3 May 1996

Adding to the bottom line

The contractors lot is not a happy one – pressure to cut rates, pressure to be with every customer yesterday, and pressure to do an immaculate job while still maintaining outputs. In this special feature we visit a number of contractors, starting with a look at how one one consultant uses the contracting tool. Peter Hill reports

ANALYSIS of farm business performance can help identify whether – and how – contractors can contribute to improved farm profitability. Often they can.

But only a planned, integrated use of contract services will make the most of that potential contribution, maintains James Miles-Hobbs of farm business consultant, Andersons.

"The planned use of contractors, rather than a fire brigade approach, is one of the key ways of making the most of what contractors have to offer," he says. "It encourages a greater commitment from the contractor, is the best way of ensuring a decent service, and gives the best opportunity to make structural changes to the benefit of the farm business."

Farmers who remain reluctant to employ contractors – because of a bad previous experience or the psychological discomfort of handing over farm operations to a third-party – would do well to reconsider how contractors can help improve farm profits.

"Manageable fixed costs, labour and power in other words, need continual reassessment to keep them under control," says Mr Miles-Hobbs. "And one thing is for certain. Wages, tractor and machinery prices, parts prices and dealer servicing and repair charges, will continue to rise."

Valuable contribution

Contract services, which are increasingly managed in a more sophisticated and professional manner, can make a valuable contribution to keeping these costs in check, he suggests. It is not the only solution but it does prove the most effective in a lot of cases.

"Farms with an experienced driver and an up-to-date tractor well-matched to implements and workload will probably find this is cheaper than employing a contractor.

"But this situation often changes when it comes to replacing tractors or operators retire. There may be specific marginal costs to pay for the benefit of operating ones own tractors and machinery which make this more expensive than using contractors."

So how can farmers, not yet making full use of contractors, analyse how they might be employed to improve profitability?

The practical approach is to look at the machinery on the farm and different operations involved, and calculate the effect on costs and profits of handing over some or all of those tasks to a contractor.

"The approach at Andersons is to start from the other end of the calculation," says Mr Miles-Hobbs. "We establish what profit is being made now, analyse the farming system that achieves those profits, and then set future cost and profit targets. We can then look at which options including the use of contractors would achieve those targets.

"Relatively high figures for machinery depreciation, repairs and fuel/oil in the farm business analysis, suggest to me that tractors and machinery are under-utilised," he adds. "Where this is coupled with low expenditure on contract services, there will often be scope for increasing the spend with contractors, reducing tractor ownership and running costs, and coming out ahead."

Reducing unit costs

Farmers in this situation have the further option of reducing the unit cost of existing equipment by giving it more work to do by taking on extra land or going into contracting themselves, either independently or through a machinery ring.

"With land rents as they are at present, the former option is likely to have negative implications for other aspects of the farm budget. Contracting not only increases depreciation costs by putting extra hours on tractors but can adversely affect management of the core farming business," notes Mr Miles-Hobbs. "Employing contractors, on the other hand, can release more time for management while bringing improved timeliness and speed of operation, as well as lower costs, without incurring extra capital investment."

Retaining control over field work – being able to get things done as and when required – is another argument put up by those sceptical of using contractors. Again, its a matter of judging whether the higher costs incurred of keeping the necessary equipment is worth the extra flexibility when a well-managed contractor relationship can bring timeliness benefits and lower costs.

Where farmers decide that employing contractors is a sensible thing to do, Mr Miles-Hobbs advice is to go at it wholeheartedly.

Good reputation

"Take the trouble to find a contractor with a good reputation and the capability to take on the work; be prepared to pay to get the best service; and consider making adjustments to the farming system to provide contractor-size blocks of work," he suggests.

"There may also be merit in establishing a commitment of more than a year or two to a contractor or formulating some form of profit sharing or financial performance incentive to encourage a high-level of commitment in return."

The key aspect is to plan the use of contractors, not expect them to turn up at a moments notice.

"Contractors understandably tend to look after regular customers who book ahead, while those who use their services on a fire brigade basis go to the back of the queue," says Mr Miles-Hobbs. "Farmers that complain they can never get a contractor when they want one need to manage the situation better."

It is also important to set out what is expected of the contractor, in terms of timeliness and the way work is carried out, for example, then make sure he is made aware, in a constructive manner, of any shortcomings in the service.

"This should be an ongoing process. If it is not clear to the contractor what the customer wants or the way he wants things doing, how can he meet expectations other than by guesswork," says Mr Miles-Hobbs.

"Take an interest in what the contractor is doing and monitor his work in the same way you would with an employee. It is as important for customers to develop a good rapport with their contractors, as it is for contractors to establish a good working relationship with their clients." &#42

Consultant James Miles-Hobbs: "Farmers that complain they cannot get hold of a contractor when they want one need to manage the situation better."