Second to the intellectual capital provided by management’s knowledge and experience, a construction company’s single largest investment is typically its heavy equipment fleet. Proper management of these assets has a direct impact on construction equipment fleet profitability – and the company’s ultimate success.
Is Your Construction Company Equipment Fleet Profitability Maximized?
To answer this question accurately, one needs a profit center set-up within the accounting system to track all costs associated with owning and operating one’s equipment. A profit center is an identifiable unit or department of a company that contributes to its overall profitability.
Do not make the mistake of charging equipment costs to overhead and allocating them to individual jobs along with true overhead costs. When using a profit center be sure to charge individual jobs rent for the use of equipment. The rates should be based on local area rates.
A profit center provides fleet profitability information by recording market-based rental income and reducing it by the equipment costs incurred. Taking the process a step further, many companies track revenues and costs by individual pieces of equipment.
Utilize the Information
By utilizing the gathered information, develop clear answers to questions regarding the fleet:
- Are project managers effectively and efficiently utilizing equipment on their jobs?
- Are individual pieces of equipment compromising the profitability of the entire fleet?
- Is it better to repair, replace, or rent a replacement for a piece of equipment that has broken?
- Profitability may need to be evaluated over longer periods of time due to cycles in the type of work performed. A particular piece of machinery may be idle for 1-2 months but may have been utilized heavily for the previous 1-2 years.
- How a construction company monitors and manages the performance of specific jobs should be reviewed, taking into account the change in how equipment costs are now reflected in the individual jobs.
- Residual values impact items’ depreciation and ultimately their cost of ownership.
Take the time to review your accounting and reporting system for equipment costs. Are you equipped for success? If not, call your CRI construction CPA for help getting back on track with your construction equipment fleet profitability.