Working out plant rates

By Joe Edwards
Construction Manager
McConnell Dowell

The recent volatility of the foreign currency exchange rates with the New Zealand dollar has impacted on the cost of imported goods as well as the cost of living. Couple these with the increased cost of diesel, and contractors need to be very careful with the rates that jobs are priced at – especially plant rates.

The expectation that contractors can provide fixed prices for an earthworks season is becoming less realistic, particularly when we look at how diesel prices have moved.

As a quick exercise I have looked at the cost of diesel for a three year period, between June 2005 and June 2008, and compared this to the increases of various Statistics Department indices. This showed up some very interesting variances.

The first variance to show up was the difference in the increase of actual diesel costs over the three years, at 119.62 percent, versus the Farm Fuel Index, which  only had a 71.19 percent increase.

In reviewing this a little further it was found that the Department of Statistics Farm Fuel Index is based upon the farm delivery costs and this in turn is made up of 51 percent petrol and 49 percent diesel.

The Farm Fuel Index is used on a large number of NZ Transport Agency projects with cost fluctuations formulas. Interestingly when I looked at the price of 91 octane petrol over the same three year period, costs only increased 60.09 percent, which explains the value for the Farm Fuel Index.

This clearly showed that the cost of diesel is not covered by cost fluctuation formulae using the Farm Fuel Index, and projects with large volumes of diesel consumption will not fully recover their costs.

The cost of construction labour through the three year review has also increased significantly and this is reflected in the Construction Labour Index. This shows that there has been a 10.8 percent increase in costs and this is unlikely to be representative of actual labour cost increases.

Using the above information to review the cost increases for rates on construction plant, I have looked at two fairly commonly used excavators – a seven tonne and a 20 tonne machine. I have also assumed that the cost increase of the ownership of plant has increased over our three year review by 10 percent, allowing for increases in bank interest rates as well as costs of parts and repair and maintenance costs.

I have assumed the rate make up of a 20 tonne excavator is:

• 60 percent for the plant ownership costs including repairs and maintenance;
• 35 percent labour costs;
• 15 percent fuel costs.

The increases allowed were:

• 10 percent on ownership costs;
• 10.81 percent for labour;
• 119.62 percent for diesel.

This would show an overall increase on the cost of the 20 tonne excavator over the three years to be 26.73 percent.

The same exercise was undertaken on a seven tonne excavator. For this we have assumed the following plant cost make up:

• 44 percent plant ownership costs;
• 44 percent labour costs;
• 12 percent fuel costs.

Again using the same increases as for the 20 tonne excavator the over the three year reviewed period, the increase in costs would be 23.51 percent.

I also looked at other Department of Statistics indices and noted that the overall Construction Index had increased 24.98 percent over the three year review period. This obviously needed to take into account a lot of areas over and above the cost of plant, labour and fuel. Some other cost increases allowed for in this index are:

• Quarry products;
• Bitumen surfacing;
• Transportation of products;
• PVC pipes;
• Concrete Pipes.

This would mean that the index would be driven by a lot of other factors and is not a reasonable reflection of plant costs.

The other statistic to be reviewed was the Road Transport Index. This showed a 28.1 percent increase. Although this may reflect to some extent the cost increase of a machine in the 20 tonne excavator range, it did not reflect the increased costs on a smaller machine, due to the make up of the rate, (i.e. percentages of ownership, labour and fuel). Nor would it be a reasonable way to review costs on other items of off road plant.

The outcome of this review of cost increases impacting on construction plant is that rates need to be reviewed each time that work is being priced, and that account must be taken for costs that can not be fixed for the duration of the job – such as diesel. In addition a lot of care needs to taken when tendering long duration jobs and the contract provisions for cost increases.

It is also important to be aware that as costs for diesel has decreased over recent times, the repairs and maintenance costs, finance costs and ownership costs on plant are increasing with the cost of imported goods and a tighter finance market. In addition, third party companies are charging more for services. These factors have an impact on plant rates. Their actual impact on plant rates cannot be evaluated unless plant rates are determined again from first principals.

The same reasoning is true when costs are falling, as you should always be aware what items of work cost so that a competitive margin can be added without either losing the job, by having rates that are too high, or losing money.

The pricing of work from first principals does not only apply to plant rates. It should be undertaken for all sections of work such as pipe laying, manholes, cesspits, etc. where a unit rate is made up of a host of sub rates. A cesspit for instance, has excavation, precast, cast iron grates, quarry product back fill, pipe connections, insitu concrete work and surface works and this does not take into account road transport costs to site.