Hunter Contracting slashed its investment in equipment support, improved machine reliability, and fixed its hourly operating costs at a reduced level with service contracts that convert equipment vendors into business partners. Eight years ago, the company signed its first full-service contract at a guaranteed price per hour for a group of production earthmovers. Since then, company revenues and fleet size have doubled, but Hunter is spending no more on mechanics or service facilities. Instead, four equipment dealers conduct all the maintenance and repairs on 66 pieces of equipment.
"In the early 1990s we started to see the opportunity to really grow the company," says Steve Padilla, Hunter's president. "At the same time, equipment was coming with complex components that required electronic diagnostic skills. We didn't want to add mechanics and keep them trained — we just didn't want to compete in the equipment-maintenance business.
"So we went to our business partners — Empire Machinery, primarily, as they were the ones that we were working with the most — to see if they could take care of our equipment more cost effectively than we could," Padilla adds.
They started talking about full service and repair contracts at a fixed cost per operating hour. Hunter and the dealer agree on a service life for a machine and an expected number of hours per year of use. The dealer estimates all the preventive maintenance and repair parts and labor that will be required over that term, and quotes a cost per hour that Hunter will pay for their services.
Padilla says the first cost-per-hour estimates weren't even close.
"We pretty much know what our machines cost to operate," he says. "They (the dealers) would have to be able to do it at our cost or a little better for us to be willing to sign the contracts.
"We spent an awful lot of time showing them how we arrive at our costs — worked at it for nearly two years from the initial concept to signing the first contract."
Creating competitive estimates challenged dealers' assumptions about repair frequency, what those repairs should entail, and how much maintenance is truly necessary to reach optimal component life.
"They had to test all the maintenance and repair ideas that they've always told us we should do," Padilla says. "In order to become partners, they had to validate their recommended guidelines."
Dealers made good on their commitments, and the list of machines purchased with service contracts has continued to grow. It includes Caterpillar earthmovers and a Gomaco paver from Empire Southwest; Volvo wheel loaders and a compact grader from Arnolds Machinery; Komatsu earthmovers from Road Machinery; Deere backhoes from RDO; and a Blaw-Knox paver and Ingersoll Rand rollers from the IR company store.
Details vary, but some consistent contract themes contribute to their success. Cost guarantees are tied to the consumer price index, but there's a price-increase cap at about 3 percent.
Dealers have to be able to service Hunter equipment throughout the state. And most contracts have a 2½-hour response window — dealers must have somebody on-site making a repair within 2½ hours of Hunter's call. If they can't get a machine back up within 24 hours, they must supply a loaner.
Service quality is a notable value.
"With the machines under contract, even minor things that are not quite right get fixed," says Bill Pitts, Hunter's equipment manager. "And the dealers have the latest, greatest service bulletins from the manufacturer — they know if there has been an update on a machine or a part."
Quality repairs translate into reliability.
"We measure availability based on eight hours a day, five days a week — that's 2,080 per year that we call 'scheduled hours'," Pitts says. "Last year, our equipment was available 98.8 percent of scheduled hours. That number has improved steadily."
Contracts spell out when main components should need repairs. But Hunter and its partners consult over oil-analysis results and inspection reports when repair decisions need to be made. Repairs attributable to job-related damage are charged back to the project where the machine was working.
"There have been some bumps in the road," Pitts says of the transition to true partnership with equipment dealers. "We have quarterly meetings with the vendors to talk about issues — what did work, what didn't work, what can we improve? If we've had a problem, that's in the past. What can we do now to take prevent it in the future?"
Significant benefits to parties on both sides of the table keep these discussions honest. Dealer partners lock up a steady stream of parts and service business for contracted machines.
"Contracts shift the risk of equipment operation to our partners — if they're wrong about an operating-cost estimate because a component needs to be rebuilt earlier than expected or repair costs are more than estimated, they have to absorb that increase in cost per hour," Padilla says. "We also leave them the rewards of outperforming the estimate — if they get more life than expected out of a component, they make more money."
Padilla admits that Hunter risks becoming overly dependent. Vendors who think of the contractor as a captive customer could take advantage of the situation to inflate costs.
"We have to start with a high level of trust, though, before we'll enter a partnership with any vendor," he says. "There are no secrets — we lay our numbers out for our partners, and we treat them fairly and honestly and with respect."
It's working. An example of mutual trust between the equipment partners is the fact that Hunter turns in the very machine-operating hours that its vendors use to build their invoices.
Contract benefits to Hunter are inestimable, but they extend well beyond fixed, low operating costs. In addition to improved reliability and a veritable halving of investment in fleet support, guaranteed cost per hour contracts have attacked the foundation of machine ownership costs.
Dealer partners are working a little harder on pricing to get the service business. And Hunter is able to resell machines at above-market prices because of their impeccable service histories.
"Our corporate goal is to be the contractor of choice for our employees, our customers, and for our business partners," says Padilla. "To succeed, we have to be the most cost effective operation."