Heavy & Highway Mini-Conference

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Tracking Equipment Utilization - A Key Driver of Fleet Success

Financial and accounting professionals and equipment managers often focus on financial measures to evaluate the success of their heavy equipment fleets.  A measure that is frequently untapped or underemphasized is equipment utilization.

Equipment utilization is a critical non-financial measure to track the number of hours your equipment is operated.  The utilization percentage is calculated by taking the number of hours operated divided by the available hours for the equipment.  The resulting percentage can be evaluated and benchmarked on an annual, monthly, or even weekly basis.

You may wonder why these measurements are so important.  Here are several factors to consider:

• Utilization is a critical driver in determining the recovery of the ownership or fixed cost components of equipment in a given year.  For example, let’s assume that the cost recovery (depreciation, insurance, licenses, interest, etc.) for a piece of equipment is $50,000 for the year.  If the equipment is operated 1,000 hours during the year, the ownership cost per hour is $50.00.  However, if the equipment is operated 1,250 hours during the year, the ownership cost per hour decreases to $40.00.

• Management must make choices on how to deploy the available capital in their company.  Of course, this capital is not unlimited.  As a result, a piece of equipment which is not being utilized fully may be tying up capital which could be used for a more productive piece of equipment.

•  Measurement of downtime for equipment repairs can identify equipment which needs to be repaired and/or replaced as a result of ongoing downtime issues.  The costs of unreliable equipment in the field are enormous.  They not only include the actual repair costs, but also include crew downtime, lost productivity, overtime to get back on schedule, travel and mobilization time for the equipment, etc.

• Measuring the percentage of time that a piece of equipment is available for productive work (i.e., not down for repair) is also a very valuable measurement.

Schlouch Incorporated (S.I.) is a 375-person complete site preparation specialist located in Eastern Pennsylvania.   At S.I., we have made measuring equipment utilization a key metric in evaluating our fleet performance.

During the fall of each year, our equipment leadership team reviews the equipment utilization for the current year and the outlook for our workload for the subsequent year.  At that time, we determine the equipment to be replaced and/or added for the subsequent year. 

Once a capital acquisition budget is finalized, we budget annual equipment operating hours for every major piece of equipment in the fleet, as well as rental equipment by equipment type.  These budgets are determined by reviewing historical trends, as well as the expected workload for the subsequent year and changes in the fleet composition.  Monthly budgets are determined based upon historical data by department and/or type of equipment, as well as anticipated business changes..

Throughout the year, we track and report upon actual operated hours vs. budgeted hours on a monthly basis.  A detailed variance analysis is prepared to highlight and explain differences vs. budget for the month and year-to-date by type of equipment and also by department and crew.  Downtime for repairs is also tracked and incorporated into the analysis.  This report is distributed to all operating department coordinators, our fleet coordinator, dispatch team and owner and allows them to:

• Investigate equipment which is not being utilized and make decisions to change the fleet composition as needed.

• Identify over- or under-allocations of equipment by type.

• Identify trends by crew or work group.

• Compare owned and rented equipment utilization.

• Identify equipment which was down for repair a significant amount of time during the month or year. 

They can then follow up with the fleet coordinator to discuss these trends.

The format for the sample monthly report we utilize follows:

We further review this information, as well as other fleet data, at an annual fleet meeting which is held each Fall and represents the culmination of our fleet review and budgeting process for the subsequent year.  The annual utilization data and trends are also reviewed and the annual hours reflected in our owning and operating (O&O) cost templates are updated accordingly.

One might question whether reporting this information on a monthly basis is adequate.  We asked the same question and decided to implement a weekly report not only designed for the department and equipment coordinators, but also for the field coordinators.  On a weekly basis, a report is generated which presents equipment hours operated, available hours, and utilization percentage.  The sources of information are as follows:

• Hours operated are based upon payroll timesheet data. 

• Available hours is calculated based upon a 40 to 50 hour work week based upon the time of the year less 8 hours for each day of lost work due to poor weather or holidays.  Typically the result is 1,800 hours of available equipment hours for a year. 

• Utilization % = operated hours divided by available hours.

The actual utilization % is compared to a budgeted utilization %, which is calculated by dividing the annual budgeted utilization by 1,800 hours.

Equipment is assigned to jobs, listed as “down for repair,” or “available” based upon our daily schedule.  The report is sorted in two ways:

1.      By type of equipment
2.      By field coordinator and job

An example of these reports is shown below:

By Equipment Type:

By Coordinator and Job:

These sortings allow our field coordinators to see the utilization on their particular projects for the week vs. the budget and compare the results to their peers and overall company utilization.  Our department coordinators and dispatch team have a tool which they can utilize to challenge how the equipment is deployed to jobs, such as:

• Identify equipment which is not being fully utilized on one project and redeploy that equipment to another project. 

• Identify situations where owned equipment is being underutilized yet we have the same type of equipment rented on other projects. 

• Identify and quantify the hour impact of equipment down for repair on overall fleet utilization.

The impact of equipment down for repair is actually compounded because:

1.      The P&L of the owned equipment suffers because the cost recovery (charges to jobs) is less than expected.
2.      You almost always pay a premium on the equipment rented to replace the owned piece that is down for repair.

We have used the tools described here for approximately eight years and have a significant history on our equipment utilization which can be used for benchmarking and analysis. 

With the development of technology, access to this data is now available on a daily basis.  Software tools which capture equipment hours on a daily basis are becoming much more prevalent and affordable.  Companies using these tools have an advantage because they can analyze this data on a daily basis and react accordingly.  We hope to deploy such a system in the future to realize these benefits and also streamline the preparation of our equipment utilization reports.

Managing an efficient and effective fleet is a challenging and multi-faceted task.  By adding equipment utilization as a key metric in evaluating your fleet performance, you may just discover some hidden trends which you can use to improve your fleet’s success!

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Article Prepared By:
Richard F. King, CPA, Treasurer & Finance Coordinator
Schlouch Incorporated

Wanted: The perfect project manager

One reason the ‘perfect project manager’ is so hard to find is that few companies provide an environment or culture in which the best project managers can thrive.  Ultimately, it may be more profitable to spend less time chasing after the mythical perfect project manager and more time creating practices and a culture that foster perfect project management.  However, the results of the FMI 2006 Project Management Survey suggest that companies can take steps in their hiring process to improve their chances of finding the right person for the job. 

According to Gregg Schoppman, author of the report, “One inalienable truth about the construction process is that there will be problems during project construction.  Construction problems are not what concern us most here, but how a project manager deals with the challenges that separate the average project managers from the great ones.”  According to the FMI Project Leader Model, the development of project managers should integrate three distinct principles—the planner, the businessperson, and the communicator.  The results of the FMI 2006 Project Management Survey show to what extent project managers currently conform to this model. 

In the FMI 2006 Project Management Survey, construction industry executives were asked about the performance of their project managers and their project management practices in four main areas—technology use, personnel, operations, and project coordination.  Some key findings from the survey include:

• Experience and communication skills (written and verbal) are the most emphasized traits when evaluating project manager candidates.

•  Financial management tops the skills most lacking in new project manager candidates.

• Client/customer relations and building skills are the strongest skill sets for project managers.

• Among the weakest skill sets, cost-to-complete and profit projections ranked the highest.

• Lack of planning, communication, and financial skills are the biggest areas of concern for project management teams. 

• Only 21% of respondents rated their project managers’ effectiveness in the area of documentation as “efficient, concise, and well documented.”

• The project manager is the primary contact and project leader from the customer’s perspective according to 80% of respondents.

• Better integration and coordination of trades, according to 85% of executives responding to the survey, could result in an improvement in schedule of 5% or more.

Breakout: Heavy, Highway, and Civil Contractor Results

Approximately 8% of the responses from construction industry executives represented heavy, highway, and civil contractors.  In general, the responses from heavy, highway, and civil (H/H/C) contractors paralleled the responses from all contractors combined.  (See the FMI 2006 Project Management Survey for the full report of results.)  There were some notable differences in the concerns of H/H/C contractors compared with all others.  For instance, more of the H/H/C sector was engaged in hard bid work, and few were involved in negotiated or CM-at-risk contracts. 

One difference between H/H/C contractors and general and trade contractors was their hiring criterion for project managers.  The H/H/C contractors placed greater emphasis on field/trade experience and less emphasis on communication skills.  Nonetheless, all contractors shared the same concerns for improving the communication skills of project managers.  As one contractor remarked, “The single greatest weakness of our project managers is their lack of people skills.  Communicating across the board is our biggest problem. . . . We also don’t train our people in these types of skills, which could be a problem.”

When asked how often their projects finished on schedule, H/H/C contractors had higher rates of on-time completion than other contractors.  Although this is a good response, only about 45% of H/H/C contractors answering the survey had projects finish on time all of the time, so there is still much room for improvement.  It may be that H/H/C contractors have more projects finish on time because their project teams are likely to meet more frequently during the project (see graph.)  The response from all other contractors was that they only meet monthly to update progress schedules.  A month can be a long time between meetings, and a lot can happen in that time that will put projects off track.  It should be more effective to hold shorter and more frequent meetings so smaller problems can be addressed before they cause bigger problems.

There is a growing concern about the need for good project documentation as projects increasingly are more complex and involve more people in collaboration.  In this area, it appears from our survey that H/H/C contractors have greater needs for improvement than other contractors do.  In the full analysis of this survey, we note that the companies that most often finish projects on time and on budget are more likely to be effective at project documentation.  In addition, the companies with project managers that rated higher at providing effective documentation tended to hire project managers with construction management degrees.  Having processes in place that encourage good documentation can save a company a lot of headaches down the road, especially if legal issues come up at any time during or after the job is completed.

The results of our survey make it clear that project managers need to be multi-faceted individuals.  Their skills, combined with sound project management processes, can make a huge difference in the profitability of a job and the company.  Lack of skilled project managers can also mean that a company’s growth may be limited. As one respondent noted, “Our biggest challenge is controlling the growth that our firm is experiencing and finding the right project managers and superintendents to satisfy the growth.” 

Project management performance can make or break the profitability of a construction company.  The focus for improving project management performance should be on the company’s project management processes and practices.  While most help wanted advertisements focus on finding the perfect project manager, the better headline for such ads might read “Wanted, the Perfect Project Manager to Work in the Perfect Project Management System.” 

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Article Prepared By:
Brian Moore
Consultant, FMI

Brian Moore is a Consultant with FMI, Management Consultants to the Construction Industry.  Brian works with contractors on various strategic, financial, and operational issues.  Specifically, his work at FMI involves in-depth market analysis, strategic and business planning, and market planning for clients throughout the nation He can be reached at 919.785.9269, or by e-mail at bmoore@fminet.com.

To obtain a copy of FMI’s 2006 Project Management Survey report, contact Phil Warner, FMI Marketing Coordinator, at 919.785.9357 or by e-mail at pwarner@fminet.com.

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Profit Thieves

Every 53 minutes, a construction company goes bankrupt. Many companies fail because they are unable to achieve the profit margins they expected when they bid their jobs.  Profit is a key reason for a company’s existence.  But, construction mistakes lead to increased costs that steal profits from a company.  I call the five common mistakes “Profit Thieves.”  Left unchecked, Profit Thieves reduce profit margins, sucking the life out of a company.  Reducing the occurrence of Profit Thieves increases a company’s profit and its vitality.

Outline

I)               Profit Thief One:  Incorrect Materials

A)      The first way to have the incorrect materials on the job is to not order enough materials, which is a result of the estimator making a mistake.  This increases costs by having to wait for additional materials to be delivered and by incurring additional shipping charges.

B)      The second way to have the incorrect materials on the job is to order more materials than are needed, which is a result of the estimator making a mistake.

1)      Some extra materials are tolerable because they are often needed for items that were missed when preparing the material list and may be used to deal with unexpected conditions.

2)      When an excessive amount of extra materials are ordered, these materials are often wasted, damaged, or have to be returned to the supplier.  This increases costs by having to pay for the wasted and damaged materials and having to pay shipping and restocking fees on the returned materials.

C)     The third way to have the incorrect materials is having the wrong materials delivered to the project.

1)      Having the wrong materials delivered to the project may be a result of ordering the wrong materials, which is a result of the estimator making a mistake.

2)      Having the wrong materials at the job-site may be a result of the materials being used in a different manner than planned, which is a result of poor communication between the estimator and the installers or a result of the estimator not understanding how materials are used in the field.

D)     This profit thief can be reduced by better estimating, better communication between the estimator and the installers, and a better understanding of construction processes.

E)      CFO’s role in monitoring and reducing this profit thief.

1)      Monitoring and controlling purchase of missing materials.

2)      Monitoring and controlling return shipping costs and restocking fees.

3)      Monitoring and controlling of waste.

4)      Monitoring and controlling of damaged materials.

II)            Profit Thief Two:  Busted Schedules

A)      The most costly form of a busted schedule is falling behind schedule. 

1)      Falling behind schedule increases costs by increasing the duration of the project, resulting in an increase in the cost of project overhead.

2)      Falling behind schedule increases costs because productivity is reduced by less optimum workflows, time spent waiting for materials, and diminished employee morale.

B)      Another form of a busted schedule is excessive schedules under-runs. 

1)      Excessive schedule under-runs are an indication the original schedule was too conservative.

2)      This results in increased costs because the duration of the schedule is longer than needed, increasing project overhead costs.

3)      If the project management team tries to shorten the duration of the schedule by using the extra time, costs are increased because productivity is reduced by less optimum workflows, time spent waiting on materials, and reduced employee morale.  These increased costs are only partially offset by the achieved reduction in project overhead.

C)     This profit thief can be reduced by preparing better schedules with realistic durations and careful monitoring to make sure the project stays on schedule.

D)     CFO’s role in monitoring and reducing this profit thief.

1)      Monitoring and controlling weekly and monthly cash flows.

2)      Monitoring and controlling labor productivity.

3)      Monitoring and controlling overtime.

III)          Profit Thief Three:  Unacceptable Quality

A)      Quality below the minimum acceptable level requires rework to bring the quality up to the required standard.

B)      This rework is more expensive than doing the work right the first time because it often requires many tasks to be redone to mitigate one improperly completed task and often requires additional trips to the project.

C)     This profit thief can be reduced by having clearly defined quality expectations, measuring adherence to the quality standards (or the cost of not meeting quality standards), and holding employees accountable for meeting these standards.

D)      CFO’s role in monitoring and reducing the cost of rework.

1)      Monitoring and controlling change orders for rework.

2)      Monitoring and controlling punch list costs.

IV)          Profit Thief Four:  Out-of-Control General Overhead

A)      Out-of-control general overhead can consume profits quickly. 

B)      This profit thief can be reduced by having a general overhead budget which is used to control costs.

C)     CFO’s role in setting up and monitoring a general overhead budget.

V)             Profit Thief Five:  Lack of Accountability

A)      Another profit thief is not holding employees accountable for their budget, schedule, quality, and safety performance.

B)      For accountability to occur, performance must be measured against a clearly defined set of expectations, and rewards must be tied to the employee’s performance.

C)     This profit thief can be reduced by having a company-wide system of measuring and rewarding performance.

D)     CFO’s role in measuring and rewarding performance.

VI)          Conclusion

A)      Diligence can reduce these profit thieves and increase the company’s profit.

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Article Prepared By:
Steven Peterson
Associate Professor of Construction Management, Weber State University

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Many thanks to the following Heavy & Highway Subcommittee members who were instrumental in developing this newsletter:  ;

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The opinions expressed by the authors featured in Talking Heavy are theirs alone and do not reflect an endorsement by CFMA. The individual authors are responsible for the validity of any numbers and mathematical operations used in any examples and for obtaining permission to use any works cited in their respective articles.