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.
                                     or
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 

(You may pass this on or use this in your newsletters or posts)

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
    

(Feel free to pass this on to others or newsletters)

How do You Price Your Heavy Equipment?

If You Can Not Cost a Your Machines, 

Then You Can Not Correctly Price Your Machines. 

or

The History of Dynamic (changing) Life Cycle

Heavy Equipment Costing

---

Ten years ago in 2000, we began a 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
• State Agencies Like California DOT
• Published Costing Books
• Internet based costing Services
• Agricultural Machine costing programs
• Printed books back to the 1930's
• Aircraft costing studies

Without a doubt 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.


This in itself, is a great idea since they will  supply you the parts and components. 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 spend the time and money to collect the costing data you need. Some manufacturers and dealers may believe that if they told you the real cost of machinery of owning heavy equipment, 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 costing data is the fact that very few machine owners demand it before purchasing.


Back to some history. We began to develop a 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.


I know a lot of people 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, 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. 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.

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

Playing Baseball by Watching the Scoreboard is Wrong!

Playing Baseball by Watching the Scoreboard is Wrong! 
 
You may wonder what this has to do with managing heavy equipment. Let me explain. But first it is important to understand why “playing baseball by watching the scoreboard. is so wrong. The scoreboard is important but it only tells you what has happened in the past. It will not tell you anything about the future.

I love Vince Lombardi's quotation "We didn't lose the game; we just ran out of time." Lombardi is commenting on the insignificance of the scoreboard. (although the clock is important)

If your focus is on what has happened in the past, you do not have your eye on the ball. You need to know where the ball is right now and where it needs to be or where it will likely be. This is where winners focus their attention.

Now what does this have to do with machinery ownership. A common misconception is that that “If you only could keep track of your expense of using your machine, you would know your cost of that machine.” We call this Historic Costing. While Historic Cost is important, it will never tell you your real cost. If you base your price on your Historic Cost, you are almost sure to loose money and at the same time lose projects that you could otherwise win!

Consider your accounting system as the scoreboard, or the way the scoreboard numbers are calculated. Accounting, by definition is a recap of the past, never the future. If you believe the past will always forecast the future, then we need to tell the players of our favorite team to give up if they are behind by even one point. Do you see why focusing on the past can be bad?

If you really want to know your cost per hour or mile or kilometer (for trucks), then you need to take into account both the past and the future. Many of your costs may be coming down the (haul) road. An elevating scraper uses tires that cost $6,500.00 each. A dozer has a track system that may cost up to $21,000.00 (depending on model). Neither of these expenses are incurred when they need to be replaced. The expense is incurred with every hour the machine runs.

To make this more difficult, the tire may last 500 to 3500 hours. The track may last 800 to 4500 hours. If you think that just because you got xxxx hours the for the last replacement, get ready to be disappointed. Every job is different. If you or your estimator is not looking for these job site differences, you will never see differences. Individual work packages or tasks take a different percentage of the component life. Geology changes. I l live in Florida. We have a lot of sand. But all sand is not the same. Different geology will cost you more or less. So do you still really believe that your accounting system will take into account these huge differences in cost?

If not Historic Cost, what really works? Dynamic (changing) Life Cycle Costing will work for you.

Very few dollars of your cost goes for frequent expenses like oil and filter changes. Even these cost can change for very many reasons. Even if they did not change, this would still only likely be $2.50 to $4.50 an hour. You need to count this but there are many more expensive things to worry about costing. For more information, contact me or see www.DecisiveCost.com

Dan Rooks

New Tool to Win More Bids or Tenders

For years many contractors have wanted to know how much their machines and trucks really cost to operate. Knowing cost means knowing how low you can safely drop a price. In the past, many costing methods were tried but these gave inaccurate results and proved to be unsatisfactory.

Now for the first time there is tool that will tell you in seconds, exactly what any machine will cost under any work type, geological application or fuel price. Best of all you use your own conditions, not someone else's.

This new simple to use tool is called DecisiveCost. The Dynamic Life Cycle, Owning and Operating Cost principles used are recommended by major manufacturers. Here are few of the machinery brands our clients are now costing: 1







If you would like to learn more about this remarkable tool or see a free no obligation demonstration, just go to www.DecisiveCost.com.

Dan Rooks
President
Decisive Systems, Inc.
941-225-1370 (Cell)
drooks@DecisiveCost.com


1. All Logos are Registered Trademarks of the respective manufacture. These do not represent any endorsement by the manufacturer of DecisiveCost products.

Is Fear Keeping You From Knowing the True Cost of Your Machinery?

Mark Twain the great American author once said; "I am an old man and have known a great many troubles, but most of them never happened."

In the thousands of people I have worked with in over 81 different countries, the one thing I often hear and see in many people is fear. Fear of the unknown. Fear of losing the business and success they have enjoyed. Fear of old age. Fear of poverty. Fear of sickness or loss of health. Fear of a recession. Fear of strangers (or slick sales reps) taking advantage of them. Fear of not being good enough. Fear of change. Fear of the loss of respect. Fear of the loss of social position. Fear of not knowing or being smart enough. This list goes on and on.

The one that gets me is the large number of employees and even owners of businesses who are actually afraid of knowing their true costs. If you look, you can see fear expressed in their language. People use many excuses for not costing their machinery. Sometimes fear is hidden. Sometimes fear is directly expressed. Here are but a few:

• "If I included ALL my costs, I would never get a job." (Fear of loss)
• "Cost doesn’t matter, only getting work does." (Fear of loss)
• "These other large contractors and equipment dealers certainly know what their cost is. If they can do it for that price, I can." (insecurity in your ability to calculate cost)
• "My accountant tells me what our machinery cost is." (see my last blog at http://decisivecost.blogspot.com/2008/01/why-your-accountant-may-be-putting-you.html )
• "I make my money out in the field, not in the office." (insecurity)
• "I am too busy to cost." (if you are too busy to know cost, you are too busy to be in business. (Often fear keeps us too busy)
• "I am not good with computers." (Fear of the unknown)
• "If I raised my price, I would not get any business." (Fear of loss)

So permit me to ask the impertinent question. What fears and insecurities are keeping you from knowing your cost?

Steven Bechtel the founder of Bechtel, the worldwide construction and engineering powerhouse once wrote that knowing cost was critical to his success. They considered their cost records to be so important that every night they locked their cost books up in the safe. Do you take knowing your real cost this important?

Running your business based on fears, insecurities and excuses for not knowing true cost are common. This major factor causes many to go out of business. You need to make up your mind that to be successful in the long term, you need to know your true cost.

We need to quit worrying about everyone else’s price. You need to know your own cost. It literally almost does not matter at what price someone else prices his or her services. The FIRST question you must answer is what is your cost? You must know exactly what is the least price for which you can put your equipment to work. Somebody will ALWAYS be willing to take a job for less than your cost! Quit worrying about it and do something that makes your services worth more.

One of the biggest mistakes many people make is assuming that your competitor knows his cost. I can guarantee you that there is only a one in a thousand chance that your competitor knows his machinery cost. I have worked with some of the biggest companies in the world. The big guys can be and often are, as much in the dark as to their true machine cost, as anyone. This happens for two reasons, first because the owners of the company are further away from points of cost, than in smaller companies. The second reason is that larger companies often are highly influenced by accounting practices that do not properly deal with machine cost. (See my last blog at http://decisivecost.blogspot.com/2008/01/why-your-accountant-may-be-putting-you.html

Many businesses are still struggling to know their cost for machinery. For example, can you tell me in 20 seconds or less the following questions?

• "How many hours each of your machines ran last week?
• "How many gallons of fuel did each of your machines consume over the last thee weeks?
• "What are the highest and lowest gallons (or liters) per hour consumed by each machine? What’s the average
• "How many dollars of wear and tear did last week work put on the undercarriage of your tracked equipment?
• "For the project that you are bidding or tendering today, how many dollars in machinery wear and tear, will it cost you, if you win the project? Exactly how was this calculated?
• "If fuel goes up or down seven cents, how did that change affect the cost of each of your machines and the cost of the project you are bidding or tendering today?
• "How much is the cost per hour of the tires on that wheel loader?
• "How does differing conditions of use affect the tire costs? (commonly this can change from on one machine from $6.00 per hour to $89.00)
• "If your hours of use of machine goes down by 250 hours in a year, by how much does your cost per hour change?

So permit me to ask the impertinent question again. What fears or insecurities are keeping you from knowing your cost? Why wouldn’t you want to know your exact cost? This is especially true if you could know your cost for any machine in 2 minutes or less.

Today we (the world) has software that acts as tools to extend your abilities to know things about your business that you never before knew. These software tools do not replace you, they are an extension of you. They works just as an excavator works to extend the work a man can do with a hand shovel.

Have you seen the science fiction writer’s dreams of an exoskeleton suit that a man puts on and it gives him incredible super human power and strength? It turns him in a kind of superman. Software gives you the ability to do things you could not do before, even if you could somehow extend the 24 hours in a day.

Good, well-designed software duplicates Best Practices. It brings into your company the processes that the smartest, most knowledgeable people are using today. It can leap frog your company into doing things your competitor is only dreaming about doing.

You may ask, "Isn’t software that is specially created for my industry expensive?" Well the answer is yes and no. It is more expensive than mass-market software like QuickBooks and Microsoft. These companies can divide their millions of dollars of development cost over millions and millions of businesses. You need software custom designed for your specific industry.
Every dollar you spend for software should make you ten dollars, in every year that you use and own it. If it does not, you bought the wrong software or you failed to properly implement and integrate it into your business processes. Today many companies (like my company), offer financing and lease-purchase of software. This spreads out your upfront cash cost. Do not let money hold you back.

Many of your machines will cost you over one million dollars during their lifetime for owning and operating cost. If you have 10, 25, 100 or more machines in your fleet, how much can you afford to spend to better manage, control this multi-million dollar cost? $250.?, $500.? $1,000.?

When you buy even a small machine for say $63,497, what difference does another $1,000.up or down, honestly make? If you could buy an option on a machine for $2000. that could make you $50,000., would you buy it? Think of software that helps you manage and control your investment as an option that you add after you purchase a machine for far, far less than $2,000 a machine.

Back to fear. The best way to deal with fear is to confront it in the daylight. Get it out in the open. Admit your fear and honest feelings. Ask yourself what is the worst thing that could happen. Dale Carnegie wrote a timeless and great book called How to Stop Worrying and Start Living (You can review it by clicking here: http://books.google.com/books#id=yCKmKv99NoIC&dq=Dale+Carnegie&hl=en&prev=http://www.google.com/search?hl=en&rls=GGLG,GGLG:2005-31,GGLG:en&q=Dale+carnegie&btnG=Search&sa=X&oi=print&ct=result&cd=1&cad=author-navigational )

Do not allow fear to control your life. Power through. There is wisdom in a multitude of counselors. Bring in an expert who knows your type of business and machinery to help you make more money.

I do not care how much you made or lost in the past, you can do better. It does not matter how you always have done it in the past. It makes no difference how your dad or grandfather did it before you. That was then and this is now. To survive you are going to have to change and your people, policies and processes have to change. Knowing your true cost is part of this change. Move forward knowing the best is yet to come.

Call me. I can help you to know your machine cost.


Dedicated to your success,

Dan Rooks

President

Decisive Systems, Inc.

"The Owning and Operating Cost People"

Phone 941-926-9260

drooks@decisivecost.comhttp://www.decisivecost.com/

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Why Your Accountant May be Putting You Out of Business

(and not even know it)

One of the questions I often ask business owners who have a fleet of machines or trucks is …..Who does your costing? I get many different answers to this question. One of the common answers is "My accountant".

Unfortunately for the client, this is a good indication that unfortunately he may be trouble and most likely does not even know it. We have found that if the owner or senior manager of a business is not involved in critical cost decisions, many problems will result.

Our world today is often run by what our accountants tell us. They have a position of great respect in many companies. We pay accountants a lot of money every year. After all, they understand all that financial stuff. They should know best, how to cost machines. Shouldn’t they?

In this newsletter I am going to pick on accountants. If you are an accountant or CFO, please do not be offended. Keep reading and maybe it will help your practice and your clients success.

Seldom will an accountant tell you why his calculation of machine cost numbers are in error! The truth is that he or she may have no clue that what he is telling you is or might be wrong. His training, tools and methods have served him well in the past. Why would they be wrong now with machine cost? He believes in his accounting system. He did the calculations. He knows they are mathematically correct.

The problem with machine cost is that being mathematically correct and being right are two different things. To be right with machine costing you have to be mathematically correct but also you have to use the correct METHOD to get to true cost. This is why we use Dynamic Life Cycle Costing as the only method to know true cost per hour. Most accountants derive cost based on historical accounting records. The problem with using historical cost is that it is seldom correct when it comes to calculating future machine cost. More about that later

Many accountants have attended cost accounting classes but, perhaps as many as 80-90% of accounting students will tell you that their least favorite class was cost accounting. I don’t blame them. Most of the cost accounting classes that I have seen are poor. They are highly questionable as to their applicability or usefulness to the real world. Worse yet, the accuracy of the finished product when applied to machinery cost is in some cases, just plain wrong.

I fully realize that what I am saying may cause some to strongly disagree. It may appear that I am against accountants. I am not. Good accounting is fundamental to business success. Some of my most valued advisors are accountants. If you are a CFO or accountant please bear with me and let me explain.

The problem with standard Historical accounting methods is that it is very poor at calculating true machine costs per hour. Oh yes, these numbers need to be tracked for historic cost and necessary in calculating cost for tax purposes. But tax cost and real cost are two entirely different things. The numbers may be absolutely mathematically correct. The only problem is that they are wrong if you intend to use them for budgeting, estimating, pricing, bidding or tender purposes. If you use the numbers from your accounting system for machine costing purposes, you are setting yourself up for disaster. Maybe not today, but sooner or later it will cost you a ton of money. Maybe even your company, your retirement program and perhaps your children’s future.

Hear are three of twenty reason why historic accounting is not good for forecasting cost.
Many machines are very complex. These complex machines do not have one lifetime. They have a whole group of component lifetimes that start at hour one and expire at different rates or time. The cost in every subsequent year of operation is going to be different than the last. Looking backwards at what happened to cost last year or even over the last three years will yield unsatisfactory machine cost numbers going forward. The older the machine is, the worse this variation becomes.

An easy way to understand this is to think about the car you drive. In the first few years you are in the "honeymoon period" of very few problems once any small glitches from the factory are fixed. In the next few years new problems like brakes battery and alternator may need to be fixed. Fast forward to the 5th to 8th year of ownership and we see all kinds of problems that we did not see in the early years. AC system, power windows, power steering pump, water pump, electronics etc. need attention.

Depreciation for tax purposes often has little to do with real world costs per hour. A machine that has an eight to ten year or more economic lifetime may be written off for tax purposes much faster. What you do for tax calculations often has little to do with reality. This is not illegal. It is smart business practice.

Your actual cost changes. Some examples of changing variables are; fuel cost changes, types of work done with a machine, number of hours of machine use and geological conditions of use. All of these drastically effect cost calculations. Yesterday's cost is not today's cost.

If your accountant is calculating your machine costs here are eight questions to ask him or her about their numbers.

Q1. When you came up with these cost numbers, did you get them based on the accounting books or did you go out to the shop and get the machines’ Owning and Operating Manuals?

If he says he looked in the accounting books, strongly consider throwing out the cost numbers.

Q2. How of much of each track machine’s cost per hour is for undercarriage cost (or final drives, or hydrostatic transmissions)?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q3. How much of each wheeled machine or truck’s cost per hour is for tires cost?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q4. How much of each machine’s cost per hour is for ground engaging tool cost?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q5. Diesel Fuel is one of the biggest expense, when fuel cost change, how does Changing costs affect the cost per hour, mile or kilometer?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q6. How much of this machine’s cost per hour is for future major costs like replacement or rebuilding the engine or changing a hydraulic pump?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q7. How do varying job conditions change your cost per hour or mile?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q8. How many hours or miles/Kilometers is this cost based. What happens if that number changes by this year by 10% or more, up or down?

If he can’t tell you, strongly consider throwing out the cost numbers.

Accurate calculation of your machine cost per hour is critical if you want to know your unit costs like; cost per ton or cubic yard or other units. Your businesses future depends on you knowing cost. Companies that know their cost, stay in business, Companies that don’t know their cost, go broke. This is true for new companies, it is true for companies that are 10, 20, 40, 80 or 100 years old. Your cost is dynamic and constantly changing.

So if you cannot count on your accountant for machine cost, on whom can you count? We have found that good costing of machine is a group effort. Maybe one person heads it up. But getting to true cost involves input from many people both within and outside of your company. Your accountant is as good as anyone to head this effort, providing that he or she has the time and the correct specialized tools. Good costing is like good estimating. It takes time and knowledge to be a good estimator of cost. In most cases it takes the efforts of a dedicated person, who is trained in machine costing. This could be an existing employee.

The correct tools are very important. This is no different than any other job. Seldom will a backhoe do what a hydraulic excavator can do and vice versa. Machine costing takes special tools like DecisiveCost. Spreadsheets can not deal with the required interactions necessary to get to true cost. This is a little like trying to keep company books and accounting with a spreadsheet. It would be a nightmare. (By the way, we have developed a test, if you think your spreadsheet is ok to use to cost machinery. Send me an e-mail and I will send you the spreadsheet test.)

Your machine cost is your cost. You cannot get accurate or dependable numbers out of some book or web site. You have to calculate cost per hour for yourself. There is just too much variation in cost per hour between machine owners. With DecisiveCost you can cost a truck or machine in two minutes or less, once you have set the system up. That book number is somebody’s cost but it is not your cost. After working with thousands of people in over 81 different countries, I can say with some authority that every company’s cost of a machine or truck is unique to that company and the type of work they are engaged in doing.

DecisiveCost is not an accounting system, or a maintenance management system it is a Dynamic Lifecycle Costing system. It is very unique. If you have questions about the accuracy of your current machine costing methods, call me or e-mail me. I can help you. Better yet, I will make you a lot of money and help assure the future success of your business.


Dedicated to your success,
Dan Rooks
President
Decisive Systems, Inc.
"The Owning and Operating Cost People"
In the U.S. Call 800-232-5767I
nternational 941-926-9260

drooks@decisivecost.comhttp://www.decisivecost.com/

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Best Practice on Education: How Does Your Company Compare

Best Practice on Education:

How Does Your Company Compare?

Many senior managers know they should be training their people, especially their key managers. Top performing contractors and businesses of all sizes have formal education programs. People in positions like; project manager, shop manager, senior estimator, superintendent, foreman and certainly top line executives, all need to stay on top of their game. If the only place or way for your people to get knowledge is from on-the-job experience, your company is paying a horrendous price. This puts you a long way from maximizing your company's potential to increase profits.

There is only one reason companies spend money to train their employees. That reason is that education makes companies money, period. The minimum Return on Investment (ROI) you should expect to get from a well designed class with a good presenter is ten dollars for every dollar you spend on education! Motorola, a long time leader in educating its managers and staff estimates their average payback per dollar spent is $44.00.

How do you recruit, keep and bring out the best in your key people? What have you done this year to re-motivate and energize your staff and in particular your managers? Our businesses have a way of sucking the life out of people. Long hours, continuous pressures and problems all create stress. You get tired of it all. How much more do you think this all affects your people? Well designed and led education programs will certainly motivate. But, even more, these programs will make permanent changes in people. A few of these changes are; acceptance of change, creativity, desire to be better, improve quality of work, acceptance of company policies and many, many more areas.

Jack Welch who successfully led General Electric to new highs, credited his management training program that they conducted in-house at Crotonville, NY, for much of his success. Welch used Crotonville not only as a place to educate GE employees, but as a medium to spread the changes in culture and thinking that have helped make GE what it is today. In Jack’s own words, he said "The GE of the future will be based on the cherished values that drive us today: mutual trust and the unending, insatiable, boundary-less thirst for the world's best ideas and best people."

Do you want the best people and ideas in your company? You need to take on responsibility for change. But how do you do this? It is really quite easy and you do not need to have a purse the size of G. E.’s, to do it. Number one, I would recommend that you stop being your company’s “expert”. (The one with all the answers, the one every one comes to get answers.) There is an interesting definition of an Expert. The story goes that an expert is a person who is more than 50 miles away from home with a briefcase!

This story draws from ancient writings about a man who roughly 2,000 years ago stated that “a man cannot be a prophet in his hometown”. In case you do not know who said this, it was said by no less than Jesus Christ himself. You can read his exact quote at Mark 6:4. I figure that if he could not do it, I probably will have trouble doing it. By being the “expert” in your company, you set yourself up for failure.

The best advice on education for your people that I can give you is to bring into your company experts in from outside to say what needs to be said. Your life will be a lot easier. When the expert leaves you just bring up and remind your people of what they learned from the expert.

How do you do this? Companies, just like your company, are planning to bring speakers, educators and experts into their company at this time of the year or early next year. Below are some resources that would greatly benefit you.

By the way if you think that because you send your people to a trade show and sign them up for classes, you are meeting the Best Practice Standards. Well, I am sorry to tell you that you are not there yet. The accepted standard for all management level people (including you), is a minimum of 45 hours a year of continuing education.

I am not criticizing you for sending people or going to trade shows. You should be doing this. I conduct trade show seminars. Here is a link to a video of a class I did at ConExpo (http://www.conexpoconagg.com/). The class was delivered to one of their largest audiences and highly successful. The title of the course is, “How much does that machine cost? Click here to see the video. http://machinecost.blogspot.com/

If you watch this video and you should, you only have 44 more hours to go this year.

If all of this does not apply to your company, please go: http://www.decisivecost.blogspot.com/ and comment on what your company is doing and how your company is actively involved in annual employee and management education. It may be an inspiration for others in our business

Many of you know a little about me from my previous contacts to you. But do you know that every year, I also conduct classes for companies interested in improving their management team? I have spoken to groups, organizations and businesses all over the world. I go wherever you need me to go. I have worked with groups of five people to five hundred. (I have found that doing a two-day class with 500 is interesting, but I’d suggest that if you can, limit it to 25 people for the best classes. If you have a larger group, I might suggest multiple classes.)

Here are some of my classes that may help you and your people to grow. Often these are classes are conducted in one or two-day formats and are modified to better fit your company and its goals.

• Achieving Excellence in Project Management
• Best Practices in Construction Supervision
• Best Practices in Construction Productivity
• Best Practices in Construction Quality Management
• Best Practices in Heavy Equipment Costing

To get more information on any of these classes or bringing these courses for your company or association, just call or e-mail me.