Construction projects are picking up steam as pandemic-related economic uncertainty begins to recede. This change could provide opportunities for construction companies to apply often-overlooked pricing strategies for contractor-owned equipment and contract administration.
Below, discover three key contractor equipment pricing and management strategies that can help your construction company yield significant savings, mitigate audit exposure, and prevent unprofitable operations.
1. Establish Set Rates and Equipment Pricing Caps in the Contract
Contractors should establish equipment rates, allowable equipment charges, and charge caps at the beginning of a project. This can help protect project owners from unexpected overruns and contractors from potential audit risks and profit-margin issues.
If contractor equipment and tool costs aren’t controlled by the contract from the outset of a project, rates can be open to construction audits.
Contractor equipment and tool pricing is generally based on prevailing competitive rates for renting similar equipment in the project vicinity, or it’s based on third-party retail rental rates and specifications books.
Defining in the contract whether rates are charged hourly, daily, weekly or monthly, and including owner- or developer-approval requirements, can help facilitate productive conversations among project management and support a successful project.
Establishing a strong cost-of-work definition surrounding contractor equipment has many benefits when coupled with a guaranteed maximum price (GMP) contract and right-to-audit clause.
- GMP contract. A GMP contract allows owners and contractors to define adequate allowable and unallowable equipment cost for a project, which helps both parties manage and control cost.
- Cost-of-work definitions. Cost-of-work definitions need to be clearly established to enable efficient and effective validation of compliant project charges.
- Right-to-audit clause. This clause shields contractors from potentially being exposed during a contract audit, especially if minimum reporting standards are written into the contract. This is because the clause clarifies all required, necessary documentation at the beginning of the project.
2. Review Equipment and Tool-Yard Profitability
When it comes to meeting project needs, construction companies should carefully consider the benefits and challenges of managing and maintaining their equipment and tool yards versus utilizing third-party equipment and tool vendors.
Contractor-owned equipment and tool yards can help decrease overall project costs for project owners, while increasing project profitability for contractors—a win-win situation. However, challenges for contractors with owned equipment may include inadequate tracking, monitoring, and reporting abilities and associated controls, which may result in an inefficient use of resources, audit risk, or reduced profitability.
To understand the revenue and expenses associated with owning and managing an equipment and tool yard, total cost considerations should be compared against historical and forecasted revenue and include common expenses.
- Staff and oversight
- Land acquisition or land rent
- Software management charges
- Fencing and security
- Transportation, freight, and delivery
If equipment and tool-revenue streams don’t exceed a company’s cost considerations, third-party rentals may be a beneficial option—especially if there aren’t additional revenue enhancements or cost-reduction initiatives and implementations.
3. Implement Reporting for Scheduling, Tracking, and Utilization
Construction companies can better manage and monitor projects by implementing a technology-based scheduling, tracking, and utilization reporting solution. These systems provide real-time visibility into maintenance, revenue, and expenses for current projects and forecasted project demands, which can drive profit.
For example, radio-frequency identification electromagnetic scanners automatically identify and track equipment and tool usage to improve management efficiencies. Idle equipment and tools generally have either reduced standby rates or aren’t a compliant project charge.
Proactively and regularly monitoring equipment and tool usage status and aligning needs with availability can help companies enhance equipment and tool usage and improve profitability by strategically planning equipment and tool acquisitions or disposals.
We're Here to Help
As market conditions continue to fluctuate, it’s an important time to apply pricing, profitability, and risk-prevention strategies. To learn more about how to leverage these strategies or for additional information about a construction cost audit and how it can benefit your project, visit our construction audits web page or contact your Moss Adams professional.