Mike Vorster
David H. Burrows Professor of Construction Engineering and Management at Virginia Tech. See ConstructionEquipment.com for full archives of "Equipment Executive."
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Few fleet-management procedures are as controversial as those designed to discourage projects from underutilizing equipment they have on site. Some companies have aggressive policies that penalize the jobs for underutilization by charging a fixed rate regardless of whether the machine is utilized or not. Others are more relaxed and charge only for the actual hours worked in the belief that communication and cooperation will identify underutilized assets and ensure that they are reassigned as needed.
Good practice lies somewhere in between. Draconian measures impact motivation and lead to gamesmanship; no measures lead to complacency and waste.
The need to maximize utilization and the need to base discussion on metrics rather than opinion means there must be a system to measure utilization and quantify its impact on performance. A fair and reasonable system exhibits the following eight characteristics.
1. Focus on owning costs. Changes in utilization impact only the fixed owning cost portion of the equipment owning and operating cost calculation. Systems to measure the impact of change in utilization should therefore be based only on the owning portion of the rate.
2. Set a clear baseline. The required utilization per week, month or year must be clear, well understood, and equal to the denominator used when converting annual fixed costs into the owning-cost portion of the rate.
3. Accommodate downtime. The system must recognize that downtime affects utilization. The required utilization, therefore, should be reduced by an amount equal to the downtime experienced when the machine should be working.
4. Allow for bonuses and penalties. It is unreasonable to penalize the job when utilization is low without providing opportunities when utilization exceeds expectations.
5. Must not impact job costing. Penalties for idle time or bonuses for high utilization should not impact the job-costing system. Job costing should always reflect the time and cost of the resources actually used to do the work.
6. Easy to implement. The system should not rely on inordinate amounts of data collection, and as much of the calculation as possible should be done behind the scenes.
7. Provide good metrics. The cost impacts of running the fleet above or below target levels should be quantified as a separate total for each project. The value should not be lost, combined or disguised within the job-costing system.
8. Encourage appropriate long-term action. Annual fixed cost recovery need not occur every week or every month; it can take place over time. The important thing is to measure and achieve the required results over time.
The accompanying table is an example of a simple, straightforward approach that includes the required characteristics. It covers a 13-week period for a given machine, but it can clearly be extended to cover all the machines working on a particular project.
Notice that the $100 hourly owning and operating cost rate for the machine is split into two distinct components. The owning portion, $40 per hour, is designed to recover the anticipated owning costs. The operating portion, $60 per hour, is set at a level sufficient to cover anticipated operating costs.
Column A indicates the weeks of the study period, and Column B shows the baseline or required weekly utilization (Target hours, T).
The only data required are contained in columns C and D. Column C is the hours actually worked by the machine during the week (W), and column D gives the on-shift downtime experienced and recorded during the week (D). Columns E, F, G and H show the transactions that impact the equipment account as a result of the recorded utilization data.
Column E records the operating-cost side of the equipment account, which receives an amount equal to the operating portion of the rate multiplied by the hours worked. In 13 weeks the machine worked 370 hours at a cost rate of $60 per hour, which generated $22,200 for the account.
Columns F and G record the owning side of the account. This calculation starts with the targeted utilization multiplied by the owning rate, then an amount equal to the recorded downtime (D) multiplied by the owning rate is subtracted. Splitting this into two columns shows that downtime precluded the company from recovering $3,600 of fixed annual costs. This metric is a good starting point for measuring the effectiveness of maintenance and replacement decisions.
Column H is the sum of columns E, F and G and shows the total of the equipment charges paid by the project to the equipment account.
Columns I, J and K show the transactions that affect the project-level cost codes. Column I shows that the operational cost codes have been debited amounts equal to the hours actually worked on the job (W) multiplied by the full owning and operating cost rate of $100 per hour. This ensures that the job-costing system correctly reflects the cost of the resources actually used to do the work.
Column J measures the cost of idle time on the machine and is calculated by subtracting the amount debited to the job cost codes (I) from the amount paid by the project to the equipment account (H). The amount in column J is debited or credited to a single project-level standby equipment cost code and measures the impact that differences from the target utilization have on project results. Column K is the sum of columns I and J.
Column L is a running total of column J and measures the impact of over- or underutilization on the project to date. It increases when utilization falls below target, and it decreases when it exceeds expectation. This metric should encourage managers to action to achieve targeted utilization.
How Fair and Reasonable Works | | A | B | C | D | E | F | G | H | I | J | L | K |
|---|
| | | | | Eqt. Acct. Receives | Bill to | |
| Week | Target Hours (T) | Worked Hours (W) | Down Hours (D) | Operating Side | Owning Side | Net Received | Cost codes (W x &100) | Location Standby Eqt. Acct | Total Paid by Location | Cumulative Location Standby Eqt. Acct. |
| | | | | W x $60 | T x $40 | D x $40 | | | | | |
| 1 | 40 | 40 | 0 | $2,400 | $1,600 | $0 | $4,000 | $4,000 | $0 | $4,000 | $0 |
| 2 | 40 | 30 | 0 | $1,800 | $1,600 | $0 | $3,400 | $3,000 | $400 | $3,400 | $400 |
| 3 | 40 | 50 | 0 | $3,000 | $1,600 | $0 | $4,600 | $5,000 | ($400) | $4,600 | $0 |
| 4 | 40 | 30 | 10 | $1,800 | $1,600 | ($400) | $3,000 | $3,000 | $0 | $3,000 | $0 |
| 5 | 40 | 40 | 10 | $2,400 | $1,600 | ($400) | $3,600 | $4,000 | ($400) | $3,600 | ($400) |
| 6 | 40 | 20 | 10 | $1,200 | $1,600 | ($400) | $2,400 | $2,000 | $400 | $2,400 | $0 |
| 7 | 40 | 50 | 0 | $3,000 | $1,600 | $0 | $4,600 | $5,000 | ($400) | $4,600 | ($400) |
| 8 | 40 | 50 | 10 | $3,000 | $1,600 | ($400) | $4,200 | $5,000 | ($800) | $4,200 | ($1,200) |
| 9 | 40 | 20 | 0 | $1,200 | $1,600 | $0 | $2,800 | $2,000 | $800 | $2,800 | ($400) |
| 10 | 40 | 40 | 0 | $2,400 | $1,600 | $0 | $4,000 | $4,000 | $0 | $4,000 | ($400) |
| 11 | 40 | 0 | 40 | $0 | $1,600 | ($1,600) | $0 | $0 | $0 | $0 | ($400) |
| 12 | 40 | 0 | 10 | $0 | $1,600 | ($400) | $1,200 | $0 | $1,200 | $1,200 | $800 |
| 13 | 40 | 0 | 0 | $0 | $1,600 | $0 | $1,600 | $0 | $1,600 | $1,600 | $2,400 |
| Totals | 520 | 370 | 90 | $22,200 | $20,800 | ($3,600) | $39,400 | $37,000 | $2,400 | $39,400 | |
