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Equipment accounts for a large percentage of the costs on most construction projects. Contractors that do not properly track their equipment costs may lose the chance to recoup the substantial money they have spent to rent or own their machines.

Following are four issues to consider when determining how to price equipment.

The Contract
Review the contract to determine if it addresses equipment pricing; if so, comply with its requirements. For example, a contract may require a contractor to use actual prices or an industry-recognized manual. If a contract does not address the issue at all, contractors should use actual costs whenever possible.

Federal Acquisition Regulations CFR 31.105(d)(2) governs pricing on projects for the federal government. The regulations permit contractors to recover allowable costs for owned equipment based on actual data if available (and if not, based on predetermined schedules or manuals). On the other hand, American Institute of Architects contracts can vary in how they address the pricing of owned equipment that contractors use for extra work. The more common methods include equipment rates accepted or negotiated at bid, equipment rates and cost negotiated as needed throughout the project, pre-approved time and materials rates, specified published rate manuals and actual costs.

Once contractors understand how they must price the equipment they used on a project, they must establish the amount of time the equipment was actually onsite. Though the supporting documents vary from project to project, contractors should be able to produce equipment rental invoices, equipment inventory or transfer logs, daily reports or other documentation establishing equipment usage or standby hours. If contractors do not have or cannot locate those documents, they can try to rely on other reports maintained by an owner or other project participants.

Owned vs. Rented Equipment
Contractors must address whether they seek to recover costs for rented or owned equipment. Equipment costs are broken into two components: time-related (ownership) and activity-related (operating). Contractors incur time-related costs for owned and rented equipment regardless of whether they actually operate the equipment. Those costs include the recovery of the initial capital outlay and ongoing costs to protect the investment, such as major repairs/overhauls, taxes, storage, insurance and depreciation.

For rented equipment, which is normally more straightforward, contractors should have invoices that detail when the equipment was onsite and the actual weekly or monthly rental rate paid. Unlike with owned equipment, contractors typically cannot recover anything other than their rental costs.

However, remember that ownership and rental rates only cover time-related costs and do not include activity-related costs (more commonly known as operating costs) such as fuel, oil and grease. Contractors should segregate their operating costs because they are not incurred while equipment idles, although they continue to incur ownership/rental costs during delays.

Internal Rates and Equipment Cost Pools
Contractors charge owned equipment to a project based on established internal rates. They normally develop those rates from certain costs that cover the purchase price and major repairs spread out over the equipment’s useful life. Similar to other ownership costs, contractors usually establish rates to cover hourly, daily or weekly costs of operation. Companies also may need to address issues such as the equipment’s resale value or the cost of money.

Many contractors that own large pieces of construction equipment establish an affiliate to rent the equipment to the individual jobs at pre-established rates similar to rental rates. Contractors that establish internal equipment rates should consider issues such as:
  • the ownership or operating costs in the internal rate;
  • variances (if any) from the actual equipment costs; and 
  • the inclusion of the cost of money. Contractors should be careful not to double dip, as their office overhead already may capture some equipment costs. The firm may need to adjust internal equipment rates to make sure they accurately capture their actual equipment costs.
Contractors that do not have an established internal rate for owned equipment can use rates from industry manuals such as The DataQuest Corporation Blue Book Rental Rates for Construction Equipment (Blue Book) or the Army Corps of Engineers Equipment Rates (ACOE)—both of which identify ownership and rental cost information for most construction equipment and specify ownership and operating rates.    

Operating vs. Standby Time
Contractors pricing equipment for requests for change orders and extras must consider whether the equipment is being operated or is on standby. In other words, consider whether the price includes operating costs during a delay when the equipment sits idle and unused. Remember, operating costs are activity-related costs, not time-related costs. That said, contractors may continue to use some equipment during a delay such as trucks and trailers. And contractors that rely on Blue Book or ACOE rates may need to make certain adjustments to determine a standby rate.

Contractors’ ability to recover a portion of the significant costs they incur on a project for equipment undoubtedly hinges on using the proper method to calculate their equipment costs and then assembling the necessary documents to substantiate those costs. Otherwise, contractors may unknowingly decrease their profit margins on projects and negatively affect their overall bottom line.

William Kime is senior managing director at FTI Consulting. For more information, email bill.kime@fticonsulting.com. John T. Bergin is senior counsel in the Washington, D.C., office of Thompson Hine. For more information, email john.bergin@thompsonhine.com.

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