By Katie Robinette, CFO and Cofounder, Evermore Accounting & Coaching

An excavating contractor told me last spring that his mini excavator cost him $45 an hour to run. I asked how he got there. He said it was the payment divided by the hours he figured he ran it.

That is the fuel and the payment. That is not the cost.

By the time we finished working through it, the real number was closer to $78. He had been bidding jobs for two years against a cost that was missing a third of itself.

This is one of the more expensive blind spots in the equipment for heavy trades, and it is entirely fixable with an afternoon and a calculator.

The two halves of the number

Equipment costs split into ownership costs, which you pay whether the machine moves or not, and operating costs, which you only pay when it runs.

You need both, and most owners only track the second one.

Ownership costs, annual:

• Depreciation, or the real loss of value over the year. If you paid $65,000 for a machine, you expect to keep six years and sell for $25,000; that is roughly $6,667 a year.
• Interest in financing, which is the interest portion only, not the whole payment.
• Insurance on the machine.
• Registration, permits, and any property tax that applies.
• Storage, if you rent yard space.

Operating costs, annual:

• Fuel and DEF
• Oil, filters, and scheduled service
• Wear parts, teeth, cutting edges, hoses
• Tires or undercarriage, which on a tracked machine is a large number of people forget until it hits
• Repairs, both planned and the ones that ruin a Tuesday
• Transport between sites, if you are not counting that elsewhere

The number that changes everything

Add both halves together, then divide by the hours you actually run the machine in a year.

That last part is where most estimates fall apart. Owners use the hours they wish they ran. The meter tells you the truth.

Here is what that looks like on a real machine:

Ownership comes to $6,667 depreciation, $2,400 interest, $1,300 insurance, and $200 registration. That is $10,567 before the machine turns over once.

Operating comes to $5,200 fuel, $1,400 service and filters, $2,600 undercarriage set aside, and $3,200 repairs. That is $12,400.

Total is $22,967 for the year.

At 800 hours, your cost is $28.71 an hour. At 500 hours, the same machine costs $45.93 an hour. At 300 hours, it is $76.56.

The machine did not change. Your utilization did.

Why low utilization is the silent killer

Notice what happened in that example. The ownership of half of your cost is fixed. It does not matter whether the machine sits. So, every hour you do not run spreads the same $10,567 across fewer hours and drives your cost per hour up.

This is why the contractor with three machines running 300 hours each is almost always losing to the contractor with one machine running 900. Same total work. Very different cost structures.

It is also why buying the second excavator "because we needed it that one week in July" can quietly damage a business that was doing fine. The payment shows up twelve times a year. The utilization shows up once.

Before you buy, run the number both ways. What does your existing machine cost per hour today, and what will it cost after you split the work across two? If the answer moves, your cost per hour up more than the rental you were avoiding, rent.

Now put it in your bids

Once you have a real cost per hour, your bidding changes.

You stop guessing at machine time and start charging for it. You add your target margin on top of a cost you can defend. And when a job comes in that wants your machine on site for four days to do six hours of actual work, you can see immediately what standby is costing you and price accordingly.

I have watched contractors raise their machine rate by $20 an hour after doing this exercise, win the same amount of work, and add real profit to the year. Not because they got greedy. Because they had been quietly donating the difference.

Set the reserve while you are at it

The undercarriage line in that example was $2,600, and that is money you are not spending this month. Put it somewhere.

Tracks, final drives, hydraulic pumps, and engines do not fail on a schedule that respects your cash position. If you are running equipment and you do not have a reserve fund, the first major failure becomes a financing event, and financing a repair is one of the more expensive ways to stay in business.

Set aside the wear and repair portion of your hourly cost every month into a separate account. When the hydraulic line goes, it is an annoyance instead of a crisis.

Where to start

Pull the hour meter reading on every machine you own, today, and write it down with the date. Do it again in ninety days. That gives you a real utilization rate instead of a guess.

Then gather twelve months of fuel, repair, insurance, and financing detail for each machine. If your books are set up with equipment as its own tracking category, this takes twenty minutes. If they are not, it takes longer, and that is worth fixing.

Knowing your true cost per hour is the difference between bidding with information and bidding with hope. We build this into the books for the excavating and heavy equipment clients we work with, because on an asset heavy business, it is the number that decides whether the year works.