BENCHMARKING: Don’t Run on Empty

The high cost of fuel and petroleum-based products has just about everyone upset and concerned – except those on the selling end of the pipeline. It’s such a significant topic that it has become a major issue in this year’s national elections.
Contractors from across the country have queried me as to what they should do about these costs. Can they pass them on to their clients and, if so, how? My response focuses upon their cost estimating system and strategy. A cost estimating system should accurately identify all of your costs and allow you to pass them onto your clients in your pricing for products and services. Really, whether fuel prices go up or down is insignificant if you have a good method for pricing. Unfortunately, most contractors don’t have an estimating methodology that allows them to analyze their costs accurately and make appropriate adjustments.

Equipment & fuel benchmarks

All equipment costs (fuel, depreciation, repairs, maintenance, insurance, in-house mechanics, etc.) for green industry companies normally range between 8 and 12 percent of revenue. This range includes trucks and vehicles as well as field equipment. The fuel component of this range is normally 2 to 4 percent. However, this percentage is creeping up with the rising cost of fuel. A million-dollar company would normally have fuel costs ranging from $20,000 to $40,000. This figure is currently breaking through the $50,000 to $60,000 ceiling.

The cost per operating hour (CPH) for equipment is comprised of three components: acquisition, fuel and maintenance. For instance, at $3.00 per gallon for #2 diesel, a new skid steer that cost $25,000 to $30,000 would have a total CPH of about $18.00. Fuel consumption per hour for a typical skid steer runs between 1 to 1.5 gallons per hour (GPH). Fuel costs per hour would be from $3.00 to $4.50 per hour. On the high end, fuel would run 25 percent of the $18.00. Here’s a chart to show you how the total CPH for this skid steer changes with increased fuel costs using a consumption rate of 1.5 gallons per operating hour.

Including fuel costs in your pricing

Once you accurately calculate the cost per hour for a piece of equipment, include these costs in your bids and pricing based upon actual run-time hours multiplied by the CPH. For instance, if your skid steer CPH is $21.00, a bid for a job requiring this skid steer for 10 hours would include $210.00 (10 x $21) for its cost. As the cost of fuel increased or decreased, so would the CPH for the equipment. This increase or decrease is then passed on to the clients in your bids.

Tips, tricks & traps

At a minimum, you should review and adjust your equipment CPH rates twice a year—once at the beginning of the year and again at the mid-way point. Here are some additional ideas for you to consider.
• Work four 10-hour days. A construction client in New England reduced both his overtime and fuel costs for his crews by gong to four 10-hour days per week for part of the year. Previously, his crews worked a minimum of 10 hours, five and a half days per week. This strategy, though not a panacea, could reduce crew vehicle fuel consumption by roughly 20 percent.
• Add extra fuel costs into general conditions. A $20,000 construction bid might include an extra $200 to $300 for fuel. This amounts to an extra 1 to 1.5 percent.
•  Put equipment costs into general and administrative (G&A) overhead. Some estimating systems put all equipment costs (except rental equipment) in G&A overhead and spread it evenly across all bids. This is a huge mistake. Be job specific with your equipment costs. Why should a job be charged for a skid steer if it only requires pickup trucks and wheelbarrows?

Conclusion

Fuel costs should be treated like any other cost in your estimating system. It will also take a lot of the guesswork and unexpected surprises out of your business. If you don’t, your life will be more “exciting” – but your emotions (and your company’s bottom line) will rise and fall with the price of a barrel of oil.

This article was adapted from Jim Huston’s book, How to Price Landscape & Irrigation Projects.