Contractors Shift to 3/4-Ton Pickups

Sept. 28, 2010

Earlier this year, Construction Equipment surveyed equipment owners to determine how pickup trucks are acquired, specified and managed. The accompanying charts provide a skeleton, or snapshot, of how equipment managers responded. In subsequent interviews, we attempted to hang some flesh on those bones to determine how pickups are managed.

And that started the debate: Drive pickups into the ground, or manage costs to obtain maximum resale value?

Equipment-management strategy has shifted in recent years from maintenance-oriented to asset-oriented. Most managers today treat their fleets as capital investments. In some cases, the equipment fleet captures as much as 80 percent of the organization's capital dollars. When an equipment-using organization acknowledges this, the fleet of machines shifts from being simply consumable tools to being assets. Assets retain value, require management over their lifecycle, and carry a residual value that can be maximized at disposal.

Two divergent management philosophies exist for pickup trucks. Traditionally, these trucks have been used up, rotated down, and tossed aside. Senior-level managers receive decked-out new trucks (usually as part of a benefits package), and trucks move down the ladder as they age or deteriorate. Low-level functions end up with the rusty cast-asides until the trucks became too expensive to justify. Residual value is nil.

At the other end, equipment managers attempt to do as recommended by Mike Vorster, David H. Burrows Professor of Construction Engineering & Management at Virginia Tech and author of Construction Equipment's "Equipment Executive" column.

"Cars and pickups must be in their own separate group so that they can be caused to balance their own books," Vorster says. "Costs for different groups are incurred and recovered in different ways, and there are frequently different financial expectations for each group." Many managers already do this with the heavy-equipment fleets; pickups can be managed the same way in order to capture the vehicle's peak residual value at point of disposal.

Of course, these are opposite ends of a management spectrum that allows a mixture of the two strategies. One example is a long-term mining operation in which pickups no longer need travel over the public roadways. Tags are removed, and the truck spends the rest of its useful life running around the mine. The mine management has determined up front not to be concerned with residual value.

The peak-residual-value strategy requires purchasing the truck at the right price and disposing of it at the right time to reduce ownership costs and maintenance expense, says Brad Allen, manager of procurement shared services for MDU Resources Group. "You haven't worn it out, and it hasn't broken," he says.

Key to managing for peak residual value is properly specifying the truck for its function. MDU works with each of its four subsidiary operations to develop the need around which specifications are built. "Once we define need, we try to find the best spec for that unit," Allen says. "Instead of running [a truck down] through multiple applications and keeping it 10 or 15 years, we've tried to keep it narrow. The parts runner may get a newer, fuel-efficient vehicle instead of a hand-me-down with 200,000 miles."

One need that has diminished among some fleet-owning organizations is the inclusion of a pickup truck in employee benefit packages. Some are moving away from supplied vehicles altogether; others are moving from pickup trucks to SUVs and automobiles. In either case, equipment managers can more ably focus on function for their pickup trucks. At Hubbard Construction, management has chosen to put salespeople and upper managers into more fuel-efficient vehicles, including sedans, says Steve Ricke, division manager equipment/construction services.

"We're using vehicles more efficiently," Ricke says. "[In the past,] you would see 15 trucks; now, you'd see a pool truck. Company vehicles just aren't there. We're pushing senior management from Expeditions to Ford 500s. Expeditions are not even in the spec for executives."

"It's a tool, not a retention device," says Matt Miller, executive vice president, Hawkins Construction. Although Hawkins offers trucks as a benefit, Miller says the company looks closely at function when specifying pickups.

Those who work in the heavy/highway functions typically work out of 3/4-ton pickups. "They're off-road more; the trucks are spec'd heavier," Miller says. "A building guy, doing commercial buildings and driving on the road, will get a half-ton. A half-ton saves on the purchase price and gas mileage."

Specialty functions, such as service applications, usually require 1- or 1.5-ton pickups, often fitted with specialty bodies (see table). Equipment managers say specifying the truck for the function enables them to accurately set useful life and, consequently, accurately determine the truck's peak residual value. Many call this the "sweet spot."

"Based on historical data, we have a sweet spot where we get out," says Ricke. "[The truck] will attract someone who can get a couple more years out of it."

At MDU Resources, Allen specs the trucks for resale as much as possible, keeping an eye on the consumer market. For that reason, options that won't fly with consumers typically are not specified. "You want something a consumer would buy at resale," he says. "We look at resale as much as we do the upfront cost."

Hawkins tends to go a step further, buying "bare-bones," says Miller. "We try to eke out efficiencies by spending a dollar less on capital that could be spent on another piece of equipment. We try to have a good cycle of trucks; every year we're buying 10 or 12. We have 80 trucks, and I don't want to buy 25 trucks in one year and none in the next."

Miller tracks truck age, maintenance cost, and mileage when making the disposal decision. "We analyze the bottom 17 percent every year," he says. "Some might have super-high miles, some might have been in a tough environment with excessive wear and tear, and some might just cause us problems.

"If there are none that have been abused, we'll tear them off by miles," Miller says, allowing Hawkins to rid itself of one-sixth of its pickups. Hawkins gives pickup trucks a useful life of six years.

MDU keys in on ownership and operating costs, emphasizing ownership. John Harmon, corporate equipment manager for MDU Resources subsidiary Knife River, says many managers do not understand that ownership costs continue even after the truck is paid for. "[They] run it out to 100,000 miles, and people think there's no ownership expense because it's paid for. The market is telling us what our ownership expense is; it's the difference between acquisition and resale."

MDU disposes based on residual value, mileage and warranty, Allen says. "We want to eliminate the repair costs, so we'll get rid of it when it's out of warranty.

"You have to view the pickup fleet the same way you view a [wheel loader] fleet," he says. "You have to lower the cost. You want to drive down the cost of a [wheel loader] so operations can charge right." Although Allen concedes that MDU cannot do that with pickups, the philosophy drives MDU's strategy.

"There are cases where we may keep [a pickup] 15 years, but we need the numbers to make sure we have made the right decision," Allen says.

Hubbard sells its pickups before large components fail, as do 56 percent of the respondents to the Construction Equipment survey. "Our plan is to never put a transmission, differential or engine in," Ricke says. "We'll do brakes and maybe an exhaust. If it's a problematic truck, eating our lunch, we'll walk away."

Nearly 60 percent of respondents reported that the most common reason for replacing a pickup truck was that repair costs exceeded the value of the truck. Because the replacement of a major component can eradicate residual value, fleet managers who manage for the sweet spot do not put undue focus on in-house maintenance.

About 40 percent of respondents reported that they turn to independent service retailers and dealers for preventive maintenance; 70 percent do so for major component work, such as engines and transmissions. Hubbard works with its manufacturer to arrange set rates for local dealers in the regions where Hubbard's trucks operate.

"We try to outsource as much as possible," says Harmon at Knife River. "You're better using [in-house service] space and skills on other machines, rather than have them tied up on a pickup."

Hayward Baker, which operates across North and South America, outsources the management of its pickup fleet, says Don Lambert, corporate equipment director, to PPH FirstFleet, a third-party management firm.

"We will customize a maintenance policy or profile," says Bob Hertzog, director of truck services for PPH FirstFleet. "We have all the detailed asset information, including acquisition cost and approximate lifecycle. "One group [of trucks] may be in a mine, and another might be servicing equipment. We customize that policy right down to the component level."

Hertzog says PPH FirstFleet's network of service providers bills back to the management company through a card program, which enables them to build a vehicle-level history of operational data.

Data enable equipment managers who target peak residual value to recoup value from the trucks when they are disposed. Others who buy a pickup truck for life, sliding it down the management ladder, do not need to pay as close attention. Even so, knowing and tracking how pickup trucks perform, including repair costs and component lifecycle, will ensure that the organization still obtains the maximum bang for its pickup trucks.

Lifecycle Data(Avg. miles before major repair, rebuild or replacement) Note: 28,029 miles driven per year, on avg. Source: Construction Equipment 2007 Pickup Truck Usage Study Lifecycles for major components, even though some 40 percent of trucks are disposed of before replacement, indicates the useful life of a pickup truck. Of course, these are industry averages, so actual numbers will vary by application and management philosophy. Tires 38,133 Batteries 63,958 Brakes 46,409 Exhaust 90,701 Air conditioning 93,862 Suspension 94,926 Gasoline engine 159,416 Diesel engine 235,657 Transmission 140,545 Differential/transfer case/axles 165,955 Pickup Usage Varies by Size(% who operate each type of truck)   Compact ½-Ton ¾-Ton 1-Ton & Supers Source: Construction Equipment 2007 Pickup Truck Usage Study Smaller trucks are used for transporting people and running errands. Larger trucks, not surprisingly, pull heavier duty, including being outfitted with lube or service bodies. Transportation for management 51 63 31 13 Transportation for workers/laborers 28 44 53 30 Pulling trailers/other equipment 2 13 50 67 Running errands 55 46 29 10 Transporting fuels/lubes 7 15 30 34 Transporting tools 11 25 46 45 Transporting parts 18 31 37 26 Other hauling tasks on jobsites 11 21 38 51 Number of Pickups Drops(avg. per company) Type 2007 1998 Base: 1,027 Source: Construction Equipment 2007 Pickup Truck Usage Study Raw numbers of pickups kept in fleets has dropped, primarily on the heavy end. The advent and popularity of SUVs has no doubt had an effect on this. Compact 6.0 5.7 ½-Ton 7.9 12.6 ¾-Ton 7.3 8.5 1-Ton 5.6 13.6 1.5-Ton 4.8 15.6 Types of Rear Bodies(by truck size)   Compact 1/2 3/4 1 1.5 Base: 1,021 Source: Construction Equipment 2007 Pickup Truck Usage Study Regardless of the size of the pickup truck, the standard bed is the most common body specified, followed by service bodies. Standard bed 92 93 93 89 88 Service body 47 38 42 47 53 Dump body 28 21 21 27 32 Platform 28 21 22 26 28 Van body 13 7 7 9 9 Types of Equipment Carried(% responding) Base: 1,000 Source: Construction Equipment 2007 Pickup Truck Usage Study Used primarily for transport, nine of 10 pickups carry a toolbox. As their use becomes more specialized, other equipment is added. Tool box 90 Bed liner 55 Welding equipment 34 Lube equipment 30 Air compressor 31 Snow plow 25 Hoist & boom/crane 12 Lift gate 10 Portable cleaning equipment 8 Winch 8 Who Does the Maintenance?(% responding)   Preventive maintenance Major components Source: Construction Equipment 2007 Pickup Truck Usage Study Preventive maintenance, such as oil changes, is done by three-fourths of respondents. Much more than that, though, and the service is shifted out of the shop to a third party. Staff 73 41 Independent service retailer 26 46 Manufacturer-authorized dealer 13 24 Average Miles Before Replacement(by type of truck) Base: 928 Source: Construction Equipment 2007 Pickup Truck Usage Study Regardless of size, pickup trucks tend to be replaced at around 170,000 miles. Compact 168,796 1/2-ton 166,069 3/4-ton 170,186 1-ton 168,677 1.5-ton 169,256 Total 165,304 Acquisition Preferences(% responding) Base: 1,009 Source: Construction Equipment 2007 Pickup Truck Usage Study Acquisition methods for pickup trucks do not vary much from that of heavy equipment, but rental does not play much of a role. Cash purchase 58 Independent finance company 15 Full-service lease 2 Local bank finance 34 Lease 7 Rent 0.2