Modern machinery is expensive for farm contractors to buy and to own. That’s why there is always a need for contractors to spend some time at the start of each season to examine machinery costs for all of their operations.
Farm contracting is a business, so each individual contractor enterprise needs to be generating a measurable profit to sustain it into the future.
The essential starting point in deciding on the charge rates for the year ahead is a full examination of all operating costs. These costs need to be reviewed annually, as we know that costs in contracting are constantly increasing year on year.
In establishing the overall operating costs, we need to break down the individual costs under the following headings:
There are various accounting ways of looking at tractor costs based on what is called a straight-line depreciation model or else based on real world tractor replacement costs.
For most contractors, the tractor replacement cost model is the easiest to understand. This is essentially what accountants call the depreciation cost.
Most contractors will know how much it costs to change a tractor after a call from their dealer sales team. Typical tractor replacement costs are now based on hours of use. A typical 150hp tractor will cost between €13 and €15/per hour on the clock.
We know that when we go to trade in a tractor with 3,000 hours on the clock, that it will cost more than €39,000 to do so. So, in this way, the tractor ownership cost which covers essentially the depreciation cost comes to €13 per hour of work.
When you are looking at labour costs, you need to include all of the labour cost, your employers’ PRSI, USC, etc. Farm accounting firm ifac has worked with FCI to establish the true cost of labour for a farm contracting business.
If you are paying a tractor driver €500 per week into his/her hand, then the driver is costing your contracting business in the region of €720 per week. That converts to a minimum of €18 per hour on a 40-hour week. This is before holiday pay costs and pension costs, which need to be considered in terms of longer employment for our drivers into the future.
You also need include the cost of travelling to and from the job when looking at fuel costs because, in many cases, the travel operation consumes more fuel per hour then the work itself, other than long silage draws from the field to the silage pit.
A typical contractor tractor will consume 10 litres of diesel per hour at modest to heavy work. At 70c/litre, that equates to €7 per hour in fuel cost.
Repair costs can be difficult to calculate because the machine age can make a big difference.
Generally, repair costs, which will include replacement parts, lubrication oil and filters, are calculated at between 3% and 5% of the machine buying price spread across the season. In the case of a €100,000 tractor, that amounts to €3,000 per season or €3 per hour if we assume a use level of 1,000 hours per season. Many farm contractors will run up to 50% more than that and that extra working load needs to be considered.
The typical yearly comprehensive insurance cover costs for a modern four-wheel-drive 150hp tractor will be in the region of €1,500.
If we assume that the tractor will be doing a range of other duties during the year, giving 1,000 hours of annual use, then we need to allocate a cost of €1.50 per hour for insurance.
This cost analysis does not allow for any return on investment for the sustainability of the contractor business, nor for a management return to organise the business. That is why at FCI we believe the minimum charge-out rate for any tractor alone, without a machine attached, leaving the farm contractor’s yard, should be €50/hour.