How to Compute Heavy Equipment Rates

Heavy equipment rentals include bulldozers, backhoes, large diesel-powered dump trucks, front-end loaders and other large construction and commercial equipment. When operating a heavy equipment rental business, rates are determined based on the profit the owner desires over a two- to four-year period. To determine what rates will provide that profit, expenses in maintaining the equipment must be considered, while also taking into account the depreciation of the equipment over time. The amount of value the equipment depreciates over time must be calculated into the rate planning as an expense (also called a "liability").

Things You Will Need

• Maintenance record log book (one for each machine)

• Hours of Operation log book (one for each machine)

• Last 3 years of property tax valuation per machine (obtained from owner's local property tax office)

Visit the local county government tax office in which each piece of heavy equipment is registered and inquire about obtaining or purchasing a listing showing three years of depreciation on the same make and model you will be renting. Since literally thousands of different county governments are all around the United States (and provincial governments in Canada), depreciation rates will be highly dependent upon how the local government determines valuation on such machinery.

Visit several heavy equipment auctions where equipment similar to your own is being sold after three to five years of use and record the final sale prices. Between Step 1 and this step, you have two value numbers for each type of machine: a government-based depreciation schedule and an auction sale price after three to five years of use. For the remainder of this article, a five-year maximum rental life will be assumed for example purposes.

Add together the government-based depreciation and the final auction price after five years for each machine and then divide the sum of those two numbers by two. Assume the machine sold for $100,000 new off of the sales floor. If the government depreciation after five years showed loss in value of $40,000 after five years and the machine is selling at auctions for an average of $70,000 after five years, then we have two numbers: $60,000 value after five years according to the government and $70,000 value after five years according to the going auction rates. Adding those two together comes to a sum of $130,000 and then divided by two gives a final average value of $65,000 after five years of use. Subtracted from $100,000, the machine depreciates $35,000 over five years on average.

Calculate rates by the hour of use, so that the machine pays for itself over five years, and also pays for the depreciation average using the previous figures. In Step 3, the total new cost of the machine was $100,000 and the total average depreciation over five years came to $35,000. Set the beginning hourly rate so after five years, the machine will generate $135,000. In this way, the liability of depreciation is turned into income. When the machine is sold at the end of five years, the final sale price will also be income, because the depreciation liability will have been negated.

Determine total cost of employees and business operations expenses and then include this final figure into the costs of doing business. These expenses shouldn't be planned as "pass on to customer" expenses if using the depreciation-negation strategy outlined in this guide, as doing so would prevent your rental prices from being competitive. Instead, use the receipts for purchases and maintenance as tax deductions at the end of each year to lower the amount of taxes which must be paid.

Set a preliminary rental price based on having the machine pay for it's new price over five years plus the depreciation loss. In this example, $135,000 is the amount desired over five years, and then add a 60 percent additional income on top of this to have a cash flow to purchase parts for repair and to pay employee wages. In this example, it is an additional $81,000. Over five years, the total which should be collected at this point is $216,000 which is $116,000 more than what the machine cost new from the dealer at the time of purchase. This percentage must be changed based on how many employees and what the agreed salary per year is.

Establish personal cost-of-living wages over a five-year period for yourself and your family and add to the five-year figure of $216,000. This is where the rental prices must be balanced to be competitive with what other heavy equipment rental firms are renting their units for. In a way, this will dictate what you will have to live on in this type of business. A fair percentage for cost-of-living, however, should be roughly 20 percent per year of the total five-year figure made previously. So, 20 percent of $216,000 is $43,200 of income per year. Over five years, this adds an additional $216,000 for a grand total of $432,000 over five years.

Set the hourly rental rate to bring in the final amount over five years. A good estimate is to keep the machine rented out 200 hours per week, or 800 hours per month, which permits weekends to be excluded. Over five years, this will be about 48,000 hours. If the machine is rented for $10.00 per hour at this number of rented hours, if successful, it will generate $480,000 over the five-year period. Adjust to $20.00 per hour if the machine only proves to rent out for half the hours desired.

Tip

The estimates here are very conservative and somewhat rigid. A heavy equipment rental business may have a larger number of employees or a smaller number of employees. Further, maintenance costs will vary in different areas and these differences will need to be accounted for in a way that the business still generates the desired level of income. In the real world, to pay all expenses while still making the desired profit may require an hourly rental fee of between $50.00 and $100.00 per hour in some cases. It would serve your business interest to set your prices close (while competitive) to what others are renting similar machines for in the given area.

This article and the final hourly rental cost breakdown assumes a conservative business owner who earns a living by renting out more than one machine at a time rather than just one. However, this example breakdown should scale to your desires, regardless of how many machines in the fleet.

Know your costs of doing business and figure all things great and small into your final chosen hourly rates. Add in the expenses of machine insurance, office supplies and computers, fuel expenses, workman's compensation insurance for employee(s), taxes according to state and federal tax codes for your desired income, etc. Every business is unique and all things must be taken into account. Consider hiring a certified accountant to help with making your business profitable.

Annual profit is, at its most basic, the operator's desired profit added on top of the total costs, liabilities and taxes.