Estimating Tools and Equipment Costs

There is too greater tendency to consider as overhead many items of cost which are truly direct job expenses and then not to make a sufficient allowance to recover them. Every item of material which a contractor purchases, has included in its price by the manufacturers and wholesales, an allowance to cover their “direct job expenses” and overhead. The Electrical Contracting Industry also has a perfect right to expect reimbursement for such costs.  In general, the clients expect to pay for such costs; in fact they assume that Electrical Contractors have enough sense to include them in their quotations.

There are some areas of “grey” where for practical estimating and accounting purposes certain items of cost which, whilst in a pure sense, come under the definition of direct job expenses, are sometimes handled as overhead expenses. Some of these items, such as supervisor’s vehicle, insurances, payment and performance bonds, and interest on borrowed money, freight and cartage which may be considered in the “grey” area, only for the reason that while some contractors may wish to include them with regularly recognized job expenses in the estimate summary, other may not wish to a take a profit on such items, and for that reason, include them in the final determination of the quoted price after the profit has been applied.

Tools and equipment is always a subject of controversy, many contractors believe that because they own the equipment there is no need to include any cost in this project. However, even if these tools and equipment are owned by the company there are still on-going costs for maintenance and depreciation.

The minor, everyday tools and equipment are often taken for granted but could be a considerable cost to replace if they are stolen, lost or broken. Equipment such as ladders, steps, cable stands, bottle jacks, rollers, job boxes, locks, chains, safety signs and barriers have a great habit of disappearing on a building site. Tools including testing instruments cordless drills, battery chargers, side grinders, electric drills, extension leads, portable lighting and consumables such as drill bits, cut off saws and cutting wheels are common objects used on a typical job and yet many contractors make no allowance in the estimate.

Tool cost is usually included in the overhead however; some contractors use a formula to calculate tool allowance on each project. As an example, the costs are expressed as a percentage of the total labour costs;
  

Total tool costs  = $26,340
Total labour costs = $ 867,540

                                                        26,340
Tools percentage of labour  =  ------------      =  3%
                                                        867,540

When it comes to the major equipment, then the costs blow out considerably. Site sheds, site offices, crib huts, site vehicles, scissor lifts, scaffolding, cherry pickers, jack hammers, generators, hydraulic crimpers, concrete drilling machines, back hoes just to name a few. 

Although some contractors include a percentage allowance in their overhead to provide for tools and equipment costs, there needs to be an evaluation for each new project to ensure the company has enough equipment to accomplish this particular project. When you are compelled to move major items of equipment back and forth between jobs, (because there is not enough to go around) is when the estimates blow out due to these unforseen costs. These additional costs not only affect the job receiving the equipment but also the job delivering it, and the flow on effect (where the workers are just making do with minimal equipment) escalates the labour and many contractors have gone into liquidation with yards full of expensive equipment and no work. 

You also need to factor in the additional labour required to organise, set up, lock away, chain up, connect battery chargers, refuel vehicles and machinery and secure job boxes at the end of each day.  

Conversely major equipment becomes a huge overhead expense when items which have not depreciated or diminished in value are standing idle due to no work requirements to utilise them.

A good example of diminishing values is shown on the ATO “Income and deduction for small business” (www.ato.gov.au/business)
 
This graph shows the two methods you can use to work out the depreciation of an asset costing $4000 with an effective life of five years. In this instance the asset has been used for 12 months for business purposes only.

Obviously if you have to hire the equipment it is a direct job cost but you still have to factor in the labour for mobilising as above. The decision to hire rather than purchase largely depends on what the equipment is used for and how long do you require it. If it is only required short term, then hiring may be the answer, however, consideration must be given to such aspects as; availability when required, minimum hire, cost of standing time when the equipment cannot be used i.e. inclement weather. 

Unfortunately too many jobs finish as a financial disaster due to insufficient attention given to the cost of supplying, operating and mobilising tools and equipment and an appropriate allowance must be made during the estimating phase of the project.

Brian Seymour MBE, industry consultant, author of “Electrical Estimator’s Labour Unit Manual” and “Starting Out”, conducts regular industry training programs throughout Australia on behalf of the Electrical & Air-conditioning industries
[email protected]. www.moyseur-consulting.com