It’s tempting to delegate the financials to your accountant—but remember, he or she is only running your numbers, not your jobs. In a competitive environment, jobs are won on the narrowest of margins, so you want your numbers to be highly accurate. Here are four costs to stay on top of at all times.
1. Owning costs
Accurately calculating equipment costs drives the rate at which you bill your customers. It’s easiest to combine depreciation, interest, insurance, taxes and permits into an ownership cost per hour. Most companies use average rates for machines in a given size class to simplify the estimating process.
However, if you estimate an equipment rate too low, your bid may be too low to return a good margin. If your rate is too high, you may not be competitive. Regularly review your costs and rates, then make adjustments based on what’s happening in the areas where you work.
2. Operating costs
Again, for convenience, most companies convert the costs of tires, undercarriage, wear parts, preventive maintenance and normal wear service or repairs into a cost per hour. As your machine utilization changes, be sure to adjust those costs for accuracy.
In addition, as machines age, operating costs tend to increase. Proactive equipment management using inspections and condition monitoring can help reduce these costs over the life of your machine. Keeping accurate numbers also helps you evaluate when renting or leasing equipment makes more economic sense than ownership.
3. Overhead costs
Labor burden—which includes all benefits like health insurance, payroll taxes and workers’ compensation—is one area where it’s easy to miscalculate. Insurance premiums can vary greatly and change at least annually, so remember to review and validate these numbers on a regular basis.
If you have your own shop or maintenance area, be aware of any compliance requirements, such as proper storage or disposal of fluids and chemicals, so you can avoid any penalties for non-compliance.
4. Project costs
Procurement costs can get off track when you’re working with new suppliers or when things are moving quickly and price and delivery dates aren’t confirmed. Materials that don’t arrive on time can disrupt an entire project schedule, add costs or eliminate the opportunity for completion bonuses.
In terms of transportation costs, it’s easy to overlook the cost of your company vehicles. If you’re using transport contractors, verify those costs regularly, as they’re constantly adjusting rates to accommodate items like rising fuel prices.
Are you in the know?
How many of these numbers do you know?
- Gross and net profit
- Average margins on similar types of jobs
- Annual sales volume
- Average number of bids per month
- Win-loss record on bids
- Bid volume required to run at a profit
- Target margins per month/quarter/year
- Monthly cash flow
- Accounts receivable aging
- Weekly payroll
Keeping your margins healthy takes relentless, accurate management of all your costs. Know your numbers and watch them grow.
