True cost could be more than thought
It may be tempting to use
on-farm machinery for
contracting purposes but
does it really pay?
Suzie Horne discovers that
the true cost of contracting
is more than most would
EXTRA cash from contracting might sound attractive, but are you being fair to yourself when setting your charges? Many farmers are able to take on contracting cheaply, but some are not costing the job properly, say consultants.
"If a machine is already owned and is used at home, and then does a little additional work for a neighbour, it may only be a question of charging the labour, fuel and a small amount for wear and tear and depreciation," says Tom Chapman, a consultant with accountant Grant Thornton.
"Thats very difficult to quantify, but may mean that small jobs can be done for a relatively low charge."
However, buying a machine on the justification that it will do your own work and earn a substantial amount from contracting is quite a different proposition. In such cases all costs – fixed and working – should be covered by the rate charged for the contracting job, says Mr Chapman.
The table shows how to work out costs by the hour and the acre, and also how varying acreages affect the fixed costs per acre of a combine.
"It is important not to overestimate the contract acres," warns Mr Chapman. "Base all calculations on land you already farm and any additional land for which a firm commitment exists. This helps to avoid the risk of undercharging for contract work undertaken."
Charges for a service such as contracting are subject to VAT. To avoid later arguments, it should be made clear when prices are quoted or agreed whether they are inclusive or exclusive of VAT, so that the customer knows what his final charge will be.
Apart from the costings aspect, there are other important factors to consider. Management on the home farm could suffer if too much critical time is spent on contracting, risking loss of timeliness and attention to detail.
If the farmers own time is to be spent on the contracting operation, the charge must reflect what that time is worth to his own business. In some cases, he would be better off paying more attention to detail on his own farm than chasing cash on someone elses land, suggests Mr Chapman.
"Contracting does make sense on the face of it but its not an answer for a business with problems.
You must get the core business running properly first. There is quite a danger that as the number of acres you cover goes up, management suffers.
"Contracting also takes a certain type of person to do it well. There is a lot more organisation, and there is always the risk of a bad debt, which many farmers would not have experience of."
Insurance must also be considered. Providing a service on another farm is unlikely to be covered by the contracting farms own insurance if it is a standard farm policy.
At the very least the insurer should be informed of this change in operations so that if needed, additional cover can be arranged.
Machinery costings – per hour/per acre
ITEM – COMBINE
Purchase price after discount 65,000 (A)
Selling price after 6 years (B) 20,000 (C)
Average value (A + C divided by 2) 42,500 (D)
Interest* (D) x 8% 3,400 (E)
Depreciation (A – C divided by B(6 years)) 7,500 (F)
Insurance** (D x £15 per £1,000) 638 (G)
Total annual fixed costs (E + F + G) 11,538 (H)
Acres worked annually 450 750 900 (I)
FIXED COST PER ACRE 25.64 15.38 12.82 (J)
Operating cost per acre
Labour @ 3acres/hour 2 2 2 (K)
Fuel 1.10 1.10 1.10 (L)
Spares & repairs as %
of new price*** 3% 5% 8% (M)
Spares and repairs cost
(A divided by M x I) 4.33 4.33 5.78 (N)
COST PER ACRE 33.07 22.81 21.70 (J+K+L+N)
TOTAL ANNUAL COST 14,882 17,108 19,530
* Interest rate = bank lending rate (%). ** Insurance = £ per average value – tractors and combines £15/£1,000.other machinery £8/£1,000 *** Spares and repairs – low use 3% – medium use 5% – high use 8% Source: Grant Thornton