Wondering why your contractor is upping his bills? It’s all about fuel costs, as Jill Hewitt from the National Association of Agricultural Contractors explains.

The weekly hikes in diesel prices could not have come at a worse time of year for contractors. They have only just given their clients their quotes for the coming season, shaken hands on it and started work in earnest.

They can now only agonise about what the diesel price is going to be next month, let alone in October or November.

Annual fixed costs of a 140hp tractor over five years

(Purchase price £44,000. Depreciation 22% a year)

Depreciation

£6259

Interest

£2133

Insurance

£528

Total

£8920

In years gone by, they and their farmer customers could be reasonably certain that the rate quoted for the job could be sustained for the next six or seven months without panic adjustments to balance sheets.

However, in the past couple of years, there have been sharp reminders how turbulent the fuel market can be. This has been nothing, though, compared to the current crisis and a genuine fear that prices will only go higher, not lower.

Cost per hour of a 140bhp tractor doing 1250 hours a year

 

Fuel @ 30p/litre

Fuel @ 54p/litre

Fuel

£6.30

£11.34

Spares and repairs

£1.76

£1.76

Fixed costs

£7.14

£7.14

Hourly cost

£15.20

£20.24

Operator cost

£11.50

£11.50

Total cost/hour

£26.70

£31.74

Cost/acre @ 4 acres/hr

£6.67

£7.93

Cost/acre @ 5 acres/hour

£5.34

£6.35

Cost/acre @ 6 acres/hour

£4.45

£5.29

Cost/acre @ 7 acres/hour

£3.56

£4.23

So how do contractors work out their charges? Just concentrate on the tables below and see the effect fuel cost changes are having. And, incidentally, these figures take no account of labour cost or equipment cost rises.

The headline figure is this: Assuming the annual hours worked and the spares/repairs costs stay the same, the operating costs per hour of a typical 140hp tractor have soared from £8.06 to £13.10.

When you add in the fixed costs for the tractor of £7.14 an hour, the total hourly operating cost jumps from £15.20 to £20.24.

The operator has to be paid as well, not just for the hours they work but also for the hours they are out of action due to sickness or holiday.

Currently the operator cost in any budget should stand at £11.50 an hour. Add this to the tractor costs above of £20.24 and you come to an eye-watering £31.74 an hour before the tractor has even moved.

Cost per acre for the tractor and mower combination

Workrate

Fuel at 30p/litre

Fuel at 54p/litre

8 acres/hour

£6.05

£6.08

9 acres/hour

£5.68

£6.24

10 acres/hour

£5.38

£5.89

12 acres/hour

£4.94

£5.36

14 acres/hour

£4.62

£4.98

15 acres/hour

£4.42

£4.83

Fuel hikes aside, the costings provide a revealing insight into the true cost of owning and operating machinery. As any contractor (and their bank manager) knows only too well, this kit and its driver have to really work day and night to earn its keep.

The crunch figure for any contractor is the work rates they can achieve and the consequent cost per acre – assuming they get at least 1250 hours a year out of a 140hp tractor.

At current fuel prices, if they can fly along at 7.5 acres an hour, the cost translates to £4.23 an acre. Crawl along at 4 acres an hour and the cost per acre almost doubles to £7.93. Ouch!

That’s not the end of the calculations either. What about the cost of the equipment that the tractor is pulling or powering?

Take the example of a 6m front-rear mower combination. Such equipment is capable of doing 2200 acres a year but is likely to break or wear more expensively so the spares/repairs bill has been increased from 5%t of purchase price to 8.5%. The cost works out at £2.71/acre.

Diesel prices soar

  • April 2004 20p/litre
  • July 2005 31p/litre
  • September 2006 35p/litre
  • November 2007 45p/litre
  • April 2008 54p/litre

Now a contractor can begin to work out the job cost by adding the cost per acre of the tractor and driver to the cost per acre of the equipment. Here again, work-rate is all-important.

When diesel costs 30p/litre, if you could cover 8 acres an hour, it would cost £6.05 an acre. Boost the work rate to 15 acres an hour and you could knock that down to £4.49 an acre.

But with diesel at 54p/litre, the cost of cutting 8 acres of grass in an hour has now jumped by 67p to £6.68 an acre. However, if you can achieve 15 acres an hour, it drops back to £4.83 an acre.

Annual fixed costs of a 6m front-rear mower combination

(Purchase price £20,000. Hours worked 2200. Depreciation 25%/year)

Depreciation

£3050

Interest

£915

Insurance

£300

Total

£4265

Fixed costs/acre £1.94
Spares and repairs costs/acre £0.77

With the sums done, it’s time for the contractor to write his quotes. Do you charge your customer what your computer tells you? Or do you try to absorb some or all of the cost increases?

Alternatively, do you tinker with the figures by running your old tractors for another year and bump up the annual hours worked? Or do you (yet again) forget about any profit?

And what if your competitor has just told your customer he can do it cheaper?

All I can say is the traditional yearly chat over prices is fast becoming a thing of the past. Don’t be surprised to have rather more frequent discussions and even a separate fuel surcharge. Any professional contractor in it for the long-haul, and wanting to provide you with the service you deserve, will be making difficult decisions.