August 15, 2010
By Mark Bradley

Mark BradleyIn this month’s article, Dan and Bill discuss the issue of equipment costs compared to labour costs.  

Dan and Bill finished discussing the costs and benefits of hiring superstars vs. average staff. Feeling like he was prepared to make better hiring and payroll decisions, Dan met with Bill to analyze his equipment. Dan wanted to buy another skid steer, but his wife and his bookkeeper didn’t feel like it was affordable.

As Dan explained the stalemate, Bill recalled when he and his wife started their business. “The easiest way to make a joint decision is to use numbers. Without knowing the costs and benefits, you are arguing over your instincts.”  

Dan agreed, “Don’t get me wrong, we don’t like relying on only our instincts. We just don’t know where to start. In my mind, I know we need another skid steer. We spend too much time messing around trying to share the one we have. But on the other hand, we’re not in a financial position to take on more costs. Our dealer can finance for about $700 per month, but we’re not ready to commit to a four-year term without knowing whether we can afford this.”

Bill got out his pencil and began writing. He explained what he was doing,  “Dan, the reason you’re stuck is because you’re looking for the answer after solving only one part of the problem. You’ve figured out how much it will cost you to own the skid steer, but then you stopped. You just need to look a few simple steps further.

“There are three important factors you must consider when evaluating an equipment purchase:
  • What are the costs of not owning the equipment (labour, productivity loss)?
  • What will the equipment cost to own and operate?
  • How could the new equipment impact sales?
“Given that we’re always looking at our productivity, we start our decision knowing what it’s costing us not to have the machine. What’s it costing you without the skid steer? How many crew hours are spent wheel barrowing, digging or loading, unloading, and transporting materials that could be done more efficiently with a machine? How much time is spent moving your current machine from site to site?”

Dan thought for a minute, “We spend no less than four man-hours every week on tasks that could be done in minutes with a machine.”

Bill jotted some numbers into his chart. “If you could save 16 labour hours per month, and your labour costs (including burden) are around $25 per hour, you could save $400 of that $700 monthly payment by saving labour hours.”

Replace labour with machines

Bill continued, “But if you replaced those 16 man-hours a month with the machine, could your labour be working on other billable tasks? If those man-hours could be spent laying stone, or planting, or working on any other billable parts of your jobs, then you’ve added 16 labour hours of billable opportunity. Maybe your labour costs won’t change, but you can do more sales in less time. And, with increased sales volumes, your overhead markups drop, making your pricing more attractive to customers. Now we’re starting to see how the equipment will really affect your business, both from a cost and sales perspective.”

Dan liked Bill’s direction. “Yes, there’s no shortage of work, but I am always short on quality people who can bring the job in on time.”

Bill agreed, “Every contractor has trouble finding great people, but I’ve never met a contractor who couldn’t find good equipment. By putting on more of your sales volume using equipment, you’ll have an easier time running your business. From a management perspective, it’s much easier to manage $50,000 worth of equipment, than it is $50,000 worth of labour.”

“I hear you!” agreed Dan.  

“Dig deeper now and analyze the other hidden costs with your situation.  There’s time spent floating equipment from site to site, reduced productivity doing work by hand because the equipment is not available, and the cost of schedule disruptions waiting for needed equipment. Don’t forget, you also have to factor the extra equipment operating costs such as fuel, maintenance, repairs and insurance,” said Bill.

“So we throw these numbers in our operating budget and see how it pans out.” nodded Dan. “I see exactly where we’re going with this. The increase in sales and decrease in labour costs has to outweigh the increase in equipment costs.”

“Exactly,” confirmed Bill. “The numbers will show you whether this is a good, or bad, investment for your company. We analyzed our equipment purchases using numbers instead of opinions, and gradually became a company that relied more heavily on equipment, instead of labour, to meet our sales goals. Our equipment costs are higher, yes, but we’re more profitable because our increased sales and reduced labour spending more than compensates for the extra equipment costs.

“It’s been easier to grow my business using more equipment and less labour. Dollar-for-dollar, equipment is more productive and less risky. However, I wouldn’t be in this position today without knowing that each of my equipment investments would pay for themselves. Sit down with your wife and bookkeeper and put numbers to these questions:

1. How much do you expect to save in labour costs? Include:    
  • Production labour savings (time)
  • Equipment transportation savings (float costs)
2. What is it going to cost you to own plus operate the equipment?  Include:
  • Purchasing/financing costs
  • Operating costs (fuel, insurance, repairs, etc.)
3. Will sales increase as a result of owning the equipment? Include:
  • Faster, more efficient production
  • More competitive pricing (due to lower production costs)
  • Increased sales opportunity by focusing your skilled labour on tasks that can’t be done by machine
“After you’ve answered these questions, review your budget and make a logical decision based on dollars and cents.”

“Brilliant,” nodded Dan. “This is the way my business was meant to be run.”

To put Bill’s systems to work for your company, join LMN for the business management/operating budget workshop series. For more information, email, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.