How do You Cost Your Heavy Equipment?

If You Can Not Cost Your Machines, Then You Can Not Correctly Price your Machines.
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The History of Dynamic (changing) Life Cycle Heavy Equipment Costing

Ten years ago in 2000, we began an in-depth study of how contractors were costing the Owning and Operating Cost of their heavy equipment. We evaluated many costing systems, some were home brew others were developed by others. When someone develops a system, it is often for their purposes, this means that it may not necessarily be for your purposes.

We looked at a wide variety of costing systems. A few of these were:

•   The Caterpillar Method (over approx. 40 years)
•   Many other manufacturers' systems
•   Federal Agencies like The U.S. Army Corps of Engineers & others
•   State Agencies Like California DOT
•   Published Costing Books
•   Internet based costing Services
•   Agricultural Machine costing programs
•   Printed books back to the 1930's
•   Aircraft and other expensive machine costing studies

Without a doubt we felt that CAT had the best system. In fact they pioneered heavy equipment costing back in the early 1970's. Never-the-less, our study identified 35+ short comings in the CAT system. Considering the age of their system and the fact it was designed for an owner with a pencil, paper and a calculator, it was quite good in comparison.

The CAT engineers that designed the system did not have a powerful computer sitting on their desktop like you do today. (VisiCalc, the first computer spreadsheet program was released in 1979) The CAT O & O (Owning and Operating) Heavy Equipment Costing System has remained basically unchanged except of some minor cost updates though 2001. Much of what made the CAT system good was mysteriously deleted in 2001. The user was instructed to talk to their dealer about repair cost.

Talking to your dealer in itself, is a great idea since they will supply you the parts, components and some major or all of the repairs and maintenance you will need. However, not all dealers have the info you need. I remember speaking one equipment dealer who could not even get fuel consumption data from the Original Equipment Manufacturer. If you have a mixed fleet, good luck. If you want to do your own repair and maintenance, good luck, as maintenance contracts can be purchased for low hours and low age machines (Although some dealers will take your fleet as is.)

I do not want you to think that CAT was entirely self-serving by the deletion of this repair cost data. In my opinion, this change had a lot to do with the fact that old system was a manual system and this made the repair cost data, very difficult to prove. In one market, repair costs were too high and in another too low. Dealers complained. To make matters worse, competitors would use these numbers against CAT! If I faced this same situation, I might have made the same decision that CAT did.

As you try to get machine costing data, you may have difficulty due to a manufacturer's secrecy. Keep in mind that some manufacturers may believe that it is not in their best interest to spend the time and money to collect costing data you need. Some manufacturers and dealers may believe that if they told you the real cost of machinery of owning heavy equipment, it may cost them sales and scare off potential customers. Some are fearful that it may expose them to competitors who do not calculate the same way they count. Fear is a great motivator.

Probably, the number one reason for the lack of Heavy Equipment costing data, is the fact that very few machine owners demand it before purchasing Heavy Equipment.

Back to some history. After our study we began to develop a computerized heavy equipment costing system. Initially, we tried working with spreadsheets but quickly found that they would not do what was necessary. Yes, spreadsheets could cost part of a machine's cost but they just will not provide the whole picture. They just are not suited for the job.

Why do think people buy millions of Accounting software packages form QuickBooks etc.? If spreadsheets are not suited for good accounting, why would you think they are good for machine costing? We found out that spreadsheets just will not provide the needed power, speed, flexibility, variability, reporting and error elimination. Accurate Heavy Equipment Costing takes a sophisticated database with a simple to use, custom interface. This what we use in DecisiveCost. 

A lot of people try to use spreadsheets. I do not criticize anyone for trying to cost with a spreadsheet. This is where companies often start but also quickly learn the weaknesses of spreadsheets. They are certainly better then pricing your equipment by matching a local rental house. (Your cost is your cost, a rental house may price based on their cost. Their cost has nothing to do with you.)

If I could categorize what made the original CAT system great, it was the focus on what today we call Dynamic (changing) Life Cycle Owing and Operating Cost. Today almost every manufacture supports the concept that your heavy equipment cost changes as the type of work and conditions change. I don't want to focus too much on spreadsheets but as soon as you use one for costing, you loose the "Dynamic" part of costing, At best, you might be able to implement a vary small number of variables. Costing one machine, for one work type and geology or strata is one thing. Costing a mixed group of machines, were work and geology changes....is entirely different thing. Costing of Heavy Equipment takes a database with a user interface.

We have a free basic costing system at www,DecisiveCost.com 

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