General Inquiries

Equipment Cost Allocation to the jobs

  • 1.  Equipment Cost Allocation to the jobs

    Posted 04-15-2019 18:40
    Hello,

    Currently, I allocate all the equipment cost quarterly to the jobs by the labor hours since our company is labor intense. I am wondering what other methods are out there for a paving contractor. Please share your process.

    Thank you,

    Simar

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    Simar Esquivel
    Controller

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  • 2.  RE: Equipment Cost Allocation to the jobs

    Posted 04-16-2019 10:50
    Hi Simar,

    Other popular approaches are:
    1) Have employees include equipment hours used on jobs with their payroll time sheets;
    2) Pull actual equipment hours from equipment ECN's using systems like VisionLink then post to your ERP system;
    3) Assign equipment to jobs and use check-in/check-out system that charges equipment to that job using day rates until equipment is moved to new job;

    The above will give you equipment revenue using budgeted equipment charge-out rates.

    Then you code actual equipment costs to equipment. The difference between the two is the profitability of your equipment division.

    If you're making money using equipment charge-out rates that are less than what you can obtain from third-parties, you're doing well. If not, you're better off leasing equipment instead.



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    Jon Olsen
    President/CEO
    Olsen Consulting LTD
    Calgary AB
    (403) 836-5118
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  • 3.  RE: Equipment Cost Allocation to the jobs

    Posted 04-16-2019 10:56
    In our practice, we generally recommend that all equipment owned be treated as a separate profit center that rents equipment to the construction job/operations by the day at the job site or in use.  Obviously, rented equipment is charged directly to the job.

    The reasons for this are:
    1. the decision to own, in general, versus to rent, is a business investment decision by ownership.  That decision to buy is to reduce costs to be more competitive and to make more money.
    2. if there is an incentive plan for the job management and labor, this removes the profits from a good buy or rent decision from the job profit and poor decisions to buy versus rent (losses) are removed from the job costs.
    3. it allows for review of utilization of owned and rented equipment analysis so that better decisions can be made on utilization.  This allows reductions of risk of buy/rent decisions since the information becomes more specific to future job types and equipment needs.

    Depreciation would be typically over the real useful life of the asset.  Labor utilized in repairs are fully loaded and charged to the "equipment P&L.  Substantial "rebuilds" are capitalized for financial purposes and amortize over the extended life of the asset.  Gains and losses on sales of used equipment are recorded in this profit center.  Assets that "sit on a job" and not utilized are charged to the job for the days "on site"...so as to make equipment use accountable to the job managers.

    We see all too often that equipment owned is not charged to job cost, and this distorts job profit/loss.  Also, investment decisions are segregated and reviewed more accurately so that companies don't become equipment poor. We generally recommend that the asset interest cost from financing is charged to the equipment profit center, along with the noted depreciation, repairs, maintenance, labor factors, cleaning costs, equipment transport, insurance, and fuel (all costs directly related to the operation of the piece of equipment ).  In calculating the costing to a job, either the cost of rental (if available) is used, or the daily cost of the equipment is precalculated when acquired based on estimated use in the calendar year (days) and total costs of depreciation, interest, fuel use, repairs, maintenance, insurance, internal maintenance labor, etc. are totaled; increased by the desired ROI on owning the equipment percentage; and that total cost and profit is divided by number of estimated days to be utilized as a minimum acceptable standard for that year (or part of the year if acquired during the year).  The "sanity check" is that it can't be greater than the cost to rent daily/weekly/monthly as would have been the process if not owned. Each year the standards are review and revised as to the equipment cost to be utilized based on better information learned or job type and use projections...and changes are made to lease rates for that coming year.

    Some clients don't want to go through this process (I think that is a mistake) and utilize the annual "sanity check" at least, using labor hours (if high labor intensive work) or estimated days used are recorded and totaled...then all costs including interest, insurance, depreciation (utilizing useful life standards) and other direct costs including labor for maintenance/repairs are divided by that factor and "generally compared" to cost to rent (estimated generally also by taking a sample of easy to identify equipment).

    When you "charge as you go" with labor utilization and all costs divided by that their can be distortions.  If you account for them somehow effectively, the the method using actual costs divided by labor hours on the job for a month or quarter (as estimated cost to complete is calculated) can work...but remember that the concept of equipment "buy-rent" profit or loss becomes loaded into the jobs and it may distort job profits/losses.



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    Tony Burruano
    President
    Burruano Group
    Cherry Hill, NJ/Naples, FL
    236.595.2149
    www.burruanogroup.com
    tonyb@burruanogroup.com
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  • 4.  RE: Equipment Cost Allocation to the jobs

    Posted 04-16-2019 11:21
    Hi Simar,

    I've often pointed clients to this article that helps establish an equipment rate: https://www.foundationsoft.com/equipment-job-costing/​

    It generally takes a little more doing upfront, because employees will need to log equipment hours along with their payroll rime.  Once the rate is established, equipment usage hours will need to be monitored so you can apply the rate to the time in your accounting.

    Hope this helps!

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    Ryan Hays
    Account Executive
    Insurance Associates Agency Inc.
    Rockville MD
    (301) 838-9400
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  • 5.  RE: Equipment Cost Allocation to the jobs

    Posted 04-16-2019 16:09
    Thank you for your time.

    Simar

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    Simar Esquivel
    Controller

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  • 6.  RE: Equipment Cost Allocation to the jobs

    Posted 04-18-2019 09:09
    Construction equipment management expert's university agree that the best approach is to directly charge equipment hours to jobs using a dual rate (Ownership & Operating).  For a good explanation of this and how to accomplish it, I recommend Mike Vorster's excellent book "Construction Equipment Economics." It is available at cempcentral.com.  Also, if you are attending the Annual CFMA Conference this year, the Construction Equipment mini conference will cover this topic and many other valuable areas.

    In terms of accomplishing this, the sitework contractor I retired from has used B2W software's "Track" solution for over 15 years. Track provides mobile daily field reporting, including labor and equipment hours, that are interfaced directly into all of the major ERP's.

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    Herb Brownett CCIFP
    President
    Brownett & Associates LLC
    West Chester PA
    (610) 823-7615
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