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Internal Plant Recharges

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Hi,

I work for a construction company and we have an internal plant recharge system whereby plant used on site is recharged to that particular Project Number. It used to ensure costs are covered in pricing for particular projects.

We base it on the repairs & maintenence costs, depreciation and any other associtaed costs.

Once the item has been fully depreciated it is still recharged, the management team feel this is unfair as the plant should be charged a virtually zero cost.

I wondered what other systems other companies use? Do other companies charge a fee to projects?

It is purely internal and only effects project by project analysis.

Thanks

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By WhichTyler
07th Jan 2019 13:52

You say it is purely internal, but also that it is used to inform pricing?

So if you don't 'charge' it, the sales team will be able to drop prices and win more jobs? Only you know how critical this is at your firm at the moment

but if you then invest in new plant the price goes up...

In short your company needs a strategy for pricing and plant replacement that everyone agrees, and sticks to... Sales team will always be happy to cut margin if it gets the sale and helps their bonus...

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By CIS1
07th Jan 2019 15:38

Yes the cost is used for calculating the price when quoting projects.

I inherited this system and was told the costs are the costs and no argument.

But I am trying to make the system fairer and transparent for everyone.

I think I will carry out a thorough review looking at the last few years costs and see if I can agree a strategy that suits everyone (as far as possible).

Thanks

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By mrme89
07th Jan 2019 14:23

If it is fully depreciated but still in use, then you would expect higher R&M costs.

If you had two identical jobs, one using the equipment at the beginning of its life, and one after it has fully depreciated, do you think that both jobs should be charged the same?

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Replying to mrme89:
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By CIS1
07th Jan 2019 15:40

This is problem I face, when the project is priced, it could be either piece of equipment - it depends on which is available once the project commences.

I try and calculate and average over the different machines based on R&M and depreciation.

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By tom123
07th Jan 2019 15:22

Where is the credit going?

Presumably it is an 'income' to the facilities department or whatever.

Agree with mrme89, this is "accounting for decision making" and you should be aiming at consistency over time.

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Replying to tom123:
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By CIS1
07th Jan 2019 15:42

It is an entry which goes against the project then shown as "recovery" against the piece of equipment.

Yes I need to implement a fair, consistent costing system.

I was wondering what other business's do in this scenario.

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Replying to CIS1:
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By tom123
07th Jan 2019 16:20

Typically you would try and set a 'rate' per calendar year.

(I suppose you could have a selection of rates, ie low/medium/high value plant).

The thing is, when someone asks you next year to explain differences between January 2020 and January 2019 it gets difficult if you have no common rule that you followed.

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Replying to CIS1:
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By WhichTyler
07th Jan 2019 17:59

As identified above, accounting for individual pieces of equipment is going to be problematic.

Set a rate card based on average, and credit recovery to the pool rather than individual kit...

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