Recently customers have been asking for clarification around hourly vs. monthly ownership rates. Here’s an example from Scott J., a project manager/estimator from Texas: “I am looking at the rates. Why is the monthly rate $1.54/hour and hourly is $3.05? So, if it is used for one month, we only charge 1.54/hour?”
The distinction may seem counterintuitive at first, but the key is understanding the differences in the monthly and hourly time standards. Think of it this way – if you are renting a piece of equipment from a rental house, it would cost less per hour to rent for a month than it would for an hour or a day. The rental owner wants to ensure that piece of equipment is constantly being used, as his administrative and handling costs are higher for frequent short rentals. So he offers a rate incentive for longer terms. In the example above, the rate on the monthly time standard (on which the Blue Book rates are calculated) is $1.54 per hour. On the hourly time standard, assuming it is on site for just one hour, the rate is much higher at $3.05 per hour.
Why use a monthly standard, and how should we calculate the FHWA rate that we submit?
The actual FHWA rate submitted for force account/change order work is calculated by taking the total Monthly Ownership Cost and dividing by 176 (the FHWA standard for hours worked per month). We add that total to the Hourly Operating Cost to get the FHWA Rate. Using this structured formula, the monthly standard is an accepted application for rate calculations. It’s easy to go from a monthly to a weekly or daily rate based on the natural correlation of weeks in a month and days in a week.
FHWA Rate = (Monthly Ownership Cost / 176) + Hourly Operating Cost
The average FHWA rates are based on a monthly time standard, since the average job will likely take a month or longer. So, there is an advantage to basing the rates on the monthly standard, rather than basing rates on a daily time factor and multiplying out from there.
Why do we display the weekly, daily, and hourly time standards when just the monthly standard is used for Blue Book Rates?
Remember, not everyone uses operating costs when calculating reimbursement. Often, internal charge rates (work being completed by one division for another division within the same business) are used for reimbursement and typically the cost to operate is excluded in these cases. Given these different use cases, it’s important to provide a variety of calculations that cover different methods of reimbursement.
If you are not being reimbursed by a government entity and prefer to be reimbursed for a month or week of work instead, it can be useful to adjust the time standard used. We make those rates available so our customers can decide which multiplier to use to calculate rates for non-standard durations of time.
With all these variations, there’s a lot to consider when setting your own rates. But it’s critically important to get it right. Rates set incorrectly can easily lead to cost overruns or missed revenue.
If you have questions on the usage of various time standards or want to learn more about how we can help you make better decisions on reimbursement issues, schedule a personal demo. We can show you how to build an optimal reimbursement model for your business. Learn more.
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Keith Tyson
Brand Marketing, EquipmentWatch
[email protected]