Business Dynamics of Hauling

One of the industries in the transportation sector is materials hauling.  This is your dump truck industry.  All of us see these trucks out on the highway usually hauling gravel or dirt.  To profit well, efficiency is the primary business principle Lack of efficiency drives up fuel costs, loss of time in hauling; increased maintenance and repairs, and finally customer dissatisfaction.  This article is an introduction to this industry as a part of the transportation sector of our economy.  Other articles address the more detailed issues within the business framework of hauling.

To appreciate the dynamic of efficiency in hauling an owner/manager must first understand how production is planned and bid including profit.  Secondly there are three production factors that drive actual costs higher.  Finally there is an administration issue with collections that significantly impact cash profit.  The following three sections introduce  each of the two production dynamics and the administration collection issue with the business of hauling.

 

Bidding and Planning

By far the most important business dynamic is bidding and the corresponding planning.   Many factors play a role in the final bid price.  To start out, the location and depth of the project play a pivotal part in the bid price.

Haulers bid their price based on the number of miles involved with travel.  Customarily haulers do not buy the material but are merely transporting the customer’s material for them.  The material is hauled from a quarry to the job site.  Then the truck returns empty to the quarry for another load.  This cycle is called the haul or trip.  So the price is often quoted in a per ton rate (material weight per trip).  The price range varies per ton based on distance; so the rate is never the same per project.  Let’s look at a simple illustration.

Suppose the load capacity is 16 tons for the truck and the desired earnings is $70 per hour.  Two different jobs are bid.  Job ‘A’ is 12 miles from the quarry, Job ‘B’ is 20 miles from the quarry.  Each job has a 5 minute wait time at the job site.  Let’s look at the final bid price per job.

                                            Job ‘A’             Job ‘B’
Load Capacity                    16 Tons            16 Tons
Mileage (Round Trip)        24                     40
Wait Time                           5 Minutes        5 Minutes
Trips Per Hour                    1.8                    1.1
Tons Per Hour Delivered    28.8                  17.6
Desired Earnings              $70/Hr              $70/Hr
Rate Per Ton                     $2.43/Ton         $3.99/Ton

Notice the significant difference in price per ton.  Yet three of four underlying factors are the same.  The only factor affecting the price is the number of travel miles.

Although the distance factor is the primary cost driver, other factors play a role in the final bid.  The secondary cost factor is the size of the truck hauling the load.  The industry uses three basic models.  The following table identifies the models, corresponding average load and the minimum income per hour of work:

Model                           Load         Minimum Rate/Hr
Tandem (Dual Axle)      15 Tons          $60
Tri-Axle                         17 Tons           $65
Quad Axle                     20 Tons           $70

Using project ‘A’ above, let’s compare the price per ton between the three basic models.

Price Variation Between Truck Sizes

                            Tandem     Tri-Axle       Quad Axle
Load (Tons)            15               17                  20
Mileage                  24               24                   24
Wait Time              5 Minutes   5 Minutes       5 Minutes
Trips/Hr                 1.8              1.8                  1.8
Tons/Hr                  27             30.6                  36
Desired Earnings  $60           $65                   $70
Rate/Ton                $2.22       $2.12                $1.94

At first glance this price differential doesn’t appear too extreme.  After all, the price range differential for the two extremes is on 28 cents.   That is a mere 9%.  But there is another law of business that greatly affects the final value.  It is the law of large numbers (Actuarial Science).  Most often bids are for projects requiring 20,000 tons or more.  Now let’s look at the total bid price.

                   Tandem       Tri-Axle    Quad Axle
Price/Ton      $2.22          $2.12         $1.94
Tonnage      20,000         20,000       20,000
Total Bid   $44,440       $42,400      $38,800

There is a $5,640 difference in the two extremes.  For the general contractor, this is a big number.  Imagine the price difference at 50,000 tons.  This illustrates the value of estimating the price per ton precisely and the importance of utilizing the best optimum truck for the job.

There are still more factors affecting the final bid price per ton and include:

* Terrain conditions at job site
* Road conditions including type of driving – city, rural and highway miles
* Time of year (wintertime rates are discounted 3 – 7%)
* Job restrictions/compliance attributes

All of the above factors greatly affect the bid price, but remember gross profit  is equal to sales less production costsThe hauler needs to understand those factors that impact hauling costs.

Production Costs

There are three significant cost drivers for hauling.  The first is the most obvious as every form of transportation requires fuel.  On average most haulers will see between costs per mile of 45 to 70 cents per mile for fuel.  Naturally the newer more fuel efficient trucks will get more miles per gallon.  The trucks typically carry two 40 gallon tanks allowing the truck to work all day without refueling.

The key to controlling fuel costs is monitoring fuel consumption per mile for each truck.  Those trucks with better fuel consumption are optimized by utilizing their efficiency for longer hauls.

The second production cost impacting overall cost of production is the driver.  A common ceiling for compensation (entire compensation package) is no more than 25% of the haul’s revenue.  If a particular driver is able to generate $70 per hour in revenue than their payroll costs will run $17.50 per hour.

A caveat to the above:  payroll  costs are all inclusive and includes employer taxes, benefits and time off.  So the 25% is all inclusive.

Some drivers are more efficient in their work because they understand their truck; what it can and can not do during operations.  So experience increases their efficiency and reduces their down time (getting stuck in mud, breaking down, getting lost, miscommunication, etc.).

A third cost, and the most complicated, is compliance.  Compliance starts out with proper maintenance of the trucks.  Regular weekly check-ups include:

* Power washing including the undercarriage
* Grease the joints
* Change out burnt bulbs
* Check air lines for cracks at rivets and noses
* Change filters (oil, air, fuel)
* Confirm water levels for radiator and washer fluid
* Check tires and rims (cracked rims)
* Check oil and lubricant levels (power steering, transmission fluid, gear oil)
* Confirm tailgate seals properly and latches correctly
* Check for tears in cover net
* Check hydraulics for load lift, including hoses and fittings

In addition to regular checkups are maintenance items.  This includes adjusting and replacing brakes, ensuring air pump provides proper pressure, replacing steering and or drive tires as they wear down.  In addition regular oil changes are conducted.  The exhaust system is replaced as necessary.

Major repairs to the power train are infrequent but do occur.

Compliance goes beyond maintenance as all trucks must have proper registration and tonnage charges must be up to date.  Often the annual price for proper registration exceeds $1,600 per truck.  In addition, some trucks require a fuel tax sticker.

But one of the more interesting compliance issues is proper route driving.  Many rural  roads have weight limits especially for bridges.  State authorities wait on the opposite side like a fox ready to pounce on the victim.  The state’s department of transportation uses mobile scales to weigh their target, noncompliance invites more scrutiny and heavy fines.  A disrespectful driver will further complicate matters because now that inspector is looking for particular company trucks to pull and inspect.

In addition to the three major production costs, there are other production expenses.  They are not as expensive but they should be noted.

  1. A) Insurance – vehicles, general liability and worker’s compensation
  2. B) Bonding
  3. C) Field Communications – radios
  4. D) Dispatching Costs
  5. E) Temporary Storage – hauling material or trucks under repair

Once production costs are subtracted from the hauling revenue, most haulers will earn a 28 to 37% gross margin.  This is actually good given the volume of revenue generated.  Remember job engagements are for thousands of tons.  Therefore the actual gross profit ends up with a high dollar value.  But that brings us to the third business dynamic – administration.

Administration

The single greatest administrative cost is collecting the amounts owed to the hauler.  Unlike retail with an exit pay system, haulers are involved in a business to business practice.  This necessitates using an invoicing system .  Collecting this money is an arduous task and requires an aggressive accounts receivable clerk to properly manage the accounts receivable.

Since this industry is volume based, failure to pay by one customer can significantly affect the final profit.  Remember, each customer owes not for a single haul but often tens to a hundred hauls; therefore a single customer may owe tens of thousands of dollars.

Summary

The business dynamics of hauling focus on one primary principle – efficiency.  Efficiency is demonstrated by properly planning and bidding jobs.  Given the volume of hauls involved, even a 2% miscalculation can cost several thousand dollars in profit.

Efficiency is also required in production, specifically the three major cost drivers: 1) fuel, 2) truck drivers and 3) compliance (maintenance, registration and routes).

The final efficiency dynamic is collecting the amounts owed.  An aggressive clerk will minimize losses associated with noncollectable accounts.  ACT ON KNOWLEDGE.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.   If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.

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About David J Hoare 427 Articles
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns