O&O Checkpoint: Owning and operating costs
| January 01, 2008 |
In a capital-intensive business like earthmoving and construction knowing your costs is crucial to success. You have to calculate the exact amount you spend running your machines. Otherwise you can’t price your work right. Guess or round off numbers and you could bid too high or be going broke and not know it for six months. Precision – down to the pennies per hour – is essential.
In this series of articles we take a look at machine specific owning and operating costs. Keep in mind that the dollar figures we cite here are broad generalities – not specific guidelines. Costs vary greatly between different size of machines and different brands. Your choice of tires and attachments, how much you pay your operators and how skillfully they run the machine all have a huge impact on the cost per hour.
To learn more about skid steer O&O costs we talked to John Strangberg, product training manager for Case Construction and used interactive computer tool developed by Case that lets you plug in your data and see how changes in all these variables affect the bottom line – the cost per hour to run the machine. Included in this computer tool is a production calendar that converts cost per hour to cost per cubic yard made. To do your own calculations you can visit any equipment dealer with a similar program. Keep in mind also that we’re only calculating machine costs here. To price your work properly you have to also include overhead, materials, profits and other requirements of the job or business.
Strangberg recommended we base our calculations on the most popular size of skid steer, those in the 1,700-to 2,200-pound operating load class (for Case this would be its 430 and 440 models). As with most O&O programs, Case’s separates owning costs from operating costs. Owning costs constitute what you pay for the machine even if it never spends a day in the dirt. This includes the purchase price (sometimes called the delivered price), taxes, insurance and the cost of financing minus the resale value and minus the cost of a set of tires. Even though tires come with the new machine, most O&O programs pull these out of the owning costs and treat them as an operating expense since they are a wear item and get replaced many times during the life of a machine. And note that there are some O&O cost models that do not subtract the resale value from the total owning cost. Sometimes called “straight line depreciation” this method assumes the machine has zero value at the end of its lifecycle. This method makes the total O&O cost much higher, but the decision to deduct the resale value or not is one best made with your accountant. In the program Case and most OEMs use, the residual value is subtracted out.
Skid steers in this size class range average about $35,000. For usage we figured the owner would put 750 hours on it a year for four years. For a residual or resale value, we went with 50 percent or $17,500.
As for operating costs, nothing even comes close to what you pay your operator. With taxes and benefits combined, this could be anywhere from $20 to $50 an hour depending on your labor market and their experience and skill. But as you’ll see in the box below, a good operator can also save you a lot of money.
Typically the second most expensive operating cost is fuel, and this bears careful attention. The price per gallon of diesel has gone up sharply in recent years and the intensity of the application has a huge impact on fuel consumption. Fuel consumption on a machine this size ranges from about 1.3 gallons per hour in light applications, to 2.3 gallons in medium and 3.2 gallons in heavy applications per hour, Strangberg says.
Regularly scheduled maintenance also counts as an operating cost, although prorated over the four-year life of a machine, it turns out to be less than you might expect. One reason is that almost all manufacturers, thanks to better lube oils and filters and component design, have been able to extend preventive maintenance on the engine from 250 to 500 hours, and 1,000 hours on hydraulic systems. Your exact costs will vary depending on the quality of oil and filters you use and labor rates for technicians. Heavy usage or applications may necessitate more frequent PMs, but that has only a tiny effect on your operating costs per hour.
Actual repair costs depend a great deal on how well you or your operator take care of a machine. But to reduce the risk that you might underestimate your costs the Case program factors in $1.74 per operating hour ($1,305 per year) for repairs. If you take good care of your machines that money just falls to your bottom line. But if you don’t factor it in and something does happen, the repair costs come directly out of your profits.
Additional wear items include bucket cutting edges and teeth or attachments and their consumables. A bucket and cutting edge may last the life of a skid steer in soft dirt applications, Strangberg says. Yet with a cold planer attachment you may be replacing bits every few hours. So the Case program has a section in it where you plug in these variables, with experience as your guide to how long such items last. In the hypothetical skid steer we’re using in this example Strangberg factored in wear on cold planer bits, bucket teeth and hammer points which pencils out to be $1.42 per hour or $1,065 per year. <
How good operators save you money:
Almost all the costs in these scenarios are fixed and beyond your direct control. The one area you do have control over, however, is how well you or your operator run and maintain the machine.
Fuel usage is primarily dictated by the application, but careful operation can help conserve fuel. If the operator uses the foot pedal throttle properly and doesn’t over rev the engine, that can increase fuel efficiency. Little things such as keeping the tires properly inflated, dewatering sites to avoid slippage and poor traction and only running the machine within its specified operating range likewise affect fuel consumption to the good. In the scenario on the previous page, if you can move from heavy fuel usage (3.2 gallons/$9.60 per hour) we spec’ed for this machine to medium (2.3 gallons/$6.90 per hour) you save $2.70 an hour and $8,100 over the lifecycle of the machine.
Taking care of your tires also pays dividends. If you can get a set of tires to go from medium wear at a 600-hour lifecycle (cost of $1.67 an hour) to light wear at 1,000 hours (a cost of $1 an hour) you can save $0.67 an hour or $2,010 over the life of the machine. Conversely, if your operator likes to shred tires and you have to replace them every 250 hours (what the Case program considers severe duty) it will cost you $4 per operating hour to keep rubber on the machine, an increase of $2.33 over the medium lifecycle and a hefty $6,990 over the four-year life of the machine.
Preventive maintenance is a small part of your overall operating costs, but neglecting it can cost you a lot of money. Engine and hydraulic system failures can cost you thousands of dollars, yet they’re easily avoided with daily grease and fluid checks by the operator and maintaining the scheduled maintenance intervals. When it comes to scheduled maintenance, there are a lot of reasons to let the dealer handle the PMs, Strangberg says. They have trained, experienced technicians and all the necessary OEM parts and supplies at hand. And you don’t make money maintaining the machine. You only make money when you’re using the machine. “Your expertise is digging the hole or doing the work. The dealer’s expertise is the machine,” Strangberg says.