Internal vs. External Equipment Rates: Fix Your WIP Now
- Cost Construction Accounting
- 5 days ago
- 6 min read
Your equipment is bleeding money and your WIP reports don't show it. That excavator charging $150/hour to jobs while sitting idle 40% of the year? It's creating phantom profits that vanish when depreciation, financing, and maintenance hit your P&L. Meanwhile, you're bidding the next job based on false numbers, wondering why "profitable" projects keep losing money at year-end.
Here's the truth: inaccurate equipment cost tracking distorts every job costing decision you make. It makes losing bids look competitive and profitable projects appear marginal. The gap between internal rental rates (what you charge your projects) and external rental rates (what the market charges) reveals whether you're financing your clients' projects or actually making money.
This guide shows you how to calculate true equipment costs, fix your WIP accuracy, and stop disguising money-losing jobs as winners.
In the Article: |
Why Equipment Rates Destroy Your Profitability
Equipment cost tracking separates profitable contractors from struggling ones. Internal rental rates represent what you charge your own projects for company-owned equipment, designed to recover depreciation, financing, insurance, storage, and maintenance over time. These rates are customized to your fleet's specific costs rather than market conditions.
External rental rates, by contrast, are market-driven prices charged by rental companies. Supply, demand, location, and competition influence these rates, providing a real-time benchmark for equipment costs in your region. The critical question: which rate gives you accurate job costing and reliable WIP reporting?
Most contractors struggle here because they set internal rates once and never revisit them. Meanwhile, equipment sits idle, financing terms change, and market rates fluctuate creating a disconnect between what you charge and what equipment actually costs your business.
The Hidden Components of Equipment Ownership
When calculating internal rental rates, contractors often miss significant cost elements. Depreciation and replacement reserves form the foundation, but financing costs, loan payments or opportunity costs of tied-up capital add substantial expenses that many overlook. Insurance, licensing, registration fees, storage overhead, major repairs, and administrative costs for equipment management all factor into your true hourly cost.
Each component affects accuracy. Skip one, and your internal rates undercharge jobs, creating phantom profits that vanish when the equipment division P&L is reconciled at year-end. Industry sources provide benchmarks, but these generic rates ignore your specific ownership structure, financing costs, and actual utilization patterns.
External Rates: What the Market Actually Charges
External rental rates come from rental companies competing in your market. Supply, demand, location, and competition drive these prices, providing real-time benchmarks for equipment costs.
When rental companies offer excavators at $125/hour while your internal rate calculates to $150/hour, the market is signaling something important about ownership economics.
The Hidden Costs That Add Up
External rentals include more than hourly rates:
Delivery and pickup: 10-20% premium for remote sites
Fuel surcharges and environmental fees: $50-$200 per day
Damage waivers and insurance: $25-$100 daily
Operator training: 15-25% productivity loss initially
Downtime waiting for delivery or repairs during peak demand
Even with these extras, external rates sometimes beat internal costs, your signal that owned equipment isn't achieving sufficient utilization.
How Rate Choices Distort Your WIP Reports
What WIP Actually Measures
Work in Progress reports track ongoing project value by comparing costs incurred against revenue earned. Equipment charges flow directly into job costs, affecting every WIP calculation and profitability projection.
Overcharge jobs with idle equipment, and WIP shows phantom profits that disappear when you reconcile equipment division P&L at year-end. Your projects look profitable on paper while equipment losses drag down overall company performance.
Undercharge during peak utilization, and you hide losses on equipment-intensive work. Heavy civil projects and site development jobs appear more profitable than reality, skewing decisions about which work types to pursue.
Why External Rates Matter for Validation
Market rates validate your internal assumptions. If your $150/hour excavator competes against $125/hour rentals, your WIP only reflects reality if you're actually recovering those higher costs through superior utilization or efficiency.
The comparison reveals whether you're truly profitable or just moving money between your operating division and equipment division, creating the illusion of project profits while losing money overall.
Real Numbers: The $50,000 Excavator Mistake
Your company owns a $250,000 excavator with an internal rate of $150/hour based on 2,000 annual hours. Reality: only 800 hours per year, just 40% utilization.
Annual costs:
Depreciation: $50,000
Financing: $20,000
Insurance: $10,000
Maintenance: $15,000
Total: $95,000
At 800 hours, true cost is $118.75/hour. Charging $150/hour recovers $120,000 annually looks like a $25,000 profit.
The problem: Equipment sits idle 60% of the year while still accruing costs. Market rental rates: $125/hour. Renting would cost $100,000 annually at 800 hours eliminating ownership costs, insurance, storage, and maintenance. You'd save $20,000 while freeing $250,000 in capital.
Your WIP shows equipment profits, but the equipment division loses money.
Equipment Type | Internal Rate | External Rate | Break-Even Utilization |
Excavator (mid-size) | $150/hour | $125/hour | 65% annual hours |
Backhoe | $100/hour | $90/hour | 58% annual hours |
Bulldozer | $200/hour | $175/hour | 70% annual hours |
Skid Steer | $75/hour | $65/hour | 52% annual hours |
Your 5-Step System for Accurate Equipment Tracking
Step 1: Calculate True Ownership Costs
Sum every expense: depreciation, financing, insurance, repairs, storage, and overhead. Add 10-15% for replacement reserves. Don't use generic industry rate calculate your actual numbers.
Step 2: Track Real Utilization
GPS systems or hour meters capture actual usage. Track monthly to identify seasonal patterns. Many contractors discover their "fully utilized" equipment actually runs 35-45% of the year.
Step 3: Set Rates Based on Reality
Divide total annual costs by realistic hours not aspirational 2,000 hours. Add 20-30% profit margin. Compared to EquipmentWatch and local rental rates. Being 20% above market means losing equipment-intensive bids.
Step 4: Monitor Market Rates Quarterly
Check rental websites quarterly. Call for quotes on key equipment. If market rates drop 10% below your internal rates, you're facing a make-or-buy decision.
Step 5: Review and Adjust Quarterly
Analyze variances between projected and actual utilization. Update rates when costs change. If equipment division shows losses while projects show profits, your rates are wrong.
When to Use Each Rate in Job Costing
Use Internal Rates When:
Equipment is available and not committed elsewhere. Utilization exceeds 50% annually. Equipment is at or near the project site. Project duration justifies deployment costs. Your rate competes with market alternatives.
Use External Rates When:
The need is short-term or specialty work. Your equipment is deployed on other projects. You don't own this equipment type. Project location makes mobilization expensive moving a bulldozer 200 miles costs $2,000-$3,000. Market rates significantly undercut your internal costs.
Calculate Total Cost:
A $125/hour rental seems cheaper than a $150/hour internal rate. Add delivery ($500), fuel surcharges ($50/day), damage waiver ($75/day), and 20% productivity loss. For two weeks, that "cheaper" rental costs $140/hour effective rate.
Critical Mistakes That Kill Equipment Profitability
Inaccurate tracking: Manual logs miss 20-30% of hours, creating flawed data.
Generic rates: Industry averages ignore your specific costs.
Never updating: Paid-off equipment should have lower rates.
Ignoring idle time: Yard equipment still accrues insurance, storage, depreciation.
Poor maintenance allocation: Major repairs hit P&L in one quarter instead of being reserved.
Overlooking mobilization: Moving equipment 200+ miles adds $2,000-$3,000.
Uniform rates: One rate for all projects ignores distance and difficulty.
Technology That Fixes Tracking Problems
Modern systems need GPS tracking for automated hour recording, job costing integration, automated rate updates, and real-time utilization reporting.
Software: Procore integrates with project management. HCSS Equipment360 specializes in maintenance and utilization. Tenna delivers GPS tracking with geofencing.
Manual alternative: Excel templates tracking equipment ID, project number, hours, and operator with monthly reconciliation work fine.
Consistent tracking beats sophisticated software nobody uses properly.
Fix Your Equipment Rates, Fix Your WIP
Accurate equipment rates ensure WIP reports reflect financial reality instead of phantom profits. Track actual hours for 90 days to establish baseline utilization. Calculate true ownership costs including every component. Compare internal rates to market rates. Identify equipment below 50% utilization for disposition.
Implement tracking systems matching your operation's scale. Establish quarterly review cycles to maintain rate accuracy as conditions change.
Construction Cost Accounting specializes in equipment cost tracking systems that integrate with job costing and WIP reporting. Our equipment rate calculator helps you determine true ownership costs and optimal internal rates. Schedule a consultation to stop hiding equipment losses in project profits.
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