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The Danger of Recovering Equipment Costs as Overhead

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Business Advice

Many contractors have been taught to think of their field equipment as an overhead cost. Accountants and book-keepers will setup the chart of accounts with field equipment included as overhead. This is a common practice in the manufacturing industry, where Cost of Goods Sold includes only the raw materials used to manufacture/create finished products, and all facilities and equipment are counted as overhead costs. As a contractor, this will hurt both your sales AND your profits. 

When you include your equipment costs in your overhead budget, you averaging out their costs and charging this average to all your clients. On the surface, this can work. Assuming that you:

  • Keep your overhead spending on budget
  • Use an overhead markup system for pricing your work
  • Meet or exceed your sales goals

…then you can be reasonably sure you’ll recover the costs of your equipment. However, by averaging your equipment costs across all your jobs, you are charging every customer the average cost of your equipment on every job. You’ll only price the job accurately if the job uses exactly the average amount of equipment.

If your job requires less equipment than the average job…

You’ll over-price the job. If you price the job based on an average equipment cost and the job requires less-than-average equipment costs, you inflate your selling by price by including too much equipment costs in your bid. If you’re bidding against our company who bids with specific equipment, your price will likely be higher than ours (all other costs being equal) and we’ll stand a better chance of winning the bid.

If your job requires more equipment than the average job…

You’ll under-price the job. You won’t recover enough of your equipment costs because you are only recovering your average equipment costs on a job with greater-than-average equipment costs. If you bid against a company who bids specific equipment into work, your price will be cheaper and you’ll win the work – but the extra costs of the equipment will come out of your profit! Your job profits will be less than expected because your profit is paying the difference between the average cost of equipment and the actual cost of equipment on that bid.

Either way, including equipment costs as overhead hurts your business. If the job equipment costs are anything different than the average, you’ll either over-price the job (potentially costing you the sale) or under-price the job (costing you profit).

Some companies can get away with this method. If you have 4 crews on the road and every crew and every crew goes out with the exact same fleet of vehicles and equipment, then the average (overhead) method can work. If you only do residential grounds maintenance and every crew/job is equipped the same, then the impact of costing equipment as overhead will be low. However, if you work on contracts where equipment requirements vary, you are costing your company sales and/or profits by budgeting your field equipment costs as overhead. Build specific equipment into your bids and you’ll:

  • Price your work more accurately
  • Increase your chances of achieving your target profit margin
  • Create a better work plan (that includes equipment requirements) for your crews, based on the estimate

The Landscape Management Network offers members the tools and the training to build accurate budgets, create profitable pricing strategies, and to link estimation and pricing directly to their budgets. For more information, check out the website at www.landscapemanagementnetwork.com.

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