Your equipment rate sheet says $85 an hour for the excavator.
You set the rate three years ago. That $85 has to cover your operator and your fuel. Take those out and you're charging about $12 an hour for the machine itself.
The dealer down the road rents the same excavator bare (no operator, no fuel) for $135 an hour. You're putting your own iron on every bid for $12. Oof!
That's not a rate. That's a subsidy. You're paying your own customer to use your equipment.
If you run a $20M to $100M equipment-heavy contractor (heavy civil, earthwork, demolition, paving, excavation, site work), the equipment rate is one of the highest-leverage financial decisions in your business. Get it right and every hour a machine runs pays for what that machine actually costs you. Get it wrong and you're absorbing the cost difference silently across every job, every year.
We work with equipment-heavy contractors in this exact band. The equipment rate is one of the most consistently underpriced inputs we see, and one of the easiest to fix once the owner sees the math.
Let's walk it.
Most contractors at this size build their equipment rate to cover fuel and operator wages, with a token line for equipment cost. That covers maybe half of what the equipment actually costs to own and run.
A defensible equipment rate has to recover:
Fuel and the operator are the costs you feel every week, and most contractors build them into the rate without thinking. Maintenance, depreciation, insurance, and taxes show up on your P&L too, but as company-wide lines, so they rarely get spread back into what each machine charges. Idle time and cost of capital never show up on the P&L at all. You pay for them whether you see them or not, and almost nobody captures them in the internal rate.
If your internal rate covers the first two and forgets the rest, you're underpricing by 30 to 60% on most assets. That gap shows up nowhere on the job cost report. It shows up at year-end as net margin that didn't materialize.
The most common one. The internal rate sheet was built three years ago, when steel was cheaper, fuel was cheaper, and operator wages were lower. The rate hasn't been touched since. Most of those inputs have moved double digits since then. The rate hasn't moved at all.
Two free sources show how far the ground has moved. The Bureau of Labor Statistics tracks what new construction machinery costs, and the Energy Information Administration tracks diesel prices every week. If your internal rate predates the last two years and hasn't been reviewed, it's almost certainly underwater.
The annual rate review we lay out below catches the drift before it compounds.
Depreciation is the asset wearing out. Every hour you run an excavator burns measurable life out of the machine. A $500K excavator you'll sell for $150K after 12,000 hours loses $350K of value over its life. That's roughly $29 for every hour it runs, before maintenance or anything else.
Most internal rates either ignore depreciation or borrow the number from the financial statements. That's the wrong number. The depreciation your CPA books follows IRS rules and is built for your tax return, not your bid. With bonus depreciation, it can write a machine off far faster than it actually wears out.
Your rate needs its own number: what you paid, minus what you'll sell it for, spread over the hours you'll actually run it.
A piece of equipment isn't billable for every hour the asset is in service. It moves between jobs. It sits during weather days, slow periods, and scheduled maintenance.
For most fleet contractors, billable hours per asset run 1,200 to 1,600 hours per year on a base of 2,080 working hours. That's roughly 58 to 77% utilization. The rest is idle time, and your ownership costs keep running during it: insurance, taxes, cost of capital, and the value the machine loses just by getting older. Those costs have to be recovered across the hours you do bill.
If your internal rate assumes the machine bills every available hour, you're short. A machine that only bills 80% of those hours needs the ownership part of its rate to be 25% higher to cover the same annual cost. Fuel and the operator don't change, because you only pay for those when the machine runs. Most internal rates don't account for utilization at all.
This is the one almost nobody captures.
A $500K excavator is $500K of capital tied up in iron instead of working in your business. If you'd taken that $500K and deployed it as working capital, equity in the next deal, or even paid down debt, you'd have an economic return on it. Tying it up in equipment has an opportunity cost.
Put a number on it using the return you'd expect if that money were working somewhere else in the business. For a family-owned contractor, that's usually 8 to 12% a year. The money tied up shrinks as the machine loses value, so average it over the machine's life. On a $500K excavator you'll sell for $150K, the average is $325K. At 8 to 12%, that's roughly $26K to $39K a year the rate has to recover. Every year.
Most internal rates ignore cost of capital entirely. On a fleet contractor with $5M to $15M of equipment on the balance sheet, that's hundreds of thousands of dollars a year the iron should be earning and isn't. You won't see it on the P&L. You'll feel it as a fleet that eats cash and never seems to pay you back.
FOR $20M–$100M CONTRACTORS
Step-by-step on a single piece of equipment. Use these numbers as illustrative, not as a fill-in-the-blank template. Your actual costs vary by asset class, region, and operating profile.
Example asset: $500K excavator
Expected useful life: 12,000 hours
Expected annual billable hours: 1,500
Expected ownership period: 8 years; Expected resale value: $150K
Annual cost build:
|
Cost component |
Annual amount |
|---|---|
|
Depreciation (purchase price minus resale, divided by useful life, times billable hours) |
$43,750 |
|
Maintenance reserve (typically 8-12% of original cost) |
$50,000 |
|
Insurance (typically 1-2% of original cost) |
$7,500 |
|
Property tax and registration |
$4,000 |
|
Cost of capital (10% on the $325K average investment over 8 years) |
$32,500 |
|
Subtotal annual ownership cost |
$137,750 |
|
Fuel and consumables (1,500 hours at $25/hr) |
$37,500 |
|
Operator wages and burden (1,500 hours at $48/hr fully loaded) |
$72,000 |
|
Total annual cost |
$247,250 |
Effective hourly rate: $247,250 divided by 1,500 billable hours = about $165/hour
Dividing by billable hours, not running hours, is what makes the rate absorb idle time.
Compare that to the $85 rate from the top of this post. The $80 gap, times 1,500 billable hours, is $120,000 a year of unrecovered cost on a single excavator. Repeat that across a fleet of major assets priced the same way, and a $30M heavy civil contractor can be leaving well into seven figures on the table every year.
Now the sanity check. To compare against the dealer, strip out fuel and the operator, because the rental rate doesn't include them. Your ownership cost alone is $137,750 divided by 1,500 hours, or about $92 an hour.
The dealer rents the same machine bare for $135 an hour, and that rate already includes the dealer's depreciation, cost of capital, and profit. So at 1,500 hours a year, owning beats renting by about $43 an hour. But only if your bid actually charges the $92. Charge $12 for the machine and you've turned a good ownership decision into a subsidy.
The rule: compare bare to bare. If your internal rate minus fuel and operator is below the dealer's bare rental rate, check whether you're recovering what the machine costs you.
The AED Cost Recovery Guide provides detailed equipment cost recovery methodology if you want the academic version of this math. The CFMA Financial Benchmarker reports equipment cost ratios for heavy civil contractors, which is a useful cross-check on whether your annual equipment cost as a percentage of revenue is in the typical band.
The defensible internal rate enables the right own-vs-rent decision. Without it, the decision is intuition.
The decision framework is utilization plus lifecycle stage:
High utilization (1,400-plus billable hours per year), established job type for your company: Own. The capital is justified by the recovery and the operational reliability of having the asset on demand.
Moderate utilization (800 to 1,400 hours per year): Mixed. Own the core fleet, rent the marginal hours. Most contractors at $20M to $100M operate in this band on most asset classes.
Low utilization (under 800 hours per year), or new job type for your company: Rent. The cost of capital on an owned asset at low utilization doesn't recover. Renting transfers the utilization risk to the rental house, which is what they're in business to absorb.
Early in a job type: Rent for the first 12 to 24 months while you validate that the work is sustainable. Buying the asset before you've proven the work is a common way to end up with an owned asset on a job type that doesn't repeat.
The math runs both ways. Owning at high utilization beats renting. Renting at low utilization beats owning. The wrong combination (owning an underutilized asset) is one of the most common equity-trapping mistakes we see in heavy civil contractors at this size.
Every twelve months, the internal equipment rate sheet should get pressure-tested. Thirty minutes per major asset class. It starts with one instruction to your team: "Pull every machine's all-in cost from last year, divide it by the hours it actually billed, and show me what we're charging."
The questions to walk:
Where any answer is yes, the rate gets adjusted. The drift it catches is worth multiples of the time.
The right owner is the Fractional CFO working with operations. Our Fractional CFOs have run these reviews from the CFO seat at 8- and 9-figure contractors. The estimator can't own it (estimators have incentives to keep rates low to clear bid thresholds). Schedule it at fiscal year-end so the rate review feeds next year's bidding and budget.
This is the part most owners hesitate on. Honest equipment pricing makes your bids higher. Your win rate on equipment-heavy hard-bid work drops for a quarter or two.
That's expected. That's also fine.
The work you lose was structurally unprofitable. The work you do win is bid at a rate that actually recovers the cost of the asset.
In our client work, equipment-heavy contractors who fix internal rates typically see one to two points of net margin recovery in the first 12 months.
The math eventually proves itself. By the end of year one, the question changes from "how do we win more equipment work" to "how do we manage the work we're winning at the new rate."
For the full pattern of where missing margin lives in equipment-heavy contractors, the Civil CFO Field Report Vol 1: Where the Profit Goes covers it across all five blind spots. The post on construction bidding strategy for profit covers the broader bid-to-bank framework that equipment rate discipline plugs into.
Annually at minimum, and more often during periods of input cost volatility. The annual review at fiscal year-end is the rhythm we build with our clients. If fuel, wages, or interest rates have moved more than 10% in a quarter, a mid-year review is warranted.
Yes, on mobilization and idle time, not on the base hourly rate. A two-week job carries the same mobilization and demobilization cost as a six-month job, but spread over far fewer billable hours. Build mobilization and demobilization as separate line items in the bid, not absorbed into the hourly rate.
You'll lose some, for a quarter or two. That's the point. Estimating will say you won't win at the new rate. Business development will say the pipeline will dry up. The answer is bid-to-bank tracking: show them which jobs actually made money at the old rate. The conversation gets easier with the data on the table.
Rental equipment is simpler in that the cost is explicit (the rental invoice). Make sure you're marking up the rental cost in the bid to recover your handling, supervision, and the costs that ride along with it (insurance during the rental period, mobilization, operator if applicable). A 10 to 20% markup on rental cost is typical and defensible. Pure pass-through of rental cost gives away the supervision and risk-bearing function you're providing the customer.
Keep them internal. The internal rate is for bidding and cost recovery. Publishing the rate creates a price ceiling in the market that hurts you on the work where you have pricing power. Force account work for public agencies is different. The agency usually sets the equipment rates from its own schedule, not yours. Knowing your full cost tells you whether that work actually pays.
CLUSTER INSIGHTS
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