Management Challenge: The Complexities of Compliance

July 12, 2011

Third in The Management Challenge Series, we look at the compliance side of the management hexagon. Read other installments in the series:
Equipment Profession Facing Management Reset
In-House vs. Outsourced Maintenance

Emissions, safety, government regulations: Pick the poison, because anyor all of these has the potential to drive today’s equipment manager into an administrative frenzy. Of the six triangles within his hexagon of equipment management, none reflects the growth in complexity of the fleet professional’s role as much as the compliance and risk management function, says Mike Vorster, who consults in the area of fleet management and organizational development.

Third in a series, this installment of The Management Challenge looks at the increasing complexity of compliance. Others in the series:

Equipment Profession Facing Management Reset
In-House vs. Outsourced Maintenance
Why Managers are Running the Rental Option
Rental Strategies Aid Compliance, Costs
Meet the New Boss, Not the Same as the Old Boss
Outsourcing Cuts Shop Costs

Any compliance requirement that touches an organization’s fleet of iron eventually lands in the equipment department, and the list of responsibilities is growing.

“Regulations weren’t nearly as big 10 years ago,” says Andy Agoos, who co-teaches with Vorster in the Construction Equipment Management Program. “Of the six major functions [in the hexagon], the one that’s become huge is risk management and compliance.” A short list of compliance and regulation topics from Agoos includes OSHA, DOT documentation, emissions, fuel tracking and fuel storage, human resources, hazardous materials, and safety.

Is Outsourcing Risk
A Risky Business?

OSHA’s new crane regulations are not only causing equipment executives to scramble on how to comply, but also are throwing a wrench in what some consider an option for risk management: the outsourcing of liability to rental companies.

Bob Andrade, CEM and vice president of equipment/asset management for EMS Group, suggests that fleet managers may be finding themselves inadvertently liable for compliance issues.

“Rental contracts are becoming more litigious,” Andrade suggests. “In many rental contracts I see these days, they try to pass off their own sole negligence onto the end-user. Nobody wants to take the risk of liability now.”

The solution, he says, is prequalification of vendors and machines, especially as it relates to crane rental.

“We try to start with the rental contract to make sure it meets our standard of terms,” Andrade says. “We revise the rental contracts so that the vendors still have to take on their own sole negligence in case they give us a bad piece or they do something improper. Most rental contracts deem our acceptance of the rental equipment as meeting all regulatory standards and our accepting the liability for machines full compliance without written notice upon delivery within usually 24 hours. Very few major companies I am aware of actually inspect their delivered rental equipment.”

EMS inspects rental machines before they take delivery. They inspect the yard, ask to see how the rental firm maintains equipment, meet the product-support teams, visit the shops, and then prequalifies the actual piece of iron.

“In the old days, being just a few years ago, you would let that stuff come on site. If there were deficiencies, you’d call the guy and he’d take care of it,” he says. “Now with the OSHA standards getting more stringent; with liability, intensified certifications, training requirements, and insurance getting more stringent; the equipment manager needs to do a much better job of preselecting and prequalifying their vendors and overseeing their rental machines coming to their site. It’s proactive instead of reactive.”

Gary Bernardez is president of AMECO, whose equipment fleet is deployed globally with an estimated replacement value between $750 and $800 million. He says he sees two elements of compliance that need to be addressed.

“The number of issues is escalating and the complexity of the issues is escalating,” Bernardez says. “It requires you to stop and check the structure. The number of challenges on fleet management is requiring us to take a look at both the staffing and type of capability needed to effectively deal with [compliance].”

Bob Andrade, CEM and vice president equipment/asset management for EMS Group, manages a $40 million fleet with machines working across the country. He says the complexity of compliance grows across regions. EMS tracks all compliance issues and “keeps building to this list.”

“Everytime something pops up, it goes on the list,” Andrade says. “Then we have to determine if it’s going to affect us. We have crews all across the United States. We may not be working in Colorado today, but we might by the end of the year. What happens when we go over there? We have to be up on all those local and area standards.”

Complexity also increases because of the sheer number of regulatory bodies, each one of which has its own compliance standards, says Rex Davis, CEM and president of RMCI. RMCI’s estimated fleet replacement value is $15 million and includes about 250 machines.

“The equipment manager has to comply with each individual regulation, and there’s no central authority,” Davis says. “What the EPA wants is completely different from what the Department of Transportation wants and what a municipality’s regulatory division on permits wants. So whether you’re dealing with a local municipality, a state government, a federal government agency, they have their own rules and regulations. Every one of those [compliance issues] has a different agency that you have to deal with.”

Each agency has its own requirements, too, so the reporting cannot be streamlined. For multiregional fleets, the problem is exacerbated because similar compliance issues may be handled differently in each region.

The increase in the number of compliance requirements plus the growing complexity of some of them has driven up the administrative requirements of the equipment-management function. Agoos estimates it to be 25 percent, up from 5 percent over the past several years.

“Documentation is the small end of the iceberg,” Agoos says. “The emphasis is on managing the process, not doing the work.”

No greater example exists of this than the fleet surveys mandated by California’s Air Resources Board (CARB) that require documentation of every machine, its horsepower, and its engine Tier. Although the urgency has been reduced somewhat, no thinking equipment professional doubts that such documentation isn’t heading to a fleet near them. Emissions will be the single most critical area of compliance that fleets will have to manage.

“Even though we have a national standard, it’s a real hodge-podge of different regional or local agencies and different independent reporting requirements,” Andrade says. “Depending where you are, you could be reporting to one agency or three agencies requiring different criteria. We capture all relevant potential data and record it even if the state doesn’t require it. As long as you’re doing compliance for a few states, you might as well do it for all of them.”

The explosion of emissions regulation has done the most in recent years to bring the issue of fleet compliance to the attention of top-level management, whether it’s the CEO of a contracting firm or the chair of a municipality’s governing board. Regardless of the type of organization, they are beginning to respond to the effect compliance has on costs.

The cost of compliance directly affects owning costs, says Vorster, and its effect is growing. In his book, “Construction Equipment Economics,” he suggests this function could be funded and managed as corporate overhead.

The cost of compliance

“On the surface, it appears to be a relatively simple routine task,” Vorster writes. “It is, however, growing in cost and complexity on a daily basis as more and more emphasis is placed on complex insurance requirements, emissions standards, and safety regulations. This function becomes extemely complex when operations are performed in many states or in international markets.”

Some costs, such as licensing fees on vehicles, can be easily tracked and applied by machine. Others, such as a hazardous materials program, may be folded into general overhead, Davis says. He says he’s seen a 25-percent increase in costs on certain equipment over the past five years due to compliance issues.

“There’s not a real simple equation on how it affects you, because it affects us overall,” he says. “Our safety cost is 5 percent of our labor; it’s added as burden. That doesn’t include all the other [compliance] items. Certain pieces of equipment are highly regulated, and there are costs associated with that. Identifying it is probably the hardest thing to do because it does melt in with everything else that’s going on.”

In New Mexico, where RMCI is headquartered, the fleet must now address noise-abatement regulations. Davis says he may have to pay as much as 20 percent more for a unit that complies with noise standards, a cost that feeds directly into the owning-cost equation.

“Ownership [cost] is the 800-pound gorilla from the fleet-management side,” Bernardez says. “We’re having to spend additional money and resources, but then you make sure you are commercially reimbursed in the rate structures.”

Of course, anything that affects an organization’s rate structures sends ripples throughout. Bid estimates change, field operations take note, and the equipment division’s balance sheets come under scrutiny.

At EMS, the equipment division initially absorbed the compliance cost increases and boosted utilization efforts to offset the additional costs, Andrade says. “Now, costs are specifically assigned as a regional fleet operating expense, just as major rental companies are adding these same compliance-related fees into their local rental contracts as surcharges. These costs are now a recognized operating expense regionally as any other cost and needs to be bid in like kind.

“We put compliance component and material or special material equipment upgrades into operating costs,” he says. “We adjusted our internal rates and expensed items as an operating expense, rather than capitalize the costs and increase our overhead accounts. Administration goes into the overhead costs, but the equipment account does not bear compliance-related safety, emissions, specialized materials for project-related compliance or other department costs. Those costs are spread between the [operating] divisions.”

Compliance demands have directly affected administrative and purchasing roles, but others have been created and added. Most notable are the monitoring and tracking of data, and the need to stay fully informed and up to date on standards and regulations.

The compliance role

“[Compliance] is an administratively intense clerical function,” Vorster writes in his book. “The individuals concerned must be fully knowledgeable of all statutory requirements and must ensure that each machine is licensed, insured, inspected and certified as required.”

AMECO and Grace Pacific each has integrated a non-equipment manager into their organizations to help monitor and track compliance. AMECO has an HSE (health/safety/environmental) director that reports to Bernardez and is reponsible for keeping his four regional equipment managers apprised of compliance issues and auditing the reporting. Grace Pacific has a corporate-level environmental department that works with the equipment group, and other divisions, on all things environmental, such as emissions.

Joseph Shacat, Environmental Compliance Manager for Grace Pacific, describes his role as advisory. The equipment division is responsible for compliance, he says, “but I’m here to help them get it done.”

“We tend to be the primary contacts with the regulatory agencies, the inspectors, the engineers,” he says. “If there are issues to be resolved, then we’ll be writing the letters, etc.”

AMECO works closely with its corporate parent, Fluor, on HSE compliance issues, Bernardez says. AMECO has its own HSE director, and each of the four regions have people on the ground to monitor and advise the four equipment managers. They confirm compliance and interact with Fluor HSE personnel.

“We rely on the combination of Fluor’s HSE structure and linkage into OSHA, and the AMECO HSE director,” he says. “Their responsibility is to always know that there is a coming change or something that needs to be quickly implemented. Fluor has good subject-matter experts, and that organization ensures we don’t miss anything. To me, it’s a level of insurance we feel good about.”

RMCI also depends on its corporate safety division for advice and counsel. But all but one compliance area are handled directly within the equipment division. The exception: hazardous-materials management.

“One of the compliance issues that seems to be getting bigger is the EPA requirements,” Davis says. “That might be something as simple as dust control in your yard. Or it’s more complicated on how you handle chemicals used in the shop or in your work environment. How you handle those, how you record those, how you clean up, how you store is a lot bigger process than it used to be.

“A can of spray paint anymore is considered hazardous waste. In the past, it was just considered a piece of trash.”

As a result, RMCI kicks hazardous material disposal to an outside vendor. Internally, hazardous waste collection and management is the responsibility of RMCI’s equipment manager, who delegates much of the tracking responsibility.

“Overall ownership of this goes to the equipment manager, but the actual operation is distributed down closer to where the work is happening,” Davis says. The shop foreman keeps a log of all haz-mat transactions, and he oversees a clerk who completes the necessary paperwork. Job superintendents label any containers on their projects so the equipment group knows how to handle them.

The rapid growth and complexity in compliance requirements clearly cannot be handled by one equipment executive. Help is needed from a variety of sources: subordinates who handle other operational functions, corporate-level subject experts, and outside vendors. 

“If you had such a person who knew how to do each individual thing, it would be a full-time position,” Davis says. “If he weren’t doing licensing, he’d be doing permits. If he weren’t doing clean-air requirements, he’d be doing clear-fuel documentation. I can’t even think of them all because there’d be so many.”