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Roadmap to a Fleet Replacement Budget



Sarasota County Florida uses a five year budget plan

When creating heavy equipment fleet replacement plans, long-range budgeting makes for a trustworthy path to follow. Such budgeting helps construction equipment fleet professionals look at utilization and maintenance projections, as well as anticipated expenditures for high-dollar and specialty items, such as side-boom pipe layers or, in a municipal fleet like Sarasota County, Fla., firetrucks.

Sarasota’s Fleet Manager Greg Morris, CEM, and Acquisitions Manager Brianne Hayes use a long-range, five-year budget plan for purchases of 200 assets annually.

Reprinted with the permission of Equipment Manager magazine, the magazine of the Association of Equipment Management Professionals.

“We also have to plan for the disposal of those assets as well as the high-dollar items,” Hayes says.

A manual disposal list is sent to the Sarasota Board of County Commissioners and, once approved, the list goes to public surplus.

“It is a paperwork trail to make sure that everything is transparent,” says Hayes, “what’s coming in and anticipated sales. The return-on-investment (ROI) balance goes back to us in a fund balance and helps us with our purchasing plan in years to come.”

A laundry list of financial aspects are considered when budgets are drawn up, including total cost of ownership and average life cycle for each class of vehicle. The county also estimates utilization in hours and/or miles for the next 12 months, based on the data from the past 12 months.

“We look at our maintenance percentage compared to our purchase cost, emissions technology, parts cost, ownership versus rental, technology, and from a refurbishment aspect, the cost of rebuilds,” Hayes says. “That’s particularly true with some of Sarasota County’s larger units, such as rescue vehicles. We look at engine rebuilds, which we purchase from the installer, and then we recalculate our life cycle, which affects our five-year plan. It pushes out the asset’s life.”

Morris and Hayes recently completed a five-year plan, which included financial analysts in their department.

“They looked up the projected fund balance and also the reserve funds we have, as well as the anticipated sales surplus,” says Hayes. “That allowed us to anticipate what we need in our fund balance to keep our operation running from year to year.”

The only problem—more of an educational process, she says—was trying to explain to the county “the fluidness and flexibility that a replacement plan has to have.”

“That was difficult [getting across the fact], for example, that yes, we really have these 100 assets that we are going to replace, but something may happen that causes us to play the switch-and-swap game. An example would be if a firetruck or some other emergency vehicle gets totaled in an accident.”

Sarasota County Fleet Manager Greg Morris says they stay on top of repair costs“We are very mindful of repair costs,” says Morris (right). “We lowered the amount the shop can spend on vehicle repairs. Sometimes they don’t need to try and fix it at all. With major repairs, we determine if repairs exceed fair market value. We have to look at things like that and also whether we can get a replacement in on time. Basically, we do a return-on-investment [analysis].

“In a situation where a business center has to stay in business using an asset, we go ahead and salvage the asset. But if a transmission or engine fails a second time,” Morris says, “it’s not worth putting more money into it. The situation is always fluid.”

The five-year plan is reviewed several times during the year in meetings with more than 25 finance and maintenance managers throughout the organization. The maintenance meetings alert Morris and Hayes to any major issues that are coming up, which allows them to revise the plan.

One thing that has benefited Sarasota County’s long-term budgeting plan, according to Hayes, is this year’s conversion of the fleet’s 5/50s and below vehicles from diesel to gasoline. This move alone significantly reduced maintenance and increased reliability.

“The exhaust system and tighter engine tolerances have benefited our operations extremely well,” Hayes says.

Another important element in budget planning is to involve the people in the field who use the equipment every day. “We strongly believe in that,” Hayes says.

“It is always helpful to have their opinion on what works well, or whether or not additional money is needed for another type of equipment. As for larger equipment, we continue to look for other technologies. That makes for a fluid and transparent fleet.”

The business of budgeting is quite different at Pennsylvania-based Henkels & McCoy Pipeline Division, says Fleet Director Gil Gilbert, CEM.

“Unlike the government and other industries where it’s easier to forecast longer terms—say, four- to five-year plans—in the pipeline world it’s harder because, although bigger jobs are posted, they can get held up by things like permits, which can vary from state to state. It’s really not advantageous to calculate out more than a few months at a time,” he says.

A lot of pipeline companies have struggled this year, including one of the oldest in the country.

The key to avoiding this type of situation, he says, is working closely with your company’s operations, marketing, and business-development people.

“They have the pulse of the industry and know what direction and what projects are coming up,” Gilbert says. “By working with them and your operations people, you can get a pretty good sense of what kind of projects you’re going to go after, the size of those projects, the bare bones of those projects—and that tells you what specialized equipment you’ll need.

“There is a plethora of big, major projects coming up in the next four years, so the type of equipment that can handle large-diameter pipe is going to become pretty scarce,” he says. “Operations people tell you how strong the possibility is to get the work.”

Even so, Gilbert says the biggest reason that Henkels & McCoy Pipeline Division strives for budgets that reach out as far as is practical is because it has such a capital-intensive fleet.

“We have some of the most expensive yellow iron that you can purchase, such as bulldozers and pipe layers, which can easily run $500,000 to $750,000 each,” he says. “First and foremost, it’s important to have a good life cycle/depreciation schedule.”

For the high-ticket machines, the division has a 10-year depreciation schedule.

“We evaluate what kind of work is forecast over the next three to four to five years and figure out if our fleet is the right size. Telematics are used to track utilization and what we can expect out of those machines,” Gilbert says.

Of a total fleet of roughly 1,000 units, about 450 to 500 are “heavy yellow iron.” The heavy equipment has a life cycle of 10 years; heavy on-road equipment, up to seven years; and general-use, light-duty pickups have five-year life cycles.

“Those are our age parameters,” says Gilbert. Depending on what type of machine it is, he says, “we’re looking at a 40- to 60-percent ratio and would expect to see at least 75 to 80 percent utilization on light support equipment.”

For some machines, many decisions are based not only on utilization that is expected now, but also the book value “and whether or not the market is right for flipping,” Gilbert says.

Equipment that is hard to find, like specialty low-boy trailers or side booms, are evaluated every 7,500 hours, and a decision is made on whether to replace the unit or do a certified rebuild.

“When I deal with other departmental managers, regional managers, and our corporate CFO/treasurer, I use a time-value-money ratio on leases versus owning. If it makes more sense to lease something versus putting upfront capital out now, that’s the direction I point to, especially when it comes to general machinery such as standard excavators,” Gilbert says, pointing out that leases generally come straight from OEM finance groups.

Gilbert calls those leases rolling leases because “they allow us to have shorter leases, but we can roll over those leases if need be for less money.”

That wasn’t always the case at Henkels & McCoy, Gilbert says. When he joined the company four years ago, he says that a poor job was being done in terms of long-range forecasting.

“They would go out and sign 38- to 46-month leases on basic machines like excavators and backhoes,” he says. “The problem is, with that type of equipment—particularly in the northeast—they work only nine months of the year, especially if you don’t have work. By letting those machines sit, you’re still paying the lease.”

After Gilbert’s arrival, those long-term leases were renegotiated and replaced by six-month rolling leases.

“I staggered the six-month leases into two sections where I would have the option of turning the excavator back in or re-signing another rolling lease. By doing that, the rate actually drops another 30 percent. We have saved more than $11 million over the past four years.”

Long-range budgets are an integral part of the fleet-management business, according to Dan Connelly, CEM, VP of Operations at Oldcastle Material. It is essential to identify the capital requirements and the rate of consumption of the fleet asset productivity, he says.

“It is not exactly a balancing act. The management purpose of a fleet manager is to understand the allocations of physical assets and then move to an understanding of the rate of consumption and capital required to sustain the level of productivity for the fleet.”

Consideration of financial aspects—such as owning cost versus repair costs, deployment, and fleet average life—are so broad in nature, Connelly says, that “there is no single point or even hand holds of points whether it be depreciation, tax credits, or something else. We base fleet decisions on categories and cost of ownership. That requires a purchase decision, but when we refer to total cost it means the cycle of an asset, but it also means the asset utilization period.”

Those decisions are based on trying to determine what can be best delivered: ownership model, leasing model, or a short-term rental.

“The primary driver in all those things is utilization,” he says. “We look at what utilization is being forecast. Is it a sustainable one, seasonal, or is it niche utilization?”

Oldcastle has about 35,000 pieces of on- and off-road equipment. Of that, approximately 12,000 are off-road.

“We look at particularly our quarry aspects: the financial feasibility of rebuilding wheel loaders and especially rigid-frame trucks in our quarry operations,” Connelly says.

“Quite frankly, our expectation in those categories is to get anywhere from one to as many as four rebuilds, depending on whether it is a haul truck or wheel loader and what size. We think that is part of the overall category cost of ownership that management has to plan for and execute for those applicable assets.”

Earlier this year, Connelly collaborated with company financial managers—a constant process, he says—to specifically develop a budget for seasonal mobile equipment for 2017.

“[We look at] fleet projections that include fleet consumption and developing category strategy, such as how many assets are scheduled to be rebuilt, where you will rebuild them, and what category they are in,” he says. “Cost collaboration with the finance folks is the projected cost per hour of the rebuild and the acquisition cost per hour. Sometimes investing in a rebuild is our best cost per hour.

 “It is category strategy, trying to identify the optimum cost per item for the optimum ownership period for each category, and then identifying where rebuilds are applicable and where they are not. You have to constantly stress that utilization is critical in achieving cost containment in a fleet.”

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