Words: Corey Adams
“Do you own your equipment?” How many times have you heard this question from a potential client? It is one of the largest red flags to ever fly from the mountain of cheap clients. They believe that if you own your equipment, the project will be cheaper because you do not have to rent it, or in essence, you will not charge for it.
In my last article, we discussed why you should charge for equipment. Determining what to charge is filled with variables, but there is an easy way to decipher it. Let us dive into the variables that drive the real cost of equipment.
- Upfront/Replacement Cost: This is obvious. Tools and equipment cost money. Not just the cost of the initial purchase, but at some point, you need to replace or update it. This cost is usually a factor of usable hours, or days, in the life expectancy of a piece of equipment. If a piece costs $20,000 and has an effective life of 2,000 hours, then the cost would be $10 per hour.
- Maintenance Cost: Almost all tools need maintenance. At some point, they need repair, oil, fresh paint, new belts, or something that typical wear and tear will provide. This varies widely by the piece of equipment but is a real cost that must be accounted for.
- Storage/Shop Cost: Here is a hidden cost that most businesses under account for, or miss altogether. Equipment needs storage. When it is not in the field, it needs a home. When it is time to repair the equipment, you need a shop to work on it in. I will agree that many companies put shop expenses in their overhead numbers, but to get extremely accurate with your costs, you need to account for a percentage of your equipment numbers.
- Carrying Cost: Most small companies have loans or lines of credit. Especially when talking about large equipment purchases. The interest on those loans is a direct expense to the equipment. Even if the loan is a revolving line of credit, somewhere in your numbers the interest needs accounted for.
Equipment expenses can go as deep as you want them to. We could discuss downtime, recoup value, depreciation expense, capital, and more, but why? Most companies will not dive that deep into their tool and equipment expenses, and they do not have to. There is already a cheat sheet available to every contractor for free that will give you the going rate for every piece of equipment you will ever need.
So where do you find this secret document? Call your local rental stores and ask for a price list. They have already run all the complex formulas to determine value, cost, maintenance, storage, market fluctuations, etc. Their numbers do include profit as well. This is where you can trim the going rental rate prices to make your estimates a bit lower than the companies that need to rent.
Typically, we charge about 75% of the daily going rental rate for our area. This allows us to add our profit at the end of the bid, and not price ourselves out. Doing it this way also ensures that if we need to rent an extra piece, or one of ours is down, we have the funds in the bid to cover the rental cost.
The best part, this style of charging never stops. If you can take care of your assets, you can enjoy more profits. Never stop charging for a piece because it is paid for, older, cheaper, or unattractive. The value of a tool is in the work it gets done.
When you own your equipment, you must treat your assets like a rental store. Renting them to your customers via your estimates. Charging for them is the correct way to protect your investment and provide profit to your company for years to come.