17 January 2001
LUKE HARDING has raised a a seemingly simple question when he wonders aloud on a pricing policy for contracting (What price contractors?, FWi Open Forum, 13 November, 2000). The answer is – anything but!
The answer should be his fixed costs divided by the number of days use, which should be put at 75% of the potential for established contractors and 25% for start-ups if he is lucky.
To this he should variable costs for wearing parts. (An estimate of spares and repairs should be included in
his fixed costs along with interest charges). To this he should add what he wishes to earn (or what he has to pay somebody else) plus a percentage for future investment.
However, if he does go by this calculation, his charges will
be about twice that of the going rate, which is a rather crude way of ascertaining what other people are charging.
A quick run-through on an envelope will suggest the following price for ploughing:
- Good s/h 120hp tractor and 5-furrow plough @ 25,000. Add interest and insurance at 10%, plus a repair bill of 500, and you are left with an annual cost of 5600 if paying over 5 years.
- Let us say that the potential ploughing season covers 4 months or 120 days, then that means that at even 75% usage each days ploughing has to produce 62 just to cover his fixed costs before he pays for his wear and tear or gives himself a wage. It becomes even more interesting if this is
his sole income, for those 90 days then need to produce a salary of at least 15,000 (i.e what you can earn driving a fork lift in a factory).
- However if you can get 90 days work and do 20 acres a day at 14 per acre, then the income is around 25,000 and the job becomes worthwhile. But it is the reaching of that target which is the problem.
Over the years I have seen only one succesful route into contracting and that is by being a known quantity, i.e your potential customers need to know you and you them on a personal basis.
Once a farmer is happy to have you resposible for an important part of his business, then you can start
to talk prices.
Another great essential is having decent modern equipment that the farmer would be proud to run himself; it also helps if you over-egg the pudding on the capacity of the machine a little bit, as this will help your customer feel justified in hiring you.
Two other considerations when deciding upon price are
- what the job is worth to the customer; you may charge 14 per acre but, by saving him the expense of buying extra kit, you are saving him 20. The chemical companies are past masters at this sort of pricing strategy.
- The second consideration is what your competitors are charging. Bear in mind your competitor is not likely to be another contractor but a neighbouring farmer or machinery ring where the aim is to spread costs already incurred. This means that they will often be able to charge less because
the basis of their costings is different to yours.
Anyway, good luck
Justin Roberts, Woodford Halse, Northamptonshire