Are you a contractor that accounts for equipment costs? Are these costs charged to jobs?
For equipment-intensive contractors, these are very important questions.
If you do account for equipment costs, another question arises: Do you charge the equipment costs to jobs using hourly rates or daily rates?
Hourly Rates
Generally, hourly rates take into consideration the combination of a variable rate, to account for an “hourly operating cost”, plus a “cost recovery” rate (based upon anticipated annual usage) that considers annual depreciation, maintenance, overhaul costs, and indirect equipment costs.
An hourly rate (based upon usage) does capture the cost of equipment at a job site, but it does not capture the cost of lost production when the equipment sits idle at a job site. This can cause inefficient equipment use and excess outside equipment rental costs.
If equipment often sits idle at a job site, a company should consider utilizing a daily rate to emphasize the importance of monitoring general equipment utilization.
Daily Rates
Daily rates account for the “ownership costs”, based upon average annual days in a construction season, and a separate rate for an enhanced “hourly operating cost” that incorporates actual direct and indirect operating costs.
Charging a daily rate encourages project managers to minimize the number of days equipment is on site, thus increasing the availability of equipment for use on other jobs. However, utilization of a daily rate does require that “total estimated equipment costs” be carefully monitored so excessive daily charges do not distort the revenue recognition process.
Deciding between hourly and daily rates can be a complex task but a rewarding endeavor. If you have questions or would like to explore which option is best for your company, contact your Blue & Co. representative or email Bob Ellis at rellis@blueandco.com, Gavin Fox at gfox@blueandco.com, or Bob Abel at bable@blueandco.com.
