and you get a truck rate no general contractor will accept. Price the excavator by the month and you break the link between what the machine did and what the job was charged, which is the whole reason for having a rate at all. The workbook decides which path each row takes from whether you filled in the Hobbs hours, so a mixed fleet comes out right without you thinking about it.
IN THE BID AND IN THE JOB COST. SAME NUMBER.
A rate that lives in a spreadsheet and nowhere else hasn't changed anything. It has to reach two places at the same value: the estimate, as equipment cost on the line that uses the machine, and the cost report, against the same code, so a job that ran three weeks of excavator carries three weeks of excavator at the rate you calculated.
Contractors who calculate a rate and then leave equipment sitting in overhead end up with the most frustrating form of this problem: an overhead percentage that climbs every year, no line item that explains it, and jobs that look profitable while the company doesn't. Across 48 trades it holds true, and it's heaviest in the equipment intensive ones, where unallocated fleet cost can move an overhead rate by high single digits on its own.
EQUIPMENT RATES, ANSWERED.
PART 3 OF 6, RECORDING SOON.
Never Miss Payroll Without Taking On Debt is a 6 part series on making payroll out of work already performed, without reaching for a line of credit. One of the sessions is this page:
Your Equipment's Leaking Money, and It's Not the Maintenance Bill
A rate built on what you paid recovers enough to own a worn out machine. It doesn't buy the next one.
Not recorded yet. The sessions that are appear on the series page, and this one joins them the day it's recorded. Nothing to sign up for: the page is the notification.
