For many contractors, establishing the breakeven cost for each operation has become more difficult. They often then resort to quoting charges for work done on a combination of what they believe others are charging and under-cutting that rate in a race to achieve more output from their expensive machinery purchases.

There are established accountancy practices for establishing business running costs, but they are difficult to apply in the field and when on the move, as most contractors are during a busy season. Contractors need a more practical approach to reflect the nature of their business.

Each contractor needs to know their costs and each contractor business will have a different cost base due to a combination of operational factors. What is more worrying is that we also know that many contractors are not fully aware of their cost base.

While many will trade as either sole traders or limited companies, producing annual accounts for tax returns, few are aware of the business profitability as their operations are often also linked to a farm enterprise. Their annual tax returns are a legal requirement, but they do not provide the necessary business information to establish the business costs.

All contractors are aware or should be aware of their annual headline costs or they should be able to get easy access to their costs under headings shown here.

FCI has worked with agricultural consultant PJ Phelan to help provide some guidance on how to establish breakeven costs in the farm contracting business, based on fuel usage levels. The contractor costs under 12 separate headings are then all directly related to the level of agricultural diesel consumed for each specific operation of the contracting business by means of an index.

This is called the cost per litre of fuel used index, so each cost to the contractor business is linked to a fuel index based on annual fuel consumption levels measured against the specific business cost. For example, if your annual total wage cost is €100,000 and your annual agricultural diesel usage is 100,000 litres, then the index for wages is 1.0. If your annual fuel bill is €140,000 then the index for fuel is 1.4. Add up all the index figures and you get a total contracting business index figure which you then use to establish breakeven costs for each operation.

Concept

At FCI we have trialled the concept with some members and found that it does give realistic breakeven costs that can be easily established and understood. FCI is in the process of converting this concept into an app for members which contractors can then update on a regular basis to respond to changes in their costs.

This is an easy system to allow you to establish your contracting business operation costs based on your fuel usage per enterprise or machinery operation. From now on you need to keep an accurate account of fuel used in each job and for each customer. Here we explain how the system works.

1 Establish your overall costs as outlined in Table 1 based on 2021 figures from your annual accounts. Ask your accountant for this information or you may already have it.

2 This system then automatically divides this cost item by your annual or estimated diesel usage to give you a cost/litre of fuel used index in the third column. As your costs change so will the values in the third column index.

3 IMPORTANT – to calculate depreciation costs you need add up the total realistic values of your machines and divide by 10. (€1m worth of machinery has a depreciation cost of about €100,000 each year).

4 At the base of the table you will see the totals, including the total costs and the total of the fuel cost index for the business. Each contractor business will have a different fuel cost index figure as they each will have a different cost base.

5 To calculate your breakeven costs, multiply the fuel cost index figure by the actual fuel used in litres per day for the job in hand and divide this figure by the work output in terms of acres, hours, bales, loads of slurry, etc as outlined in the examples below.

These figures are startling for many contractors, who also then need to include a profit margin on top of this breakeven cost. This fuel cost index system provides a more realistic approach to costing for contractor.

FCI will be encouraging all contractors to carry out this fuel cost index analysis exercise on their business. This will result in some eye-opening experiences for Irish contractors. With the rising cost of machine ownership, the breakeven cost for each operation has become more difficult.