Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
In my last column, I said that the total of all costs (fuel, repairs, mechanics, depreciation, insurance, etc.) for trucks, autos and field equipment for a green industry company usually runs 12% plus/minus 2% of revenue. A $1-million company would have about $120,000 of such costs. All of these costs should be passed on to your customers (with an appropriate margin added to them) in your pricing for your services and projects. This article will explain how to do so.
Calculating the cost per hour (CPH) for a skid-steer.
The total cost per hour (TCPH) for a truck, automobile or piece of equipment is comprised of three components. They are the acquisition CPH, the maintenance CPH and the fuel CPH. Costs for our example skid-steer are calculated over a six-year useful lifetime at 500 billable hours per year for a total of 3,000 lifetime billable hours. I always aim to overstate the costs and understate the lifetime hours. This ensures that I do not understate the TCPH. Essentially, what you are doing is dividing the lifetime costs for an item by its lifetime billable hours.
- Acquisition CPH: Includes the purchase price, interest paid, sales tax, toolboxes, paint/wraps and upgrades (for trucks and autos) minus any salvage value upon trade in or sale. It is $60,000 lifetime for our skid-steer, or $20 per hour ($60,000 ÷ 3,000).
- Maintenance CPH: Includes inland marine insurance (or vehicle insurance), maintenance services, oil changes, tires and tire repairs (or tracks and track repairs), washing of same, registrations and so forth. We estimate our skid-steer to cost $5,000 per year or $30,000 lifetime. This is $10 per hour ($30,000 ÷ 3,000).
- Fuel CPH: We estimate our fuel consumption to be 2 gallons per hour at $3 per gallon or $6 per hour.
- Total CPH: Our total CPH is: $20 ACPH + $10 MCPH + $6 FCPH = $36
How it works.
If you plan to run this skid-steer five hours per day on a job, you’d multiply the $36 x 5 = $180 per day cost. You would then add a 25-35% margin to this figure to arrive at a price to charge your customer.
$180 ÷ (1 - .35) = $180 ÷ .65 = $277
Note: The margin is $97 ($277 – 180) or 35%
When estimating the costs for a project, you would total the estimated number of hours the skid-steer would run on the job and multiply that figure by the TCPH. You would then add an appropriate margin to the total cost.
Marketing equipment costs.
I’d argue from a cost-analysis perspective that the $36 TCPH is a reasonable cost figure for the skid-steer in question. However, the question becomes how much margin should you add to that figure to charge your customer? This is a marketing question.
I like to use common benchmarks from the marketplace that the customer is familiar with when it comes to calculating an amount to charge the customer. In a normal economy, I’d add a minimum margin of 25-35%. I may charge less than this in a recession. Because rental shops would reinforce my charge to the customer, I’d consider charging rental rates to residential customers. I’d discount this somewhat for commercial customers.
One client told me that he charged $500 per day for an installation crew member. Since putting a skid-steer on a job was like putting at least one extra crew member on it, he charged $500 per day for the machine (without an operator).
I told him that as long as he could charge that amount without getting any push-back, he should do so. In a robust economy, the customer’s primary concern is schedule (when can you start?). However, in a recession, the customer’s number one concern is price. Research local rental rates if you’re unsure how much to charge for a particular piece of equipment. Such rates should help you determine how much to charge your customers.