From the beginning of September, hundreds of hedge-cutting contractors will begin their seasonal work cutting hedges.
The Association of Farm & Forestry Contractors in Ireland (FCI) noted that all too often such contractors lack some important system cost information. As a result, the association has published an analysis of the costs involved in running a tractor and hedge cutter.
“Contractors tend to charge for their hedge-cutting operations based on a combination of the amount of work on the farm, last year’s rate and what you believe competitors are working for.
“With modern high-cost machinery and increasing labour costs (if you can get drivers), there is an urgent need to examine machinery costs for all contractor operations.
“Each individual enterprise needs to be generating a profit. Charge rates must be based on all operating costs. They need to be reviewed annually, as we know that costs in contracting are constantly increasing.”
The analysis examines the weekly and hourly costs associated with operating a contractor hedge-cutting service using a modern 150hp tractor and a contractor-specification hedge cutter with a 6m reach, joystick control and full support brackets.
The association outlined that the operating costs remain the same irrespective of who the customer is - a farmer, local authority or a utility provider.
To establish overall costs, the FCI broke it down to individual costs under the following headings:
1 Tractor costs
There are various ways of looking at tractor costs based on what is called a straight line depreciation model or else based on replacement costs. For most contractors, tractor replacement cost is the easiest to understand.
We all know how much it costs to change a tractor. Typical tractor replacement costs are based on hours of use. A typical 150hp tractor will cost between €10 and €15/per hour on the clock.
We know that when we go to trade in a tractor with 3,000 hours that it costs in excess of €30,000 to do so. So, being generous, tractor ownership, which covers essentially the depreciation cost, comes to €10/hour.
2 Labour costs
When you are looking at labour costs, you need to include all of the cost, including your employer’s PRSI. The FCI explained that it partnered with ifac farm accounts during its series of payroll meetings and established the true cost of labour to a farm contracting business.
If you are paying a hedge cutter driver €500 into their hand, then the driver is costing you close to €720/week. They note that this converts to €18/hour on a 40-hour week.
3 Fuel costs
You also need to 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 than the hedge-cutting itself.
A typical contractor hedge cutter outfit will consume 7l of diesel per hour. At €0.70/l, that equates to €4.90/hour in fuel cost.
4 Repair costs
Repair costs can be difficult to calculate because the machine age can make a difference. Generally, repair costs 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/hour if we assume 1,000 hours, out of which about 11 weeks or 500 hours is allocated to hedge-cutting work in the season.
5 Insurance costs
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 some other duties during the year, giving 1,000 hours of annual use, which is often not the case, then we allocate a cost of €1.50/hour for insurance costs.
Total tractor costs
Before we include the costs of the hedge cutter, we need to summarise the tractor operating costs as follows:
Hedge cutter costs
It is important to add in the costs associated with owning the hedge cutter. Here, the FCI has used a simple costing system that has been in the construction machinery sector for decades and always proves accurate against other more detailed costing approaches.
This is based on a cost of €0.50 per €1,000 invested in the machine. In the case of the contractor-specification hedge cutter costing €30,000, the machine cost is €15/hour.
This is the information that you need to know when planning the services that you as a contractor offer each year.
This rate will allow you to have money to re-invest in a new machine over its lifetime. It will allow you to pay staff a reasonable wage, but it does not guarantee you a healthy profit.
The association concluded by outlining that farm contracting is a business. It is a business where the contractor provides a service, provides local skilled employment, while there is always the struggle to meet repayments and be profitable.
Know your costs, set your margins and invoice your customers as soon as the work is done to ensure that you have a sustainable contracting business for you and your family.