For pipeline construction companies, profitable heavy equipment utilization is a crucial component of a healthy financial balance sheet. If equipment could be perpetually utilized on projects, retaining a large fleet would be a no-brainer: billable equipment hours equal revenue for your business. But, due to the cyclical nature of pipeline projects, low fleet utilization intermittently occurs and can siphon capital into unnecessary fixed equipment costs. In this blog, we take a look at various management options that can reduce the impact of industry fluctuations and help optimize a heavy equipment fleet.
Squeeze out efficiencies or max out capabilities - what’s the right approach?
The costs associated with operating heavy equipment are significant, especially when the fleet is large and specialized. With the most commonly purchased new dozers and excavators ranging in price from $75,000 to $175,000 USD, heavy equipment comprises the majority of a pipeline construction company’s capital budget. At this scale, both the efficiencies and wastage can add up fast. When the total cost of a fleet reaches the eight-figure range, even a one percent variance in operating costs can result in a six-figure positive or negative impact on the bottom line.
Not to say that being conservative when it comes to investing in equipment is suitable either - the ability to submit competitive tenders can be increased by a robust equipment list. For example, successful big-inch contractor Waschuk Pipeline Construction Ltd., of Red Deer, Alberta maintains an impressive fleet that helps to differentiate them from the competition. With 72 sidebooms, 53 excavators, 47 dozers plus numerous graders, rock trucks, loaders, and farm tractors in addition to 200 other vehicles, Waschuk has a history of completing multi-million dollar projects. For Wes Waschuk, current president of the company, having the right inventory is important: “We maintain a top-end fleet of equipment and trucks that we rotate out every couple of years, so we have good, current equipment”. During the 1990’s, the company experienced remarkable growth. “Our equipment didn’t come home for ten years,” Waschuk recalls. Sounds ideal. The current condition of the pipeline construction industry, however, is a stark contrast. For example, out of a group of eight large projects awaiting approval at the end of 2016, only Enbridge’s Line 9B reversal and expansion project was completed by 2018. Northern Gateway, Energy East and the Pacific Northwest LNG lines were all cancelled, while as of publication, green-lighted projects such as Enbridge’s Line 3, Keystone XL and Eagle Mountain-Woodfibre have yet to break ground.
It is prohibitively difficult to make capital expenditure decisions by anticipating when the next massive, multi-million dollar project will start. Take the Keystone XL project, for example. First proposed in 2008, the pipeline was granted NEB approval two years later. U.S approval took exponentially longer, but construction is finally slated to begin in 2019. A decade is a little long to stay on standby. What is the best way to strike a balance between being prepared and being prudent? Turns out, there are a few ways to maximize the profitability of a heavy equipment fleet.
1- Implement a demand-responsive equipment inventory system
Variability of demand in the oil and gas industry is constant. In periods of decreased demand, reducing the number of machines in a fleet decreases the fixed costs and frees up capital for other objectives. When the industry experiences the upswing of a boom, there are many ways to augment your equipment list and position your company to meet the increased demand. A couple of approaches to adjusting inventory to meet demand are ownership and borrowing.
Besides the convenience of being in control of the composition and availability of your fleet, owning offers financial advantages as well. Operating expenses such as depreciation and maintenance can lower income tax payable and increase net income. Owning equipment also allows contractors the option of renting out surplus machines between projects, creating an alternate revenue stream.
Buying and selling machines has gotten easier as well. Traditionally facilitated through a dealership, online transactions are becoming increasingly popular thanks to a wide selection of platforms and sale approaches. One of the dominant players in the game, specializing in global asset management and disposition, is long-time auction giant Ritchie Bros.. They recently added another selling solution to their online offerings and as Ravi Saligram, CEO of Ritchie Bros., explains, the new Marketplace-E “offers sellers increased control over price, location and timing, while providing buyers access to more equipment available to purchase right away”. With three transaction options, sellers are able to set a reserve price while buyers are able to choose between making offers and negotiating, or paying the ‘buy now’ price which works like a standard e-commerce transaction. Ritchie Bros. continues to offer live auction events with online bidding as well as the online marketplace IronPlanet. (A webinar is available from Ritchie Bros. to answer questions regarding how to choose the right option from their different platforms).
Buying and selling online has expanded the reach, variety and accessibility of heavy equipment while reducing the amount of time involved in the acquisition process. If the scope of work, project timeline and company financial position call for purchasing stock, hundreds of pieces of equipment can be explored from a laptop or handheld device. In situations when buying is not prudent, demand responsive inventory can be achieved with rental and lease options.
Renting and Leasing
Renting and leasing are popular and functional options for operating with a flexible equipment inventory. Agreements often include delivery and maintenance which reduce costs, and rental payments can sometimes be charged to the client, offsetting part of the operating expenses related to equipment. As well, the selection and availability of rental equipment is by no means restrictive: according to a report by Grand View Research, the global construction equipment rental market is expected to reach $84.6 billion USD by 2022. Driven in part by the wide range of modern, productive machines available in rental fleets, the shift to this alternative reduces immobilized capital, lowers maintenance costs, increases cost control and provides companies the option of reducing their transport fleet. Evidently, reducing upfront capital investment is catching on: in the U.K., over 80 percent of equipment sold is purchased by rental companies.
Dozr and AnyQuip connect equipment owners with contractors seeking machines. It would seem that sharing economy platforms are as viable in the equipment world as they are for accommodation and ride-hailing: Caterpillar invested in one such startup called Yard Club before ultimately acquiring it. Aaron Kline, former CEO of Yard Club divulged Cat bought the company “primarily for the technology”. Yard Club founders had not only developed a platform that “facilitated contractor-to-contractor transactions” but also had an impressive fleet utilization dashboard that allowed users to manage dispatching and mobilization.
Demand responsive inventory has an increased chance of being profitable when there is adequate data to inform the decision. Reviewing past projects with the ability to scrutinize the equipment list and how many days each machine worked can help forecast inventory requirements. Conveniently, telematics and other digital technologies have brought heavy equipment operation into the realm of big data, providing valuable insight into equipment utilization. More on digitization a little later.
2- Choose the right equipment to increase profits, applications and resale opportunities
The second consideration when it comes to optimizing a heavy equipment fleet is the composition of the equipment list. If the financial and economic assessments reveal that purchasing equipment is the best option, choosing the right machines can further help to ensure profitable fleet utilization. Often, the first question that arises is whether to buy new or used.
One consideration in this debate is the impact that new vs used has on a contractor’s ability to submit competitive tenders; meeting the minimum technical qualifications may not be adequate for securing lucrative contracts. Not to mention, brand new machines come with the latest tech, which can increase grade and elevation accuracy as well as attract more skilled operators. However, the biggest downfall of new equipment is the steep initial depreciation: in the first year, machines lose 20 percent of their value and, depending on market conditions, this number can get as high as 40 percent. But, since heavy equipment depreciation is not linear, buying used equipment may actually have a financial advantage to buying new. If well maintained, used equipment can retain its value and be worth close to what was paid for it when it’s time to sell. The best way to demand top dollar for used equipment or make an informed purchase is to keep/require meticulous maintenance records. Digital records are easy to enter, store, retrieve and share between concerned parties within an organization such as mechanics and accounts payable. Digital maintenance schedules can notify shop foremen and mechanics of upcoming servicing, simplifying the process through automation. Also, records kept on a digital platform are easily exported to interested buyers.
Another consideration when choosing equipment is potential versatility. Some pipeline construction equipment is highly specialized, limiting the possibility of diversifying its application which could increase the profitability of ownership. Volvo has addressed the limitation of specialized equipment with a “patented adaptation of their standard crawler excavators”. Unlike conventional pipelayers, Volvo’s unit utilizes an excavator-based design which increases visibility, maneuverability and stability while providing the option to be used in other heavy-lift applications or converted to a standard excavator.
The choice between buying new and used equipment sometimes boils down to the capital expenditures budget rather than preference. Buying new machines can attract the best operators and may result in an efficient, high tech fleet. On the other hand, used equipment is often just as serviceable as new and has the advantage of better value retention. The ability to purchase machines that have extensive maintenance records is desirable and, in order to get top-dollar for pieces of equipment when it comes time to sell, proof of meticulous maintenance will increase perceived value.
3 - Implement digital technology integration to capitalize on data, manage assets and increase efficiency
Perhaps the greatest contributions to equipment optimization have come from the integration of digital systems. Companies such as Shell invest more than $1 billion globally in R&D each year, partially in an effort to capitalize on data as an asset. With the goal of becoming a predictive organization that is able to prevent plant equipment downtime, Shell uses digital platforms to efficiently retrieve data and perform analyses. In 2016, while he was the IT Technology Manager of Smart Solutions for Real Time Process Information at Shell Global Solutions, John de Koning stressed that efficiency is “critical in times of depressed oil prices” and highlighted the necessity for integrated online platforms.
telematics has made mass data collection possible. The detail provided by telematics is staggering: global positioning, engine temperature, fluid pressure, fuel utilization, idle time, even remote fault code diagnostics. This level of real-time actionable data enables fleet managers to effectively manage asset performance, preventing costly equipment downtime. Telematics integrate with other digital management platforms as well. The data collected can synchronize with the digital systems used to plan projects and dispatch equipment. These digital applications are integral to contractors that work on multiple jobs at the same time as the coordination of multiple crews and equipment can be a major challenge. The challenges of managing or future planning overlapping pipeline projects are significantly reduced when work flows are planned using a digital system. Equipment lists can be synchronized with software platforms like Aimsio’s, enabling project managers to drag and drop machines into various jobs, effectively visualizing the distribution of assets. Mobilization becomes more efficient as well - when it’s time to move equipment, the software will ensure that the user is aware of nearest available equipment, preventing wasted mileage.
Informed equipment management decisions require access to quality data along with an efficient way to organize and share the information. Integrating digital systems into an existing fleet is relatively painless. Telematics systems such as Danfoss offer “instant retro fit” and “plug and perform” installation capabilities, allowing all subsequent data to be captured. While digital management software requires more time to set up, depending on the platform capabilities, once it has been configured the user has access to much more than equipment data. For example, Aimsio offers users the ability to use drag-and-drop resource dispatching for operators and equipment, complete electronic field tickets and safety forms, as well as real-time, remote tracking and reporting on project progress. They are also able to integrate telematics data into their user interface, consolidating all the information in one place.
All in all, much can be done to tighten up heavy equipment operations
For industries such as pipeline construction that require large, specialized fleets, optimizing key performance indicators such as utilization, downtime and cost per hour help to increase the profitability of heavy equipment assets. Fleet optimization has the potential to offset disruptive industry lulls and can be achieved through operating the right size of fleet, with the best machine choices and the right digital management systems. Aimsio specializes in configuring and integrating our digital field management software for pipeline construction companies, including their heavy equipment and vehicle fleets.