Heavy construction contractors, by necessity, have a huge investment in equipment. To stay profitable, they have to maximize utilization of this equipment, and software technology can help them immensely.
First, let’s define a few key terms and explore some financial implications. Utilization is operating a piece of equipment to perform construction work and it is the key to recovering the ownership costs of that asset. Ownership costs are the costs of just having a piece of equipment. This is primarily depreciation, but also includes taxes licenses and insurance.
Contractors recover these costs by performing construction work and charging equipment to jobs at an hourly rate. By charging jobs, they recover the cost through contract value over time. Some people have a hard time grasping that depreciation is a real cost, because it is recorded by journal entries. However, when you write a $300,000 purchase check or make a monthly loan payment, it’s real money.
As an example of actual costs, the ownership costs of a midsize piece of equipment, such as a dozer or excavator is currently about $35 an hour based on 1,200 hours of planned utilization in a year. Therefore, every hour under 1,200 that the equipment does not operate creates $35 of unabsorbed ownership cost. Underutilization of 30 percent is not uncommon in the industry. That means the equipment worked 840 hours rather than 1,200. A shortfall of 360 hours resulting in unrecovered cost of $10,800. This is a per-piece average. In a fleet of 100 machines, the total unrecovered cost in this scenario is therefore over a million dollars.
The two primary causes of low equipment utilization are inefficient deployment and unscheduled downtime. Deployment is getting a piece of equipment to where it is needed to perform work.
Traditionally this is performed by a company’s dispatch function. Many companies still do this manually using whiteboards or magnet boards and spreadsheets, supplemented by phone calls, emails and text messages. In all but the smallest equipment fleets, it is very difficult to keep up with all the equipment in real time and to know exactly what is needed where and when. Invariably there will be gaps where available equipment that could be deployed is not, and worksites that need equipment do not get what is needed to meet requirements. The other challenge is that management cannot really tell how the equipment is being deployed without going and looking at the whiteboard or spreadsheet, which is probably out of date.
The best technology to maximize deployment is automated, online scheduling and dispatching software. This type of solution gives contractors one central system with two critical advantages the previously mentioned system can’t match: real-time information and enterprise-wide access. The primary computer screen looks like a magnet board but is automated, so that equipment deployment schedules can be created and changed with drag-and-drop simplicity. Gaps are apparent. Conflicts and available options are obvious. New requirements and assignments can be entered and are visible immediately to everyone.
From the office, or from the field with a mobile device, stakeholders (with the right credentials) can view and manage the schedule in real time. This gives them the power to adjust quickly and efficiently to changing requirements – a constant in heavy construction – and optimize equipment utilization.
An even bigger problem than low deployment is unscheduled downtime. This is where a piece of equipment has successfully been deployed where it is needed but for some mechanical reason cannot be operated. The industry average for unscheduled downtime is 25 percent, so it is a major contributor to overall low utilization of equipment.
Unscheduled downtime typically is a result of poor preventative maintenance. As with deployment, managing preventative maintenance in a fleet of any size is extremely challenging. Construction equipment fleets consist of large complicated pieces of machinery. This is compounded by the multiple types of machines that each have different preventative maintenance requirements. It is virtually impossible to perform solid preventive maintenance without applying technology.
In this case, the technology is a Computerized Maintenance Management System (CMMS). With this type of software-based system, each piece of equipment is set up with the manufacturer’s specified preventative maintenance schedule. Notification to perform scheduled maintenance is triggered either by date or by data from the equipment, such as operating hours.
For each specified maintenance service, there is a standard work order in the system. The equipment mechanics can set up the work order on a laptop or tablet with the push of a button. This will ensure that the maintenance work performed is uniform and as specified.
Contractors using this technology solution have reported being able to reduce unscheduled downtime from 25 percent or more to 5 percent or less. This brings up another important point. These contractors track and measure this. Unscheduled downtime is an important fleet management KPI. The maintenance activity data provided by a CMMS will help calculate this.
Finally, there is an added advantage to using these two technologies in combination, especially when the systems talk to each other. With integrated CMMS and dispatching software systems, for example, a maintenance team can see the utilization schedule in real time and arrange non-emergency work to be done when a machine is not being used, so that work does not adversely impact uptime. Likewise, a scheduler or dispatcher with real-time access to maintenance status is in the best possible position to deploy equipment efficiently and maximize utilization.
Best in class contractors are using these technologies to increase equipment utilization and reduce unscheduled downtime. Invest in this type of technology, and your company will utilize equipment more, reduce unscheduled downtime and increase your bottom line.
HERB BROWNETT, CCIFP, is the President of Brownett & Associates, LLC, a construction financial management consulting firm in Philadelphia, PA. Previously, he served as CFO, Senior VP, and VP of Finance for a variety of construction companies. Herb is a longtime member of CFMA and was national chairman of both CFMA and the ICCIFP.