Heavy Equipment

Construction Equipment Management

Many contractors own and use extensive spreads of construction equipment to accomplish their construction projects. Construction equipment is very expensive, and the contractor's investment in "iron" can easily run into the tens of millions of dollars. Construction equipment makes money for the contractor, but it must be carefully managed to produce the expected income. In other words, construction equipment management is critical.

Construction equipment must be managed just as any other capital investment. Construction equipment management involves making informed judgments about equipment acquisition and financing, establishing a comprehensive preventive maintenance program, maintaining accurate and current records of equipment income, expense, usage, and establishing an appropriate company policy concerning equipment replacement.

A rigorous preventive maintenance program is essential to profitable construction equipment management and utilization. Equipment downtime can have serious effect on project costs and schedules. A contractor's preventive maintenance program must be tailored to its own equipment specifications and the job site conditions where the equipment operates. Special attention must be given to those key machines whose downtime would have a particularly severe effect on production and costs.

Once equipment is obtained, the contractor attempts to recover the acquisition costs by using it and realizing residual values upon its disposition. The accounting procedures used to charge construction projects with equipment costs vary substantially for one contractor to the next. However, a common procedure is to establish an internal rental rate for each piece of equipment.

During the progress of work in the field, a charge equal to the internal rental rate times the number of equipment hours, weeks, or months is made against the project. At the same time, an equal but opposite credit is made to the ledger account of that equipment unit.

In essence, what the contractor is doing is establishing, at least on paper, a separate company that owns, services, and maintains all of its major equipment and rents it to the contractor at predetermined rates. This equipment accounting procedure provides a cumulative record of expense and earnings for each major equipment unit.

How these figures compare provides company management with invaluable information concerning equipment utilization, maintenance, costs, and replacement. In short, the company knows which machines are paying their way and which are not. Many construction firms have a company policy stating that when the annual cost of an equipment item exceeds its annual earnings, it is either replaced or sold.

A large construction company is apt to treat its equipment division as a separate profit center. This just says that the equipment investment is treated as a separate business, with the return on the investment required to be commensurate with the risk. Whether a contractor expects a break-even performance or a profit on its equipment investment depends on the company and its construction equipment management policy.