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Recovering Equipment Costs Through Overhead: The Double Edged Dilemma

| Topic:

Business Advice

by: Batman

Part of a new series of blog posts from the Super Heroes on the LMN Support Team.

Accountants, bookkeepers and contractors alike, tend to view field equipment as an operating cost, and therefore lump them in with their other overhead expenses. This may apply to industries whereby the only costs of good sold are the direct materials used to create the final product; with equipment and other expenses designated to overhead (e.g. manufacturing industry). This line of thinking does not necessarily bode well for the contracting world.

When lumping your equipment in with your other overhead expenses, you are now spreading out all of these costs across an average, and in turn, charge your customers an average price for every job. This sets a dangerous precedent for all of the work you will price out moving forward, as now the only jobs that are being priced accurately, are jobs where the average amount of equipment is actually being used.

Consider the following scenario: a customer tells you that they are considering having a paver driveway installed and have a maximum amount they are willing to pay (which they won’t share with you). They give you no information about the size/location of their lot, and what kind of paver they want; all the customer mentions is that you will not win the job if your quote is above their maximum spend.

Airing on the side of caution, you give a quotation of an average price of what a paver driveway may cost. If your average price is lower than the job actually costs and you win the job, you may not be as profitable because you didn’t price it high enough. If your average price is higher than what the job actually costs, you’re now at risk of not winning the job because you priced yourself out. This is illustrated in the graph below:

Jobs With Low Equipment Usage

In the jobs marked as grey, where there is little equipment usage, you may be pricing your work too HIGH and may be losing these jobs to the competition. You’re now reducing your potential for revenue.

Jobs With High Equipment Usage

In the jobs marked as red, where there is high equipment usage, you may be pricing your work too LOW and will most likely win these jobs. But now you’re reducing your profit as the extra cost of doing the job must come from somewhere.

There are some instances where pricing your equipment out on an average may work out: you do the same type of work, all-year round, with the same equipment used by each crew, day in and day out. Since there isn’t much fluctuation with how the equipment is being used, an average price might pass here.

If your breakdown of work contains variable uses of equipment from job to job, ideally you would want to bid your jobs to accurately to reflect the cost of said equipment. By doing so, you will be opening yourself up to winning a wider mix of jobs and with confidence knowing that your pricing is accurate to the job at hand.

Keep that hard-earned profit where it belongs, in your bank account and win more jobs with confidence. Check out this VIDEO on how LMN can help you organize Equipment Budget within LMN’s Budgeting software.

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