Equipment rental rates formula

To calculate equipment rental rates, use a short-term equipment rate calculator or other accounting software, such as that available from the Ontario Ministry of Agriculture, Food and Rural Affairs or the Goldenseal Reference Manual. Enter the information into the data fields required in order to determine the rental rate.

equipment rental rates formula

Spreadsheet or accounting software can be used to enter the information into a present value formula. A rental contract specifies the payment terms and a monthly payment is calculated by determining the present value of the equipment. The rental rate can be calculated at various rates depending on the circumstances of the rental, such as by the hour, day, week or monthly, according to the Goldenseal Reference Manual.

Determine what the equipment is worth when it is purchased new. Then, determine the rate of interest in order to calculate a monthly rate. Divide the monthly rate by four to get a weekly rate or by 30 to get a daily rate. Equipment lease rate calculators are available online as well as excel spreadsheets that can be downloaded to easily calculate the rental costs.

For businesses that rent out equipment, accounting software can be purchased to easily track and enter details in the data fields provided, as explained by the Goldenseal Reference Manual. The software allows you to enter a name, description, the type of rate period as well as a flat amount. Equipment billing software is also available for individuals who want to charge for use of their equipment.

What Is the Importance of Financial Accounting?The more equipment you use, the more accurate equipment cost recovery techniques must be for bidding and reporting purposes. Regardless what type of construction work you do, you will have some sort of equipment you need to charge to the job as part of the bid process or the actual accounting for the project. How much of your typical job costs are equipment related will determine how much time and effort you put into managing and calculating costs used for bidding and accounting.

In previous columns, we have discussed using a "rental" method to allocate equipment costs for bidding and accounting purposes. All office and administration expenses have to come out of that, along with interest expense. Believe me, it doesn't take much of a decrease in rental revenues to turn a profit into a loss. With the big fixed costs a rental company has on each rental unit, it is quite understandable. In the box below is an example of how the formula cited above can be applied.

Keep in mind, however, that a rental company would sell the unit off before they reached this position. Also note that the depreciation rate they use is factored into the gross profit number, and interest cost must be added to the cost figure, as well. The figure also takes into account a full year of use, whether the unit is on a job or sitting in the yard over the winter.

In other words, the cost of holding the unit is figured into this equation. In reality, the cost of the equipment will be determined by the annual utilization, interest, maintenance costs and who performs it, trucking and pure daily operating costs. The useful life is also a major factor in this process. The longer you can keep the equipment operating efficiently, the lower your annual cost will be.

Once you figure the annual equipment cost, you either charge out the entire cost based on an hourly or daily rate; adjust the rates to compensate for winter or expected down time; or charge the unallocated cost to overhead.

At some point of utilization, it does not pay to own the equipment. If you can, it will be more efficient to rent the equipment on a job by job basis. You may have to keep a minimum inventory of equipment on hand, but most should be rented if you find yourself in this position.

You can all crunch the numbers to see how your equipment costs are running and how your recovery technique is working. Take the largest piece of equipment you own and schedule out the fixed costs: monthly debt service, storage and insurance.

Then estimate the hours or days in use and attach operating costs such as fuel, maintenance and delivery. Add it all up and divide by number of working days in a year to come out to a daily rate. If the unit sits in the winter, you can adjust the number to a lower figure. The result you come up with is what you have to recover to break even on your unit from a cash perspective.

Notice I substituted the full note payment for depreciation and interest amounts. You can run it both ways if you want. There is no magic formula here. The logic expressed is to compare your equipment costs to how a rental company may do it, then adjust from there — as long as you have the proper information to do so.The rates in this guide are intended as guidelines paralleling amounts an equipment owner should charge during rental or contractual periods to recover equipment-related costs on a single-shift 8-hour basis.

These rates are derived from cost formulas and data developed by EquipmentWatch and from analytic methods used in the construction industry. Generally, these methods consider purchase price, depreciation, maintenance and overhaul costs, indirect equipment costs, and average annual use hours. Specific market conditions, such as local supply and demand, are not considered in these calculations. These rates are not a tabulation of rates being charged nationally. They do not reflect rates charged by rental companies except by coincidence.

Recognizing that costs may vary considerably from state to state, a Regional Rate Adjustment Table is provided as Appendix I. We have another webinar this Friday with occupational safety and health attorney, Adele Abrams. Join us Friday, April 17 at p.

Register now for our upcoming webinar on Wednesday! Register now! Skip to content Menu. Need to prove it to a customer? Download the Guide. MCAA is currently accepting applications for its flagship executive education program, the Advanced Leadership Institute.

Designed specifically for mechanical contracting executives, the ALI is focused on developing the talents and business networks of leaders in the industry. The application process is competitive, so early submission is recommended. Contribute Now!

Calculating The Rate to Charge For Your Time and Equipment

Reply on Twitter Retweet on Twitter Like on Twitter Twitter Reply on Twitter Retweet on Twitter 1 Like on Twitter 3 Twitter Reply on Twitter Retweet on Twitter 6 Like on Twitter 10 Twitter For a monthly lease, you can use the items to generate revenue for your business without a huge upfront cost.

But even if you use average office equipment like copiers, you may find that renting is a better option. Some places will advertise a monthly cost, but far too many will invite you to get in touch if you want a quote. Look at the overall cost of the item in question to arrive at your intended rental term. To arrive at a monthly rate, your rental provider will likely take both current value and residual value into account. You still need to factor in interest. Although it can vary based on credit rating and type of lease, expect to pay between 0.

If the interest rate is 0. Stephanie Faris is a novelist and business writer whose work has appeared on numerous small business blogs, including Zappos, GoDaddy, 99Designs, and the Intuit Small Business Blog.

She worked for the State of Tennessee for 19 years, the latter six of which were spent as a supervisor. She has written about business for entrepreneurs and marketing firms since Share It.

About the Author.By tracking Time Utilization by machine and time period, you can make quicker, more accurate decisions on what equipment or parts to keep on hand. This KPI shows you increasing or decreasing utilization trends so you can make decisions about now and the future. The right analytics for equipment rental solution will alert you immediately when your fleet falls below a certain utilization percentage.

Sub-par utilization is an easy determinate for removing that machine from your fleet instead of holding on to equipment that is not making any money. The rental rate KPI measures the average change in rental rates from period to period.

How Do You Calculate Equipment Rental Rates?

It is one of the easiest metrics to capture, but also one of the most important. Rates can be broken down by daily, weekly, or monthly contracts. Calculating regular payments for your equipment signifies the minimum rental amount you can set to maintain revenue goals and benchmarks, while ensuring you still meet short-term needs.

Equipment rental companies that do not properly track rental rates may lose the chance to recoup the substantial money they have spent to rent or own their machines in the first place. It also helps your company stay competitive by easily comparing the cost of brands, operators, and divisions. The Washout Percentage is used as a final calculation upon disposal of an asset or to more accurately predict the future disposal of an existing asset.

This metric is the measurement of profitability over the life of a machine. There are variations of this metric, but the simplest way to look at it is cash in versus cash out.

The formula is total expenses purchase price, prep, carrying costs, maintenance versus total income rental income, sale price. For example, what is the sale price required to reach a desired return on a piece of equipment?

It's obviously not good business to carry machines that consistently need maintenance and often out of commission. Revenue is lost, but -- more importantly -- customer satisfaction is highly effected and the potential for that customer to go elsewhere is increased.

Physical Utilization differs from traditional Time Utilization because it measures the time a piece of equipment was committed to a customer and not available to other customers. That may or may not align with the time for which a customer was billed breakdowns, weather issues, and compensation for previous issues come in to play here. Non-rental ready includes pieces that are in transit, in need of maintenance, or entirely out of commission. This metric will tell you precisely when to acquire new equipment and when to sell off equipment.

No machine should ever be non-rental ready for more than two weeks. This KPI measures the general age of your fleet in relation to when its equipment units were put in service for the first time.

Knowledge of fleet age is most important when measuring degradation of equipment. This is important insight for regular maintenance of used or refurbished equipment, as well as determining value. The division of the fleet helps users more closely examine any changes in rates, utilizations, and fleet mix from one period to the next. Measuring the other fleet rental activity against the base fleet will signify any meaningful changes in revenue.

equipment rental rates formula

Additionally, by examining the base fleet only, users will be able to clearly determine the effect of rate changes and utilization on revenue from period to period. Over time, the base fleet revenue should stay relatively consistent, as it reflects continuing operations as opposed to any significant changes to the fleet.

Best KPIs for the equipment rental industry. Eric Wenham. This forecast shows the strength of the industry and the ability of those in equipment rental to quickly react to market changes to maintain growth and reinforce the value of renting to their customers. The most critical step in setting your company up for success to ride the wave of industry growth is to more precisely monitor and measure the metrics that matter most to your business.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".

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 Canadadepreciation 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. 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 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.

This percentage must be changed based on how many employees and what the agreed salary per year is. 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. Set the hourly rental rate to bring in the final amount over five years.

equipment rental rates formula

A good estimate is to keep the machine rented out hours per week, or hours per month, which permits weekends to be excluded.

Over five years, this will be about 48, hours. 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. 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.

Determining Equipment Costs Per Hour - How to Calculate

Know your costs of doing business and figure all things great and small into your final chosen hourly rates.Archives RSS. Price setting is arguably the most important decision a business can make—and also the most difficult. Yet despite a decision so critical and complex, many companies rely on historical price sheets, or so-called cost-plus practices, or heuristics, or simply gut feeling for what a customer will pay.

Equipment rental businesses with capital-intensive, long-lived assets face a particularly challenging pricing decision. They invest capital in revenue-generating assets and then are subject to market forces that drive rental rates above or below levels required to cover the cost of that capital. In addition, such businesses constantly face the asset management challenge of whether to invest in existing assets or dispose of those assets and reinvest the proceeds in new ones. This decision is complicated, and it varies based on disposition value and asset age.

How Do You Calculate Equipment Rental Rates?

To complicate matters further, business-to-business industries, especially technical products industries, have more-complex and less-transparent pricing structures, which makes it difficult to truly understand the market price for a given product or service. But all of that complexity can lead to greater rewards for rental companies that approach price setting analyticallythat set prices strategicallyand that implement a process for updating those prices dynamically.

Getting the pricing decision right leads to tremendous value creation; getting it wrong leads to painful value destruction. For example, one AlixPartners client in oil field services set equipment rental rates sufficient to earn required rates of return—but far below market—in a rapidly growing shale play. Customers snapped up the offers, and the client quickly sold out its fleet, with terms typically lasting at least one year. The upshot: even though our client locked up the market, it earned far below market returns for at least one year before being able to raise prices; and even then, the price escalations were hard-fought because customers had become anchored by the initially low prices.

On the flip side, the delaying of rate decreases in a declining market can lead to unused equipment whose costs are largely already sunk and rapid market share losses, which puts a company at a disadvantaged starting point when the market turns. An optimal pricing strategy would have sensed the requisite to charge rates in excess of required return on invested capital ROIC in a good market as well as the need to quickly reduce prices to below ROIC in a bad market.

Figure 1 illustrates a simple yet powerful framework for managing prices by showing how market prices evolve as the market seeks equilibrium and how a company can set prices in response.

There are several basic actions business-to-business equipment rental companies can take to improve pricing management and maximize impact to the bottom line. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong.

Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article.

AlixPartners is not a certified public accounting firm and is not authorized to practice law or provide legal services.


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