Let’s start this off on the right foot. This article is all about how to affect fleet cost containment in the real world for your equipment division. Before I explain what Pygmies have to do with fleet costs, let’s set the stage for our little adventure with a primer on cost containment.
COST CONTAINMENT
Cost containment begins with cost management, which is the process of planning and controlling the budget of a business. Many construction businesses employ cost management plans for specific construction projects, as well as for overall business management.
When applying it to a construction project, projected expenditures are calculated while the project is still in the planning stage so that they can be sanctioned beforehand. During the actual construction project, all expenses are recorded and examined to ensure alignment with the cost management plan. After the project is finished, the predicted costs and actual costs can be compared and analyzed, which helps to true-up future cost management budgets.
It would be unfathomable to imagine conducting business any other way. After all, we bid jobs with a sharp pencil and frugal calculations to secure the winning bid. We hate leaving money on the table (too much difference between your company’s winning bid and the next runner-up) or losing a bid by a percent or two. Consequently, cost management is the key to our company’s vitality and health.
THE JOURNEY BEGINS
We have been applying these concepts for years in managing construction projects, yet when it comes to managing the costs of running our fleets, it’s not quite a rigorous protocol. The latitude or variances in costs can be troublesome on a project when we have allocated so much for equipment costs and then watch the job margins shrink as additional equipment costs are applied to the project. Even in cases where it isn’t applied directly to a given project, the company has to absorb the costs.
In other scenarios, the bid rates are moderately deflated because the true rates of renting the equipment from the Equipment Division would place us in a noncompetitive position, which is too prohibitive. In this case, the company has to eat the delta (or difference), but at least we have competitive pricing and can get work.
It is a dilemma. If we price the bids with true costs of fleet usage and upkeep, we may be over-priced in bidding. If we don’t bid true costs, it will eventually affect the margins as the excess costs have to be covered by the company one way or another, leading to lower profits. The good news is that you are in the same quagmire as many of your competitors. The bad news is that it’s not reassuring.
MEASURING UP WITHOUT CUTTING DOWN
The question remains: How can I reduce my equipment costs without instructing them to simply cut their current level of maintenance? We know that’s a double-edged sword as neglected equipment often results in higher costs. This is true because small problems that could have been caught and resolved in the early stages of degradation must now wait until they advance to more serious downtime and costs. So, what is the answer?
The shop appears to be a big black hole to pour in your money. It’s a necessary evil—right? It has to be as challenging as balancing the Federal Budget—right? Wrong.
If you want to reduce your fleet costs, you first need to understand them. Where are your costs relative to others? I mean; are you in line or way out of whack comparatively to other companies like yours? After all, you may think you are the tallest guy in the jungle until you started visiting surrounding tribes and then you find out you were merely the tallest Pygmy in your tribe. That may be enlightening but it’s also certainly demoralizing.
METHOD OF COMPARISON
Like our tribe of Pygmies where height is relative, so too are fleet costs, which means that some method of comparison is in order. In the case of our diminutive friend, they need to think it through before backing up to the doorjamb of the hooch and marking off the top of their head to compare to others. They have to realize that the doorjamb has to remain in the village and can’t be comfortably carried to other villages in the vicinity.
Let’s try something more portable … like a string, but let’s mark it off in some form of units or even increments so we will know how much above or below we really are. This will assist us on our pilgrimage so we can now measure the difference to determine how our height stacks up with all the other jungle occupants.
In part two of this article, we’ll look at two simple ratios to make the case for fleet costs and find the true measure of a Pygmy. Until then, enjoy the journey! ■
Look for part two of this article in the next issue of MCS.
About The Author: Preston Ingalls is president and CEO of TBR Strategies, LLC, a Raleigh, North Carolina-based maintenance and reliability firm specializing in the construction and oil and gas industries. Preston can be reached at pingalls@tbr-strategies.com, or visit www.tbr-strategies.com.
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Modern Contractor Solutions – March 2016
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