Management Talk 3

What does it cost per hour to operate your backhoe or Bobcat? Air compressor? Radial arm saw? You need to know these figures for the equipment you need to run your business.
The key is determining what your costs are. It takes discipline to gather all the data, but once it’s together, you’ll know what you’re doing.
If the equipment uses fuel, start with a full tank and record the hours on the operation gauge. At each fill, record gallons of fuel and number of hours operated. After 8 to 10 fills (on at least three jobs) divide cost of fuel used by hours of operation.
If you have a maintenance plan for the equipment, divide the total cost of the plan per year by total hours of operation. If you keep track of maintenance costs for each piece of equipment, divide total cost per year by hours of operation.
Now consider all the "extra" stuff that it costs to operate equipment, such as replacing tires, tracks or traction devices. Divide that total cost per year by hours of operation. Add the cost of all licenses, permits, fees, taxes and insurance. Divide that total cost per year by the hours of operation.
If the equipment is moved from site to site, total the moving costs for a year and divide by the hours of operation. Calculate depreciation or replacement cost (generally on a five-year cycle) and divide that total cost per year by the hours of operation.
Then add all of the above costs to find the cost per hour for that piece of equipment. Finally, take the cost per hour and multiply that by your normal markup. That will give you the rate you should be charging per hour for that piece of equipment.
Don’t stop there. Some equipment needs an operator. If you pay an operator by the hour, say $20, you must first add your normal burden to that amount, or the amount you pay in taxes, insurance, workers compensation, vacation, etc., for each employee.
In most states, multiplying the hourly pay by 1.35 gives you approximately what an operator actually costs. In this case, $20 times 1.35 gives a $27 cost per hour. Ask your CPA to check this number. Some states’ requirements will be higher and some lower. In California, for example, the cost is closer to 1.48.
An easy way to calculate a correct "burden" rate is using our Markup Calculator, found at www.markupandprofit.com/soft¬_calc.html. It has a section for hourly labor rates. You can calculate a complete charge rate with the markup included, or calculate your burden rate by including all employee-related costs. Add your employee cost to the cost per hour for the piece of equipment.
Finally, take the total for the equipment and the operator and multiply that by your markup to get an accurate sales price per hour for the equipment and the operator.
All this figuring takes effort, but will pay for itself quickly. Your rate per hour for equipment or for both equipment and operator should never be set based on what your competition is charging. Here, like new home, remodeling or specialty work sales, your competition’s prices will almost always be too low. Base your sales price on your own numbers and nothing else.
Michael Stone is an expert in business management, sales, computer-assisted estimating systems and contract/proposal writing for the construction industry. He is the author of “Markup and Profit: A Contractor’s Guide.”

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