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Construction Equipment Economics

Disclosure: The following content was written and sponsored by Tenna.

Construction businesses require reliable information to improve investment strategies and mitigate risk. 

It goes without saying that the goal of all construction businesses is to grow the company by winning new projects – and ideally, profitable projects. As a result, many contractors focus their efforts heavily on estimating bids and filling the backlog, managing labor productivity, and implementing project management processes to improve field operations. These are all necessary and worthwhile efforts, but one key factor that can really move the needle is missing: managing their equipment.

While there are common strategies and best practices for bidding work and managing project labor and productivity, many contractors neglect to create conditions that allow them to develop an informed plan and take the most strategic approach to owning and operating their equipment fleet. Now that we’ve seen more comprehensive fleet information made available with modern equipment management systems, we’ve found that the tie between owning and operating the individual fleet assets, while thinking of the fleet as a whole as a true “asset class”, is much more strategic than most contractors have been approaching it.

One concern is that, in many cases, the contractors that are using systems to better control their equipment are not effectively using the data that their system provides to make meaningful changes in their operations and in effect do not achieve any significant impact on profitability. Another concern is that these contractors are using wrong-fit systems that don’t supply the right information to allow them to do so, as generic data can be meaningless if it isn’t translated into relevant, useful information.

This article goes into depth on construction equipment economics and how managing a construction equipment fleet with good information from a reliable system can change the financial landscape of a construction business.

 

Why “pretty good data” isn’t good enough.

At this point, many contractors have some sort of system in place to gather basic information on their equipment operations. However, it takes more than just slapping trackers on their assets and viewing dots on a map to make a real impact. It’s certainly a step in the right direction, but there is so much more to the equipment fleet than just location.

Being that contractors feel that they are on the right track because they have that system in place and feel invested in that system since they’ve already gone through the time, labor, costs, and other efforts to implement, they typically assert that they’re getting “pretty good data” when discussing the way their system is performing. Let’s discuss the effects of this.

The big-picture situation is that contractors regularly deploy large capital investments to their project sites, which translates to a big chunk of change coming out of their pockets that gets directed towards acquiring, operating, and maintaining equipment. While equipment is handled in the field, acquisition and disposition decisions are an executive-level area of focus. Without comprehensive information to influence these decisions based on how the fleet is being used in the field, the higher-level management of the fleet as an asset class becomes problematic.

The approach most contractors take with their equipment tracking and management systems is to focus on solving their immediate pain points – the field-level focus – but they don’t take it a step further to let those impacts permeate deeper within the business. 

To be clear, the system should definitely be solving those pain points and symptoms at the minimum to decrease the friction in routine field-level operations, but if contractors stop there and don’t harness the rest of their equipment management data and the upstream effects of that information, they’re not treating the bigger-picture situation and problems. Without allowing the information to reach the upper levels, contractors are not leveraging the true power of the system to truly affect valuable change in the business.

“Pretty good” data is simply not good enough really satisfy this problem. Without great, reliable information, contractors can’t truly know their costs with a high degree of certainty to influence new strategies or even simply avoid over or under-allocation of costs. Without this, contractors won’t know enough to make strategic investments or narrow down the ways they deploy their fleet assets.

Equipment is a huge investment, and contractors routinely invest so much of their capital into their fleet assets. Without really good data, these contractors make decisions to dump and tangle their capital into their fleet based on incomplete, inaccurate, or manipulated information. With the right information, they may find that they have opportunities to cut back or readjust and reinvest elsewhere.

Contractors will always require tangible assets to execute their projects, and the construction industry has the technologies and systems needed for contractors to make better decisions about how they invest money into their fleet. Having a construction-focused system in place that delivers really good information that they can leverage is a true business need to stay ahead, competitive, and profitable.  

 

The upstream and downstream financial effects of equipment management against the bottom line

Gathering equipment data starts in the field. Better equipment management translates to better labor productivity, which has positive impacts on schedule and performance and improves satisfaction in the eyes of the client. When rolled out across operations, this compounds in savings and rich data that go beyond the operational impacts and flow upstream to the higher levels of the business.

Related savings and opportunities roll up in aggregate and have influence in the board room. Compounded savings automatically impact the bottom line, and useful information can be leveraged to continue to refine strategy from the top back down to the field.

Now, the savings from efficiencies in the field undoubtedly have benefits at the project level, and this does have a compound effect, but if the savings aren’t coming from multiple places (i.e., being used effectively by the whole team), it won’t really move the needle in the grand scheme of things.

The truth is that the aggregate of this data impacts bigger things and allows for a more holistic view of overall business operations vs. just field operations. The equipment management system solves the symptoms of inefficiencies contractors suffer from in the field and highlights opportunities for behavior and process changes, but at a greater scale, it allows them to pivot strategies at the business level and make overarching repairs. Good information from these systems affords contractors with the knowledge, awareness, and potential to spot problems farther out in advance than they are currently being responded to and re-strategize for solutions that stick.

The senior leaders of a construction business can set themselves up to do the right things for their company with respect to their fleet assets if they have the right information to do so. Fleet data helps inform whether they are over-invested in some areas and under-invested in others. When contractors are over-invested in their fleet, they can easily free up capital to deploy elsewhere to the areas that have been under-invested in. That extra yellow iron represents a lot of cash that can be made available and better directed. 

A helpful way of framing the mindset around asset management is to approach the equipment fleets as a true asset class which should be assessed and rebalanced regularly like an individual would manage a retirement account or other investment portfolio. With good information that demonstrates the current value, usage, and overall need for each investment, contractors are able to effectively rebalance their fleet portfolio to find ways to capitalize while ensuring they’re not overinvested here while leaving other areas struggling.

The key opportunity in the equipment management space is having enough information so that the decisions are well-informed and guided. When contractors are bidding work, they know exactly what it costs to do that work based on past performance, allowing them to accurately price their equipment rates instead of over or underinflating their bids. Equipment management systems allow contractors to make decisions based on cost and productivity and utilization management for their equipment. These solutions exist today, and many in an automated fashion, so that contractors don’t have to sort through the data to expose these facts themselves, and risk muddling it in the process.

Without the visibility and information offered by equipment management systems, equipment inefficiencies lead to compounding costs and negative schedule impacts which can result in liquidated damages for delays and overall owner dissatisfaction which hinders your ability to win new work – all additional downstream cost blows to the bank account. Construction is too risky of an industry to allow these cost impacts to compound.

 

How Equipment management helps manage risk.

Construction is a risk-intensive business, ranging in risk level across multiple fronts from operational safety to contract liability to competitive margins. Most construction projects (especially heavy civil) are complicated and get more so as the contract value gets higher with so many more moving parts, issues and challenges. Fleet challenges, specifically, are a major obstacle to maneuver.

As established earlier, it’s an extremely high risk to make decisions with inaccurate or incomplete information. Mismanaging risk can hit a contractor with major financial losses on contracts at best and tangle them in expensive and time-consuming lawsuits and/or put a construction firm entirely out of business at worst. The frequency at which we see this news speaks to how complicated the construction industry has become and how complex construction projects can be from a management and execution standpoint.

A result of this when it comes to risk management is that contractors have a big need to access accurate and trustworthy information. They need the right systems in place to get them information directly, without having it trickle through multiple different systems and hands to get to it.

The ability to see a precise level of transparency over operations creates a level of comfort and confidence at the executive level and those working for them because they have the certainty that they are making decisions based on good information and true facts. Of course, it’s still possible to make the wrong decisions even with good data, but if contractors can take out the main drivers of bad decisions – inaccurate and incomplete data – and spend the time to understand the information they’ve generated, they can set up the conditions for themselves to lead to the right decisions.

When contractors can solve the underlying problems, they benefit from second and third-order upstream effects. When it comes to the contractual impacts involved in construction work, having knowledge and awareness to be proactive not only saves costs but opens opportunities to adjust strategy to abate risk and to improve overall revenue.

 

Takeaways for Leveraging Equipment Data

In summary, having an equipment management system that delivers reliable information can help contractors build, run and maintain a more effective construction business.

In a narrow-market and competitive industry where, outside of highly specialized work, margins and profits aren’t typically very high, contractors who are running systems that they think “does most of what I want it to do” or they “feel pretty good about,” in reality are hurting their bottom line. If contractors are not totally confident in their system, they should stop spending money on it because the risks and costs associated with the bad information are too high to ignore.

Better equipment management, made possible by good data, not only opens up avenues for bigger growth opportunities, but it also supports the key areas contractors already focus their efforts on such as estimating and project management, allowing them to excel in multiple vital capacities.

Contractors need to invest in a reliable system that they’ll find will not only quickly pay for itself in savings generated through operational efficiencies but will also help them become more strategic and make smart decisions around their capital investments and allocations to set the stage for meaningful growth and big results.

About the Author

Austin Conti

Austin Conti, Tenna CEO and Co-Founder leverages his international experience in construction operations for heavy civil, building, and energy projects with The Conti Group, a global contractor in the construction business for over 100 years. Austin’s passion for entrepreneurship has led him to create a construction technology platform built on over a century’s experience from The Conti Group.

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