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Govi Kannan's four steps to managing cost data

WORLD PLANT

Collect data on ownership and operating costs separately.

If your account ing system on ly considers the aggregate cost for a piece of equipment, it would be very difficult to spot cost overruns. For example, the resale value could have dropped due to changing market conditions or because the shop costs are increasing. The former is due to external conditions while the latter is due to internal operations. Collecting data separately makes it easier to isolate and analyse the problem.

Define an internal recovery rate. An internal recovery cost is the cost per hour that, when charged out to the user of the equipment, will recover both the ownership and operating costs of the machine throughout its life. The ownership part of the recovery rate should recover the ownership costs of the machine while the operating part of the recovery rate should recover the operating cost of the machine. Combining the two rates and not being aware of the different proportions makes it difficult to define these rates, pinpoint problems and make the right decisions.

Understand the components of ownership costs. Some parts of the ownership costs such as insurance, are simple to understand and manage. Others, such as capital costs, finance costs, tax implications and return on investments are more complicated and require both understanding and judgment. Regardless of the components, the ownership costs are a function of utilisation of the machine (number of hours per year and number of years). The internal recovery rate is set based on expected utilisat ion. If utilisation is higher than est imated, then an excess is recovered from the operations. Similarly, if the machine is under-utilised then the recovery is not sufficient.

Understand the components of operating costs. Almost all components of operating costs are a function of service meter unit. Some, such as fuel consumption, tyre wear and preventive maintenance are easy to predict. But repair cost, which is associated with component life, parts and labour, is a very complex subject. Repair costs, especially, are a function of age, application, and job environment.