How to Manage the Equipment Account (p.2)

September 28, 2010

It is not a trivial task to ensure that the administrative procedures used to record time worked for each unit are functioning correctly. It is relatively easy to record hours worked for major pieces, but it requires diligence, discipline and a keen focus to ensure that appropriate time is recorded for trailers and support vehicles. A defined and well-implemented method must exist to record time for every unit that accrues cost in the equipment account. If we do not do this, the whole system becomes a farce. Some machines or classes will pay their way, but others will be perceived as provided free for all or some of the time.

It is impossible to administer a cost-recovery process unless you ensure that your team fully and correctly records the time that machines are used.

When these procedures are functioning correctly, we can turn to the hourly, daily or monthly cost-recovery rate itself. The principle here is that the cost-recovery rate for each class must be set at a level that enables each class to balance itself. One class should not subsidize another. It is wrong and dangerous to assume all is in order when haul trucks show a $400,000 gain and pavers and asphalt rollers show a $380,000 loss. The equipment account might have made $20,000, but this was due only to a completely random balance between grading and paving.

Experience shows that front-line production groups frequently subsidize groups that receive less care and attention. Good work done to extend component lives and reduce operating costs in the wheel loader group can be lost if we balance our account by using a gain in that group to offset losses in trench rollers and skid steers.

If we approach the problem as set out above, we can determine if a gain or loss in the equipment account is due to under-reported hours or understated cost-recovery rates. Let's look at our major cost categories to see how these provide us with important information.

Owning costs. Owning costs exhibit two characteristics that we can use to our advantage. First, they occur on an annual basis and are largely independent of the number of hours worked. Second, they are relatively easy to estimate and unlikely to vary unexpectedly as the year progresses.

Annual owning-cost budgets are thus fairly easy to determine, and we arrive at the hourly owning-cost-recovery rate by dividing this annual amountby an annual target for hourly utilization. Budget variances are thus extremely sensitive to changes in utilization. The gain or loss on owning costs for a class, group or operating fleet gives a good indication as to whether or not utilization targets have been met. Equipment managers can influence but, in the final analysis, do little to improve utilization. This portion of the equipment account is thus a partnership between equipment and operations, who work together to improve utilization and therefore balance owning costs experienced and owning costs re-covered.

Operating costs. Operating costs are different. They are largely proportional to the number of hours worked, but are as uncertain and unpredictable as the cost and quantity of labor, parts and materials needed to keep individual units up and running. Budget variances thus do not arise because of changes in utilization. They arise because more than anticipated is spent on labor parts and materials. This portion of the equipment account is the direct responsibility of the equipment manager, who needs to look at the efficiency of equipment operations and work with project teams to improve the application and operation of the equipment.

Fuel. Fuel is included as a major cost type for three reasons. First, it is a substantial portion of the equipment account. Second, it currently represents an exceptional buying risk that cannot be lumped together with other operating costs; it must be managed separately. Third, fuel usage represents the gold standard in so far as equipment usage is concerned. Fuel is to hourly equipment cost as payroll is to hourly labor cost. We need to know the fuel-budget variance for each unit, class, group and operating fleet.

Each of these three cost types must be tracked and managed for each of the machine categories. Although the equipment account should balance across the fleet, each of the subaccounts must balance in order to ensure overall fleet finances are in efficient working order.