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Reporting to the Depot

February 19, 2005

Author & Date: Martin Booe, 1/05
Publication: Workforce (Quick Sign-Up Required To Access)
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This article brings focus to a huge and often un-tapped labor market. The US Military turns out over 200,000 veterans who transition into civilian life every year making them a huge source of employees. In the military people are taught to both lead and follow. They are taught a lot of practical skills; how to work very hard under extreme conditions. There is a lot of potential to partner with the government and utilize ex-military personnel in construction.

The article also makes some fantastic points about leadership development and how well the veterans work out in their leadership programs. I believe that the military teaches the use of standardized systems and that is something that many smaller and medium sized contractors have difficulty implementing. If you start to implement Process Documentation and Improvement you should also think about how you are going to approach hiring new people into your organization to make sure they will follow, maintain and improve the systems you are trying to implement.

It should also be noted that a lot of the reasons for Home Depot's success under CEO Robert Nardelli is that he came from General Electric and puts a lot of stock in Human Resources. Shortly after arriving at Home Depot he hired Dennis Donovan to lead the HR effort and made him the second highest paid person in the company - that definitely made a statement about how highly Home Depot ranks HR and personnel development. Is your HR Manager the second highest paid person in your organization? What do you think the impact of hiring an HR Manager of that caliber would be? There is nothing as important for your success as the talent you surround yourself with.

Don't treat HR like an administrative function.

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Equipment Expenses & The Contractor

February 07, 2005

Today I got into a discussion regarding the various methods of accounting for equipment expenses for contracting businesses.  These are all the costs associated with an equipment fleet including registration, license fees, insurance, depreciation, maintenance, modifications and repairs.  Depending on the type of contractor these costs range from insignificant up to 30% or more of their annual costs. 

Some contractors simply choose to look at these costs as overhead.  Depending on the type of business this is usually an inaccurate allocation of the costs since they are really indirect job costs - costs that are incurred as part of constructing a project but not directly attributable to a specific project.  Assuming that the business is looking at these costs as indirect costs there are a couple of ways to allocate them. 

The simplest method is to simply allocate the costs to individual projects as a factor of labor, total revenue or using some other methodology.  There are strong arguments for this method including the fact that it takes very little time to manage throughout the year and strictly from a reporting and accounting standpoint when looking at the project portfolio for the year this method seems to be within a reasonable range of the more challenging but also most accurate method of utilizing internal billing rates for equipment as described below. 

Utilizing internal billing rates on either an hourly, weekly or monthly basis for equipment is the most accurate method of allocating indirect equipment costs to individual jobs.  The goal is to set equipment billing rates that over the course of the year will offset the total cost of the equipment fleet based on utilization on your projects.  This method requires additional paperwork, accounting data entry, management and possibly an upgrade of the accounting system to one with an equipment module.  As stated previously this is the most accurate method of recovering equipment costs but if it requires all the additional work and systems and doesn't produce substantially different accounting results then the simpler allocation methods then why go to the extra trouble? 

If you are a contractor where equipment utilized varies significantly based on the particular job and equipment makes up at least 20% of your job costs then the proper utilization of that equipment can make a huge difference in your job costs and therefore your profitability.  Running a business successfully is all about the proper utilization of resources; cash, people, material and equipment. 

I believe that people will make the right decisions if given the right information.  If you show someone how to save 10% on their job costs by changing their mix of people and equipment then they will make the right decisions every day.  If equipment costs are charged to overhead or allocated then there is no direct connection in their minds between taking an extra truck to the jobsite and additional costs.  This creates a culture of hording and feeling like the job is constantly being over-charged for the use of the equipment.  This drives poor utilization of equipment resources and that costs money every day. 

On the other hand if equipment is charged directly to the job at a rate then when estimators bid the job they have an exact number to work with and when people including project managers, superintendents and foreman take a piece of equipment to the job they know exactly what the cost will be.  When they are trained to track productivity and plan efficiently they will decide to take one truck with three people in it rather than two trucks.  Even if there are two trucks available in the yard it is still more efficient to leave one in the yard - less fuel, less risk, less wear & tear.  They will choose to work overtime to get a job done to avoid a second day of equipment utilization costs - thus making the equipment and the crew available to be utilized elsewhere. 

Again, depending on the specifics of the business but in general these little decisions made every day by every employee add up to a lot of money at the end of the year and will far outweigh the costs of implementing an equipment tracking system.  For more information regarding whether this could benefit your company look into a Rapid Construction Company Analysis (RCCA) which is potentially a free assessment. 
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