Finding the Equipment Management Sweet Spot
Capturing accurate equipment information is a challenge that many contractors face. Data collection and analysis has traditionally been a manual process, and many times information would slip through the cracks leading to equipment being poorly maintained, overused or even retired before necessary.
For firms engaged in heavy construction work, maintaining a healthy equipment fleet is both vital for project success as well as being one of the largest capital expenses. So, taking proper care of heavy iron the machines is key to bringing in projects on time and maximizing profitability. For a contractor with a capital and operating budget of $10 million or more for heavy equipment, even a 1 percent savings on equipment costs could add hundreds of thousands of dollars directly to the bottom line.
To maximize equipment investments, one must first understanding the differences and relationship between ownership and operating costs, leverage the right tools and technologies to obtain accurate field data on performance and usage, then make data-driven decisions to optimize fleet management and maintenance.
Owning vs Operating: Maximizing Construction Equipment Productivity and Profitability
When a piece of equipment is purchased, there are ownership costs that occur regardless of how the machine is used. These owning costs are typically fixed annually and are based on the purchase price, interest, depreciation, licensing, insurance and taxes. As a machine ages, the incremental cost of ownership declines, due mostly to a slowdown in the rate of depreciation.
Operating costs, however, go up over time depending on how the equipment is used and maintained. As the machinery ages, increases in fuel and oil consumption, routine maintenance and parts replacement and unexpected repairs occur.
As ownership and operating costs move in these different directions over the lifecycle of equipment there is typically a point of optimal return on investment. This “sweet spot,” as described by Dr. Mike Vorster, the David H. Burrows Professor Emeritus at Virginia Tech and head of the Construction Engineering and Management Program, occurs when the increasing cost of operations begins to dominate the benefits of a decreasing cost of ownership for a machine. This is when the machine is the most profitable, but also when the incremental total costs of having that machine in your fleet begin to rise. Knowing where equipment stands in the fleet lifecycles can make a significant difference in knowing how each piece of machinery should be used on jobs, when to devote more resources to maintenance, and when to ultimately look to replace equipment to keep fleets productive in the field.
The Tools to Make Smarter Equipment Decisions
So, how can contractors achieve optimal equipment management? Telematics, mobile applications for equipment data collection in the field and equipment capture technologies like Bluetooth and RFID are becoming more prevalent and powerful. The real hurdle in most companies is what exactly to do with the data once captured.
Few construction or financial managers have the time to parse and crunch the data on field operational costs on their whole fleet, combine that with data on incremental owning costs, and uncover the real rates at which their machines should be charged as costs against their jobs—a rate that changes over time for each machine. Fewer still have the time to track the trends in those rates to see when it starts to make sense to retire certain machines and invest in new ones. Yet, this is exactly what needs to happen if they are going to realize that bump to the bottom line.
The good news is that there are software applications — many integrated into existing construction ERP platforms — that can automate and streamline these processes, allowing equipment managers to take large sets of data, parse and analyze them and create detailed reports. These applications help equipment managers know the real rates that should be applied to the use of all the machines in their fleet and have information on hand to help with the difficult decisions of when to sell, buy or rent. And when integrated into an ERP like Viewpoint Vista, this data can directly update job cost estimates and projections, ensuring that accurate bids are created and accurate job profitability is recorded.
If repair, maintenance, ownership costs and meter readings are diligently recorded for each piece of equipment, a company can accurately predict equipment lifecycles and optimal returns on investments instead of simply guessing. Creating historical data on the cost curves for owning and operating heavy equipment allows much more informed decisions about when to invest more in their fleet or when certain machines should be sold. Contractors can avoid the common problem of waiting too long to replace a piece of equipment. Using more informed data and metrics to create equipment benchmarks, they know when a machine will become more expensive to keep than it is worth.
Want to learn more about how to better manage your equipment through leading-edge technology, visit our website, www.viewpoint.com, to see a full range of solutions to improve your construction organization.