Words: Corey Adams
We have all done it. Do not deny it. We have all pounded a nail in with a crescent wrench at one point in our life. We knew it wasn’t the right tool for the job, but it got us by, and we kept moving.
Too many companies treat their businesses the same way. This is an egregious error that prevents a company not only from growing but realizing profit potential. The reality of tools is that their only function is to make you more money. Tools and equipment are an investment and must create a return for your company.
One of the best economic books of recorded history is The Wealth of Nations by Adam Smith, 1776. I will admit it is a difficult read, but it is slammed full of practical economic advice, rational thought, and nuance of a developing nation’s economy. When discussing technology, and the division of labor, Smith states the obvious. The productivity of a man with updated and correct tools is greater than the productivity of a man without them. One man with the correct tools and equipment can replace many men that are working without. This is a paraphrase, but pretty close to the baseline idea. People need technology, tools, and equipment to lower the cost of labor in productivity.
We all know that on average, the highest cost of a project is labor. We also can agree that good labor is getting harder to find. Technology, tools, and equipment can help a company make up the difference. I talk about this a lot when discussing hiring and retaining employees. Good employees want to work for companies that provide them the best resources to complete a project. This includes resources that make their job easier, faster, and less of a physical burden on their bodies.
So why do many companies starve themselves of these resources? I believe it is because they do not allocate the value to a project correctly, or charge for it. We find this mostly in the small owner/operator companies. Tools and equipment are often looked at as an upfront expense, and not as a productivity booster. The initial cost of a tool is often regarded as money spent. The item should be viewed as a direct billable asset to every job for the life of the tool. Yes, and especially, after it is paid for! This is where the real return lies.
I can hear some of the objections already. “We have too many tools that are small to bill everything directly.” “If I bill for everything I use, I will not be able to compete.” “That tool costs too much.” My response is usually the same to all objections, “Why?” Many companies already charge this way and have plenty of work. I am a firm believer that the only obstacles that are preventing you from reaching your goals are self-imposed.
The first question is not should I be charging, but what tools should I charge for? I prefer to tear a page right out of the accountant’s playbook, depreciation. Any tool that has a value, or cost, over the IRS threshold must be put onto a depreciation schedule. This takes the total cost and disperses the tax deductions over a set amount of years. If a tool is large enough to hit the depreciation schedule, it should be directly billed to each job. This includes the obvious equipment such as skid steers, but also will add mixers, trailers, rebar tie guns, scaffolding, compactors, grout pumps, and a host of other items that will need to be replaced at some point.
When dealing with a truck, we add some to the daily rate to cover the small, non-billable tools typically found in the truck. We charge $90 per day for a truck and the basic tools that would be on it. This not only takes care of the truck expense, but helps us account for the lost, broken, and general tool requirements of a company.
Hopefully, we have started to plant the seed that charging for tools and equipment is a must. They require maintenance, repair, and sometimes replacement. The cost of this should be billed to the jobs that need the items and not jammed into your general overhead fund. Successful companies work on ways to lower overhead, not make it a catch-all for disorganized expenses.
Next month we are going to dive into the amount we should be charging and how to come up with it!