Equipment Replacement, How Long Can You Safely Keep Your Machines?

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This is a good video overview of how one Equipment Manager uses information to make decisions and saves money. The video is about one hour long. Considering that it took him 45 years to learn this, maybe it is not too long. It will give you a good way to compare your processes to his, no matter if you have 5 machines or 874 like Bill DeRousse.

Bill will show you his numbers and explain why you need to calculate this for your fleet.
To see Video Click Here

The PowerPoint slides (which you will want) are available for free. Just send me your e-mail address by private message. (They are too large to attach and not yet published on the internet.)

DESCRIPTION:
Should a vehicle be replaced or repaired? Study an example of equipment costs (Cost Per Mile or Hour, Repair hours per mile/hour, Average age and Average usage) over the past four years and see what factors have affected costs.

PRESENTOR:

Bill DeRousse
City of Everett Washington and Everett Utilities

Mr. Bill DeRousse has been a Fleet Manager for 45 years with both private and public fleet operations. He is currently the Fleet Superintendent for the city of Everett and Everett Transit, Everett, Washington. He served for six years as the president of the Public Fleet Managers Association and now the information officer, serves as a committee chair with Seattle Chapter of NAFA. Serves on many committees within the state Of Washington as well on several national transit and vehicle committees. Bill is a public speaker in all areas of fleet management giving presentations throughout the United States annually.

For more info on the calculating Best Equipment Replacement points in time, Click Here or send me an e-mail. Please post comments about the video or subject matter.

Quote:

Originally Posted by jmac My hourly operating costs get lower the more I use the machine if you consider initial cost. The hours used per year are the unknown. (Heavy Equipment Forums)

Right on jmac. This is why contractors who really want to know their costs start off the year (or next 12 months) with an estimate or forecast based on current conditions. We have a tool that will track the hours on a machine when fueled or every week, if you like.

We use this to project what will happen over the next 12 months if business continues like it has been running. I normally suggest to clients that they adjust their forecast every month or every quarter.

This data also used to for Productivity Variance reports. This lets clients know what machines need to be sold or bought.

"The sooner you close the barn door or gate, the less stock you loose." You do not want to wait until year end to to find out that you 750 hour forecast, should have been 325 hours.
Dan

Quote:

Originally Posted by Aussie Leroy How much $/hr for a D8R or simalar in australia Wet rate,Leroy (Heavy Equipment Forums)

Leroy, are you asking for the COST per hour of this machine or what guys are charging as a PRICE? Suppose you get several PRICES from people who:

• Do not know their true cost per hour
• Operate their machine in different Geological conditions
• Who use their machine in a different Work application (See Here)
• Have Repair labor rates different than your cost
• Have not adjusted for Cost of fuel changes for three years
• Bought their machine new and it has less than 5,000 hours on it
• Bought their machine at auction and it has 15,000 hours on it

Are you getting the idea that you need to know YOUR cost and that your cost may be as much as 200% different than another person's cost?

To start you on the costing journey there is a FREE costing tool on this web site. (Click Here)

[QUOTE=Aussie Leroy;253454]How much $/hr for a D8R or simalar in australia Wet rate,Leroy[/QUOTE]

Leroy, are you asking for the COST per hour of this machine or what guys are charging as a PRICE? Suppose you get several PRICES from people who:
[LIST]
[*]Do not know their true cost per hour
[*]Operate their machine in different Geological conditions
[*]Who use their machine in a different Work application [URL="https://docs.google.com/leaf?id=1GOW48uwBfr5j3PIbgaCBHSd99SoD_TmwWp6dpLAFIQY&sort=name&layout=list&num=50"](See Here)[/URL]
[*]Have Repair labor rates different than your cost
[*]Have not adjusted for Cost of fuel changes for three years
[*]Bought their machine new and it has less than 5,000 hours on it
[*]Bought their machine at auction and it has 15,000 hours on it
[/LIST]

Are you getting the idea that you need to know YOUR cost and that your cost may be as much as 200% different than another person's cost?

To start you on the costing journey their is a FREE costing tool on this web site. [URL="http://www.decisivecost.com/"](Click Here)[/URL]

Do You Keep Your Old Heavy Equipment or Sell it and Rent?

Do You Keep Your Old Heavy Equipment or Sell it and Rent?

The question of keeping or selling a old machine is a highly individual management decision. I do not believe in a One-Size-Fit-All, answer. There are just too many variables. Just one of these variables is the “Type of Use Planned.” A friend has a CAT D5 Dozer. He is not “in the business.” He just likes tinkering and pushing dirt around on his property. His decision to Keep or, Sell and Rent, will be very different than a businessperson (who is employed at a profit-oriented enterprise), might make.

A $10,000. machine could be different than a $38,000.00 machine. The point is that if you do not accurately calculate the COST per hour, you will never know how much that old machine really costs per hour. What seems to be the right decision, may be costing you more than you think.

This decision changes over time. A 1998 CAT 345BL had an auction value of $77,000. in 2008. Today that same machine may bring $38,000. I think this could change your decision to Buy, Rent or Sell.

Keeping a machine is a lot like buying a horse for your daughter. It will cost you more than you think. The cost per ride is shocking, if she does not ride it much.. I have seen old machines cost an owner $250.00 per hour. vs. $75.00 per hour for the same machine on the front line that gets used.

The important take-away is that you have to cost ALL your machines, not just the ones that get used.

Do You Know Your Heavy Equipment Owning and Operating Cost Per Hour?

People use different methods to determine the Owning and Operating cost per hour of their Heavy Equipment. In about 60 seconds, you can find out how you compare to other people who have taken this survey. When you are finished, you will instantly see the results of this short survey.
No name or ID is collected.

Click Here

If you would like to learn more about Machine or Truck costing for free, go to www.DecisiveCost.com

How to Place a Value on Another Person’s Machine

How to Place a Value on Another Person’s Machine


From time to time a person has the opportunity to use another person’s machine. The challenge is to determine the value of that machine. A machine's value is established by first determining the machine’s cost per hour. Once you know the cost per hour of your uncle's (or the owner’s) machine, you can start to put a price or value on that machine.


One method is to find the “Equivalent Value” of the machine. This helps to make sure that you are not over paying for the borrowed machine. There are times when it is cheaper to rent a machine than to own or borrow a machine. Likewise, some people are renting when they should be owning.


Determining the cost of a machine is not particularly hard. But, the first time you cost a machine it does take some time to collect all of the necessary information. This is an estimate. It is not perfect but it is lot better than guessing or using someone else’s numbers.


All too often people try to take a very dangerous a short cut by using rental or competitor prices for the purpose of setting the price they charge for a machine. It is natural (but wrong), to think that; "They must know their cost, because they are a large operation". Remember being bigger does not automatically mean better. It just means that they can get away with mistakes (like poor cost calculations), longer than the smaller guy.


The value of a borrowed machine has a lot do with the Owning Costs of a machine. These are the fixed costs of owning a machine. An older machine’s Operating Cost is first determined by Fair Market Value (FMV) of the machine. A visit to Ritchee Bros. web site  Auction Results, will give you a quick (but rough), idea of the machine’s FMV.


The more hours you use the machine in a year, the less these hours will cost you (or the owner) per hour. A machine that get used 1,000 hours a year will cost about 66% less Owning Cost per hour,  than a machine that only gets 333 hours of use per year. This is because the fixed costs are spread over the hours the machine is used.

People are shocked to find out that the old machine they keep around for occasional service is perhaps costing them more per hour of use, then a new machine that gets used regularly. It is an absolute fallacy that a machine which is paid-off, only costs you for fuel and grease.


Operating Cost must include not only fuel, oil changes and grease but also many other costs for future expense of:

• Major component or parts repair and replacement
• Ground Engaging Tool wear parts
• Tires or Track and Undercarriage
• Many small repairs costing less than $500.00.

The Life Cycle of these components and parts are directly increased or decreased by the Job Conditions or Work Application where the machine is used. (See here).


Here is a link to a free online costing tool which you can use to bring many of these costs together. (Click here). Send me a message if you would like to get more information on machine costing.


Dan Rooks
Decisive Systems, Inc.
www.DecisiveCost.com

Relationship Between Work and Heavy Equipment Cost

The type of work a machine performs (See this) and the environment in which it works, affects many items related to the cost of that machine. Here are a few of these affected factors. These will change your machine cost:

• Economic life of the machine
• Fuel consumption (Gallons or Liters per hour)
• Life Cycle of engine and major components
• Tire or Track Undercarriage Life Cycle
• Ground Engaging Tool life
• Production speed of machine
• Production rate of manpower

These changes can easily amount to a project cost difference on a machine of 200% or more. In the past their was no easy way to calculate the cost of these changes. Over time, many owners, estimators and equipment managers grew accustomed to not calculating these real job costs.


Today, the personal computer has brought enormous power to compute what was previously too time consuming or difficult to calculate to millions of people. Many owners, estimators and equipment managers are now using their computer to calculate their true cost with DecisiveCost. These difficult calculations are done seconds without any typing or entering of complex formulas.

Knowing your cost will enable you to win more projects by allowing you to lower your price, to the least amount you can safely bid or tender.


Many Heavy Equipment engineers have noted the close relationship between Fuel Consumption rates and equipment wear. With every revolution of a machine’s crankshaft, many parts are worn. Admittedly, this is a small amount of wear, but consider that a machine operating at 2400 RPM and 1000 hours a year will make 72,000,000,000 revolutions in a 5 year time period! The end of life is coming as sure as death and taxes. The only questions are when and will you have the money to replace the engine and machine major components.


If you want to survive and prosper in this business you must know your cost to know how much to charge for the use of a machine. Your costs are your costs. Someone else will likely have different costs.


You would not want to sell a ton of aggregate used on a project for $15.00 a ton less than your cost. If some other company either does not know what the cost of aggregate is or wants to sell the aggregate at less than their cost, that is their right (and problem) to do so. You must look at your machine cost in the same way.

Who Calculates Your Machine Cost or Labor Burden?

 Who Calculates Your Machine Cost or Labor Burden?

Do you hate doing office work like accounting and bookkeeping as much as I do?

Many clients have said to me “My Accountant calculates my machine cost.” (or labor burden). Most smaller and medium sized businesses (with less than 500 employees) have either in-house or outside accountants. They do an important job.

Many owners and managers in all sizes of organizations do not realize the huge variance between different types of accountants and the specific skill sets that they bring to your business. Due to the different perspectives and rules that each type of accountant bring to the table, they will have a major impact on your business and the quality of decisions you make. It is important for you to understand the differences.

A Financial Accountant who prepares your company’s tax returns, Income Statement and Balance Sheet will likely report projections and results in a much different manner than a Management Accountant. Accounting viewpoints can be as different as day and night.

A Financial Accountant may say your cost of an employee is $xx,xxx.xx per year, or a machine costs $xxx.xx per hour. This is a historical view as recorded in your accounting system. A Management Accountant may say "Wait a minute. Here is your REAL cost." You will need to know why these two accountants are coming up with very different results. This difference may easily be twice as much or more!

You will be surprised to learn that many real costs are not recorded, even in very good accounting systems! For example; Non-productive time or costs like wear and tear. Many costs may be hidden or mixed into other accounts which are not added into “payroll or machine costs”. Also in many cases, the past is NOT a good predictor of the future.

Wikipedia says “Management Accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.”

In contrast to financial accounting information, management accounting information is designed for internal use by managers of the organization Compare this view to information which is intended for use by shareholders, creditors, public regulators or taxing authorities. Management accounting calculations are usually confidential and not publicly reported. Their information is forward-looking, instead of historical. Management Accounting calculations are computed with management decision-making needs in mind, and are often based on management information systems, rather than being ruled by generally accepted accounting principles (GAAP) to which all public accountants are required to follow.

Just because you have a small or medium-sized business, it doesn’t mean you can’t afford a Management Accountant. Many Management Accountants work with small businesses at reasonable prices.

There are at least 46 types of certifications for accountants. For this article, let’s discuss just six types of accounting which may be of special interest to you:

Audit Accounting: Audit services are at the core of public accounting (CPA) work. CPA’s certify to third parties that the reports they are viewing are reasonable representations of a company’s financial position, and that the statements comply with generally accepted accounting principles (also known as GAAP a complex set of accounting principles and rules that CPAs must adhere to). Auditing work involves checking transactions, account balances, internal accounting control systems, and financial statements for businesses, public, and not-for-profit organizations. It enables new accountants to understand how financial transactions are supposed to be recorded and reported to third parties, and how businesses make money. An auditing career provides a solid foundation for future work in more specialized accounting arenas (e.g., tax, financial, investment, analytical, or management accounting).

Tax Accounting: Tax accountants (many, but not all, are CPAs) prepare corporate and personal income tax statements. They may also assist with strategies for minimizing and deferring taxes, and provide advice on when to expense items, how to approach a merger or acquisition, etc. They need to have a thorough understanding of economics and keep current with the ever-changing tax code. Because taxes are based on laws, many firms also require staff members to acquire additional legal training.

Financial Accounting: Financial accountants draw information from the general ledgers to prepare internal and external financial statements and management discussions and disclosures. They also take part in the business’s important financial decisions involving mergers and acquisitions, employee benefits planning and long-term financial projections. This work can vary from week to week, so it needs a combined understanding of accounting and finance.

Management Accounting: Management accountants work in companies and contribute to decisions about capital budgeting and business analysis. Major activities include time and cost analysis and projections, contracts analysis, and participation in efforts to control expenses. Management accountants are now major contributors to business decisions, working alongside marketing and financial managers to develop new, profitable business. They are not constrained by GAAP, and so may be able to provide information that’s more meaningful for day-to-day decisions

Budget Analysis Accounting: A budget analyst develops and manages financial plans in a business. This position requires strong quantitative skills as well as good people skills especially if they are involved in negotiations.

Bookkeeping: Is the recording of day-to-day financial transactions (e.g., sales, purchases, income, and payments). Bookkeeping should be performed by someone with strong organizational skills who enjoys a sense of order and control. To obtain the most value from bookkeeping staff, they should be trained by and/or report to someone with a strong accounting background. I.e. bookkeeping is generally considered to be a high-level clerical function and should not be confused with true accounting, which requires extended study and experience.

In conclusion:

There are a number of different ways that you and your accountants can analyze your numbers. So it’s good to ask yourself:

1. Which type of accountant is providing you with information and advice and what is their perspective?
2. Do you fully understand how they have arrived at their numbers, and why they took a particular approach? (i.e. Historic records vs. CAT cost method)
3. Does their approach make sense given the particular decisions that you need to make?

If you want to speak with a management accountant about possibly helping you, contact me, I may be able to refer you to someone.

Cost of Heavy Equipment per Hour

Trying to calculate your cost based on Historic Accounting information is like trying to find the time by looking at a broken clock. It absolutely correct 2 x in a day! Only after the sale of a machine can you take the total amount paid out over a machine's ownership life and compute what that particular machine really cost you per hour.

Even then you might not want to use that number to base your price per hour on due to the fact that:

1. The cost for diesel fuel, service, parts, operator is very likely different now, than in the previous 5 (or whatever) years
2. Type of work application may be different (see CAT Performance Handbook)
3. Geology of work may be different (sand vs, clayey soils job)
4. You use the machine more or less annual hours than the machine you sold
5. The new machine is more or less dependable than the old machine
6. You might have sold the machine right before a major repair
7. The market value for used machines has changed
8. Your accounting system did not compute the "Cost of Money into your costs unless you financed 100%.

Nobody said this business was going to be easy. It just looks easy. If you send me an e-mail with your mail and e-mail information, I will send you a free copy of the CAT Performance Handbook costing section and some information on how to make all of this easier. No charge or obligation.
Dan

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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Ten Keys to Prospering in a Market Where Competitors Undercut Your Prices

1. Know your Bid/Win Ratio. This will vary but it is important to know and track.. If you are in a business where it takes 5 or 10 bids to win one, be glad you are not in a business like the drywall business where it often takes 30 or more bids to win one.
2. Stop guessing about cost. When you know your true cost, you know how low it is safe to go.
3. Focus on and measure (count) Quality. Lean about what "Quality in Construction" really means.
4. Work at reducing your cost. A $1,00.00 cost savings is equal to a $10,000.00 increase in sales (If you operate at a net profit of 10%).
5. Quit worrying about being the cheapest bid. Become the "Low Cost Producer". Study "Lean Construction".
6. Specialize and a find a niche. Specialist generally have less competition. They can ask and get premium fees. At the same time reduce cost.
7. Partner with larger contractors based on your true machine cost plus.
8. Track each of your competitors. They like you, have a limited number of machines, operators and supervisors. Let them fill up with below cost work.
9. Work at being the best, not the cheapest.. Remember, like you, every Caterpillar (and other brand) salesperson is faced with competitive pressures based on price only. You do not see CAT going out of business.
10. Know your real cost per Hour on each job, for your machines. (Do not even consider using other company's cost, prices or Historic Accounting records. Use Dynamic (changing) Life Cycle Owning and Operation Cost. This must include budgets for all heavy equipment repair and maintenance cost. For more help with any of these, contact me at www.DecisiveCost.com
    

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