The Association of Farm and Forestry Contractors in Ireland (FCI) has developed a digital tool to help contractors better understand their costs, and what they should be charging.
The ‘FCI Fuel Cost Index System’ will allow contractors determine their own breakeven charge rate by collating various cost factors, which is benchmarked against fuel consumption.
This gives the contractor their ‘fuel cost index’ which can be applied to various work units – namely acres, load/tonnes, hours, and bales – to determine the price per each of those units that would have to be charged for the contractor to get their money back.
Digital tool
The development of the tool is being spearheaded by FCI CEO, Michael Moroney.
Speaking to Agriland, he said: “[The tool’s] purpose is to help contractors to identify their costs. If you don’t know what your costs are, it’s very difficult to establish how profitable, if profitable at all, your business is, so the first part of any management exercise is to identify your costs.
He added: “There hasn’t been a mechanism for [contractors] to identify their costs in a way that suits the kind of business they run. It’s not an accountancy business. Most of them don’t have office back-up as such to carry out these kind of functions.”
According to Moroney, most contractors “run the business from the tractor seat”.
In order to use the digital tool, a contractor will need to know their most recent yearly expenditure across a number of variables, including fuel, wages, depreciation, repairs, insurance, and bank interest. These figures will be available from the contractor’s accountant.
The figure for yearly fuel usage in litres will also be needed.
Hidden costs
Moroney says that he has seen examples of contractors who are less profitable than they could be due to costs that they have not taken account of.
An example of this would be bank interest, though not necessarily the interest paid on a loan.
“We’re talking about if they look at their bank account and they calculate the level of interest the bank has deducted from them in the past 12 months. That’s money out of the system, because its either late payments, or they haven’t collected money yet, or they’re overdrawn for a period, as well as bank fees.
“Very few contractors would actually take account of that and they don’t even seem to value it or realise. In many contractor outfits it could be between €5,000 and €10,OOO a year, which is a lot of money,” Moroney said.
However, he added that depreciation on machinery and equipment is an even more important factor.
“Quite honestly, everyone seems to struggle with depreciation, what does it mean, how do you measure it?,” the FCI CEO said.
“What you want to find out is the cost of change. Ultimately what you want to know is how much is it going to cost to change from my three-year-old tractor to a brand new tractor?”
According to Moroney, the cost of changing the tractor can vary between €15/engine hour and €20/engine hour. But that €5 difference can be significant.
“In a typical contractor fleet, if you did, say, 1,500 hours in the year, over three years that’s 4,500 hours… That’s significant because €20/engine hour over 4,500 hours is a lot of money. It’s just so much money and I don’t think people realise that’s what depreciation means in practice,” he said.
In the ‘FCI Fuel Cost Index System’, the cost of depreciation is taken as 10% of the current value of all items combined.
“In calculating the depreciation, my suggestion is to go around the yard with a notebook, and put a realistic price or a value on the machine you have in the yard. Nowadays it’s quite easy to get a million euro worth of equipment in the yard. 10% of that is €100,000.”
“If you leave that out, you’re not being truthful about your business, because you’re not including your depreciation cost,” Moroney added.
The idea of the fuel costing tool is, according to the FCI CEO, “about encouraging guys to look at their costs”.
Because contractors will be going by their annual returns, the most recent cost figures they have will refer to the prior year.
“They’ll have their 2021 figures, and they can see they paid more wages this year or their diesel was higher this year, so they can put in a figure with a reasonable estimate as to what 2022 was.
“This might get people focused to do their 2022 accounts earlier so that they know what their costs are going to be in 2023,” Moroney said.
The tool has been partially rolled-out to some FCI members who are trialling it. Moroney says these members appear happy with the service.
The aim is to convert the digital tool into a phone app, and for all contractors, not just FCI members, to use it.
“The more people who use it, the more information is given to contractors, and they can make better decisions. You need information to make the best decisions. If you have good, accurate information, generated in your own business-specific way, well then you’ll make good business decisions,” the FCI CEO said.