Capital Equipment Budgeting for Contractors
Contractors know the challenges of budgeting for capital equipment all too well.
The typical budget for contractors is established for the following year, or sometimes the next two or three years. The common theme is change. Contractors must be flexible, keeping in mind their budget might have to be adjusted due to new contracts, equipment breakdowns and even weather.
Christman Cable in Denton, Texas is a perfect example. As a contractor, the company replaces and installs new underground cable, installs utility poles, and helps rebuild electric lines after severe weather events.
“The three most important aspects of our budget include manpower, contracts and equipment. Contracts have the biggest impact by far. Do we have any new contracts that we need to buy equipment for? Is a contract ending? Do we have a contract in another part of Texas or New Mexico that will require travel? These are the key questions we ask ourselves as we try to budget for all possible scenarios,” said Tommy Christman, Vice President, Christman Cable.
Responding to Change
Companies like Sherman + Reilly understand the challenges utility contractors face and strive to provide solutions that can help with changing needs.
“We work with small to expansive companies and their approach to budgeting is always different. Smaller contractors often budget based on projects. When opportunities or situations change, so does the budget. If they receive a contract to build a new substation, the entire budget can be rewritten, since capital equipment needs to be acquired quickly. For our smaller customers, we expect orders will change with potential urgency,” said Donnie Bright, Business Development Manager, Sherman + Reilly, a Textron company.
Budgets can change for the opposite reason, as well: contracts can be lost, scheduled work pushed back, and the money to buy new equipment might just not be there.
Take Away: Remain flexible in establishing a capital budget. Understand your uncontrollable factors and consider how a lucrative opportunity or a lost contract will effect planned purchases. Develop strong relationships with capital equipment suppliers, so, when plans change, availability of equipment and delivery times are just a call away.
Strategic Planning
While smaller companies do not have the luxury of reliable, long term planning, they do plan for the future and respond to changing industry trends using different methods from large companies.
Christman said, “When my Dad and I started the company 10 years ago, we had three or four employees. Now, we have 32. In five to ten years, we hope to have more than 60.” To reach that goal, Christman Cable is working hard to get more contracts and expand its area of expertise.
“When we started, Dad and I pulled underground cable with capstans mounted on the back of pickups,” said Christman. Today, the company owns a number of Sherman + Reilly products including the new Duct Dawg underground cable puller. “This piece of equipment has significantly improved our efficiency. Our pull-time has been cut by 75%, while also cutting my labor in half,” explains Christman.
Christman Cable adapts to changing work practices, which occur in all industries including electric distribution companies. “In West Texas, we replace a lot of old direct-buried conductor. We upgrade the system by installing piping first and then pulling the conductor through,” says Christman.
Take Away: Over time, work practices will change and new equipment will be needed to get the job done. Ensure the equipment will provide efficiency to increase profits and grow your business at the end of the day.
Replacement Schedules
Deciding when to replace older equipment can be challenging, as Bright explains, “Some customers have strategic plans and aspirations for steady growth and a fixed replacement schedule. Some organizations run equipment until it no longer operates.”
The life-cycle of capital equipment depends on several things; how well it is built, how many hours it has been operated, and the work conditions. At Christman Cable, most capital equipment is replaced on a three-year cycle. That includes the boom and bucket trucks used to set utility poles. “Actually, our overhead trucks wear out more quickly than our other equipment. A lot of our jobs are off-road, in the oil fields, and that is rough work. Now, if we only drove the trucks on streets and highways, they would last longer but that is not where the work is,” explains Christman.
Take Away: There is a difference between getting the most work and the most profit out of a piece of equipment. Operating a boom truck hard until it fails, may or may not be good for business. Plan accordingly.
Adopting New Technology
Even if a machine is operating well, it may be advantageous to sell it and get a newer model. It depends on what advantages the new model provides. The design might be better. It might be more reliable or have new, useful features. For example, Christman Cable has a new Duct Dawg X underground puller which can be operated remotely. This makes work safer and crew size can be reduced, so purchasing the upgraded cable puller was a good business decision. The challenge is knowing when the expense is worth it.
Training goes hand in hand with capital purchases. The latest and greatest machine will be of little use if the worker does not know how to operate it. The training is critical. Chappy, one of the Sherman + Reilly sales representatives, came out and spent a couple days teaching everyone how to use machine which comes with the equipment purchase,” says Christman.
Take Away: The question is, will the upgrade increase profits? If it is unclear, consider leasing the latest technology to find out. Always factor in training and find out what will be provided and when.
Maintenance
When it comes to scheduled replacements, maintenance is critical. “Our fleet manager takes care of everything, he handles a lot of the mechanical work, and performs all of the maintenance himself. This reduces our costs, but maintenance is a never ending project,” points out Christman.
Larger companies typically have dedicated maintenance departments with extensive maintenance and repair programs. While costly, a robust program can extend the life of a piece of equipment and reduce life-cycle costs.
Take Away: Keeping capital equipment in good working order is vital. Some capital equipment vendors will help maintain equipment, either by performing the work or by providing reliable technical assistance. Know what the vendor provides and find out if parts are available.
The Unexpected
Always plan for the unanticipated failures. “After contract changes, I would say the biggest reason we modify our budget is equipment failures. We might have a boom truck or a boring machine go down and we have to replace it and that wasn't in the budget,” says Christman.
For a large corporation, the loss of a single machine is a minor setback. For a small company, it can stop a job.
Bad weather can also effect capital budgeting. Christman says, “We have a set amount work that really needs to be accomplished, so we can invoice for it. It hurts our finances and capital budget when a bad storm, tornado, or hurricane hits and we have to pull crews off of their scheduled work and send them out to do storm repairs. We don’t get paid as much as we would for normal work, so it plays a big part in budgeting.”
When the unexpected happens, a contractor may need to buy new equipment immediately or defer a scheduled purchase. “A number of factors determine the inventory levels we have on hand at Sherman + Reilly, but we always aim to have product available. We know things change quickly in this industry and we want to be a reliable partner for our contractors so they can always come to us first,” says Bright.
Take Away: Contingency planning should always go hand in hand with capital budgeting.
