Outsourcing equipment management
| June 12, 2007
You’re being pulled in a thousand different directions and frittering away too much time on non-essential tasks, and you’re not alone. Everybody is asked to do more these days. When a construction business is going strong, time and manpower are the two most challenging resources to muster.
Trying to do it all yourself may work for the contractor with one backhoe, a truck and a very flexible schedule. And billion-dollar construction companies have the economies of scale and enough equipment to keep a shop full of technicians and specialists busy. But everybody else ought to take a long hard look at how much time they spend managing, fixing, buying, selling and transporting their equipment and how they might make more efficient use of their time by outsourcing some of the detail work.
In the world of white collars and desk jockeys, aggressive outsourcing has been the solution to the time and labor crunch for a decade or more. Outsourcing means farming out non-essential tasks to vendors or subcontractors to allow you to concentrate on what you do best – your core competencies. Yet there is no reason why construction companies with big fleets of equipment can’t outsource many of their equipment-related chores to free up more time to push dirt, pave roads and build buildings.
The key is to develop deliberate and strategic goals in your outsourcing and then share these goals with your vendors and service providers and see what they can come up with for you. You don’t want to just jump on the nearest rental machine every time you get into a bind. You want a long-term plan that dovetails with the size and skills of your workforce and makes sense for your financial goals.
Get competitive or disappear
“Every business over time becomes more competitive, that’s the law of business,” says Toby Mack, executive vice president of the Associated Equipment Distributors. “As the typical contractor becomes more sophisticated, he looks at his costs and core competencies a lot more critically, focuses on those core competencies and outsources other things.”
Similar dynamics are going on at the dealer level. “Dealers see opportunities to be more competitive and to gain advantage by becoming preferred providers because they offer a greater range of services,” Mack says. “So it’s not just dealers reacting. It’s dealers trying to serve the customer better.”
“Most dealers don’t know how to build buildings and dig holes. And most contractors don’t have the expertise that the dealers have in repairing equipment,” says Matt Di Iorio, vice president of marketing for AED. “The more sophisticated contractors understand the true costs of employing technicians and managing their fleets and will increasingly look to dealers to fix their operating costs and focus on their core competencies.”
Finding the true costs
Accurately costing equipment is one of the biggest challenges contractors face, according to Larry Kaye, president of Script International, an equipment rental consulting firm. “Most contractors do not have an internal system to do that. They’ll put their cost figures in as a percentage so it’s not as accurate as it should be.”
Contractors also sometimes forget to consider the depreciation of the equipment until tax time. “Depreciation should be a factor on every machine,” Kaye says, “setting aside a few dollars a day to replace that item when it finally wears out. When you suddenly find you need to spend $25,000 to replace a machine, it hurts your cash flow.” The result of not knowing your costs is that you may be losing money and not know it. The solution is to spend a good deal of time pushing a pencil to track your costs, invest several thousand dollars in a software program that can do the same or outsource this work.
Over the past few years, two service trends have emerged to help contractors eliminate or reduce the time and labor involved in accurately costing equipment. Both involve the outsourcing of certain equipment management chores.
Many dealers write contracts giving their customers guaranteed operating costs per hour on specific jobs. Rather than have the contractor figure up all the equipment-related costs, these dealers will study the site and plans, determine how much dirt needs to be moved and the best way to move it, then hand the contractor a complete equipment program for the job, including a cost per hour for the machinery, guaranteed maintenance contracts and a guaranteed buyback price for the used equipment when the job is done.
The other way to fix equipment costs and hand over repairs, maintenance, scheduling and uptime worries to a third party is to use rental equipment.
Rental to the rescue
If rental utilization is any indication of how much outsourcing contractors are doing, the trends indicate they are doing a lot and likely to do more in the future. According to Daniel Kaplan, president of Daniel Kaplan Associates, only 5 percent of equipment was rented in 1993. That grew to 11 percent in 1995, 20 percent in 1998 and 35 percent today. Kaplan predicts by 2008 that figure will rise to 50 percent.
“I think that a contractor would have to be able to use a piece of equipment more than 65 percent of the time to justify owning it,” Kaplan says. “The rental companies buy it and dispose of it better than the contractors can. They have late model equipment. Also, rental rates have come down quite a bit in the past two years, making it much more attractive to rent than to own.”
Rental equipment also unburdens contractors from a host of logistics problems. “Whether you own one machine or 10, the challenges are the same,” Kaye says. “You have to keep it running, you have to store it somewhere, you have to move it around. And when a machine that you own breaks down, you’re up the creek.”
Undoubtedly, the availability of rental equipment has made life easier for many contractors. What is perhaps less well known is that it has fundamentally and permanently altered the financial management strategies of construction companies.
“In the past the mark of a successful contractor was that he owned all his equipment,” Kaplan says. “Now they have to go back and reevaluate their balance sheet because the rental rates are so low that owning has become a real question. The sign of success today is a good balance sheet.”
Deciding what to keep and what to outsource
The idea of letting a third party handle some or most of your equipment management chores may seem alien at first. And it’s not a foolproof formula for success.
“I think it’s probably going to be wise for the bigger contractors to own their fleets,” says Di Iorio. “Ownership depends on utilization. The larger contractors have the ability to keep that iron moving and as long as the utilization is high they can get a better return on it than anyone else.”
But even the larger contractors need to take a close look at how efficiently they service their own equipment. “Our dealers collectively spend millions of dollars training their technicians to work on the equipment they represent,” Di Iorio says.
“The factory authorized dealer also invests heavily in tooling and equipment,” Mack adds. “There is a large capital investment, not just the human resources.”
The mechanical expertise the dealers offer is so strong that some dealers are even renting out their technicians to a contractor customer for specified periods of time, Di Iorio says. “If the contractor can cut a deal so that the dealer knows his technician is going to be used over a longer period of time, it is less expensive for the dealer to manage and keep that technician employed if he can pass some of those costs on to the contractor,” he says. “It’s all about utilization.”
Creative thinking solves problems you didn’t know you had
In their push to capture more business, equipment dealers and rental providers are coming up with new and novel services that take some of the logistical headaches and hassles off the contractor’s plate.
Kaye, who built up and sold two rental companies over the past 30 years, offered his customers who needed it a few acres where they could park equipment and supplies. “I made my yard available as a laydown yard. Doing that really ties you to your customer because that’s where he starts and finishes the day.”
Another service that has yet to take off but that Kaye sees as a huge draw in the near future is for rental companies to give customers use of their computer systems. “The rental company would put a terminal in the contractor’s office and he could set up his inventory and have all the maintenance and repair records stored on the rental company’s servers.”
A firewall would guarantee privacy and the contractor would just pay a monthly fee and get all the functionality of a robust corporate server and software. “I would operate that part of the business as a profit center,” Kaye says.
Some rental companies are already taking steps in this direction. Dave Mason, vice president of the contracting firm 11 Western, has used Rental Service Corp.’s facility in Las Vegas as a business hub while on the road. Mason used RSC’s mailing address, fax machine, copier, printers and conference room to conduct business while temporarily working in Las Vegas.
Extreme service keeps customers
Kaplan notes the most progressive rental companies are throwing as much service as they can muster at contractors. “They can provide full service, maintain the equipment at a frequency recommended by the manufacturer based on the hours used and come out and do everything from checking oil and changing filters to maintaining the tires,” he says. “They can give the contractor utilization reports and change out equipment that’s not being well utilized.”
Tire selection and maintenance is another non-profit-making chore that contractors can sometimes better leave to their tire vendors. With tires, a little bit of neglect or misunderstanding can lead to small but steady erosions in productivity and profits.
“The commercial tire dealer can go in and do a complete and computerized tire survey that can show the contractor a cost per hour,” says Bill Porterfield, Continental General sales manager for the company’s western region.
Such a survey would evaluate soil conditions, rolling resistance, load-carrying capabilities of the machine and air pressures to get the maximum life and productivity out of the tires. You can also contract with your tire vendor to provide safety training and to maintain tires in the field, so your crews aren’t running flat tires into town to get fixed.
Given the growth in rental and dealer services, there’s no doubt contractors are increasing their levels of outsourcing. And most contractors will find a balance between in-house labor and outsourced labor, owned equipment and rental equipment.
But it is also possible to outsource your entire fleet. A company called AMECO specializes in providing 100 percent of your fleet assets needed for construction projects and the company can also buy your fleet outright and provide the equipment back to you on an as-needed basis.
Pat Monnot, vice president of operations at AMECO, describes what the company calls common services: “We take a fairly large project with multiple contractors and manage all of the assets for the client across all of the contractors. That covers a range of things from shoring and shielding boxes to cranes, mobile equipment, temporary buildings, even hardhats and safety glasses. We serve as the equipment supplier to all the subs. That way if you are putting up scaffolding, it can be used for multiple subs without each contractor coming in and erecting his own. You can save $10 million to $15 million on a mega-project just by eliminating duplication alone.”
A typical customer for AMECO’s common services would be a utility company that wants to serve as its own general contractor on something like a large power plant but doesn’t want to get tied down in the details of purchasing, servicing and disposing of equipment. AMECO’s common services also helps align equipment needs for construction companies that have gone through consolidations or mergers and have too much of a fleet, not enough fleet, or a fleet that doesn’t match the companies’ future construction goals.
For some of these AMECO also provides fleet buyouts. “We will buy those equipment units and supply them back as a maintained long-term lease,’” says Brad McCaleb, AMECO’s director of marketing. “Usually our criteria for that are that the fleet has to have about 100 total units and a decent backlog of work to complete.” With a fleet buyout the contractor gets an immediate cash infusion to pursue other business initiatives.
Monnot says AMECO differs from the rental companies in the level of involvement it provides in the contracting process. As a subsidiary of Fluor Corp., AMECO has its roots in the construction business. “We still wear our contractor hat when we go to work for these guys,” says Monnot. “We’re trying to reduce their costs in order to make them more profitable so we can grow both their business and ours. If a contractor wants us to help him take on some risk to finish a job on time and under budget, we’re willing to do that too.”