An OPEN LETTER to Would-be Rate-Cutters
Page 56
Page 59
If you've noticed an error in this article please click here to report it so we can fix it.
In Response to a Special Request, "The Commercial Motor" Costs Expert Outlines All the Items of Expense Which a Haulier Must Include When Compiling a Rate if He is to Obtain a Profit : Fixed Weekly Charge of £19 14s. 91. Plus Mileage IHAVE been asked to deal once more with the problem of rates and charges in connection with municipal hire and to write an article suggesting rates which should be quoted for that type of work. As municipal hire was the subject of my article which was published in The Commercial Motor on June 10, I referred my inquirer to that article and asked him why it was not enough.
The reply was to the effect that something a little more simple was required. I had dealt with a type of vehicle which the smaller type of haulier would not be likely to have and had not sufficiently stressed establishment costs. He again emphasized the need for simplicity, asking that the article be written in words of one syllable, or something approaching that
It was then that I tumbled to it. There are clearly symptoms of rate-cutting about, and this fellow wanted something that he could show to prospective rate-cutters in the hope of persuading them to mend their ways and amend their quotations. In view of all this, I decided that my contribution to this week's The Commercial Motor should be an open letter to hauliers who are interested in municipal haulage, or who are likely to be interested in the near future.
Dear Haulier, I have been told that you are quoting, or are thinking of quoting, for a job of haulage which is on offer from the local authority of the district in or near which you reside and have your business premises. I understand that the vehicles you own, which you would use for the work if you are successful in getting the job, are of 4-5-tons capacity and of popular type.
I have also been told that the work in which you are interested is casual hire. That means that the authority does not enter into a contract with you to extend over any substantial period, but calls upon you occasionally. This is important in view of the object of this letter: it seriously affects the question of the rates which you should obtain.
Those of rtu who regularly read these articles will find nothing new in the methods I adopt and shall use. Few of you will have the figures as I shall present them, for there have been many changes of late in the prices of the commodities which the haulier uses and all the changes have been in an upward direction.
First, then, the vehicle: what it costs to buy, what it costs to operate, what other expenditure must be taken into account, and, finally, what it should earn for its owner.
The capacity of the vehicle is stated to be 4-5 tons. That is rather ambiguous; do we mean a 4-tonner carry922 ing a 5-ton load, or a 5-tonner which will rarely be called upon to carry its rated load? I do not believe that a haulier would use a 5-tonner on work of this kind and load it with only 4 tons. I shall, therefore, proceed on the assumption that the vehicle is a 5-tanner, an end-tipper by the way.
A popular vehicle answering to the above specification will cost, in round figures, £1,000. That amount is made up in this way: the net price is £856, to which must be added £124 and some odd shillings and pence for purchase tax, making the list price £980. The balance of £20 will be spent on painting and lettering, delivery charges andso on.
Six Years for Depreciation
That information is required in order that we may deal with that awkward item of operating costsdepreciation—which really means the rate at which the vehicle, wears out. Most .operators will agree with me that if it lasts six years it will have done well, and six years is the period which I shall use in this article.
Depreciation is not calculated directly from the total outlay; there are two deductions to be made before we divide by six. First, the tyres. Tyres depreciate, or wear out, much quicker than vehicles. A vehicle will last, say, 180,000 miles, whereas a sot of tyres may last no more than 20,000. That means that nine sets of tyres will be used in the life of the vehicle so that it would obviously be wrong to treat the tyres in the same way as the vehicle. First, of all, therefore, we subtract from £1,000 the cost of a set of tyres.
The 5-tonner I have in mind is fitted with 7.50-20 tyres (34 by 7) and the cost today is £152 14s. We do not want to clutter up our calculations by too many shillings and pence, and for that reason I shall take the round figure of £152. A short while ago the cost was only £126, and it is just as well to remember that. It means that your tyre cost is 21 per cent. more than it was last September.
If you get 20,000 miles a set, the cost is 1.82d. per mile, whereas last year it was only 1.51d. That is a point to note, for if you are using last year's figures you are a long way out.
Deduct the cost of the tyres, £152, from the initial outlay and we have £848. That is the net cost of the vehicle less tyres.
Next we must take into account that the haulier, when the six years are up, will try to get something for the old vehicle, even if it is only by way of a part-exchange deal. He will not get much: if I take £48 I am being generous. Take away that £48 and we are left with £800. Spread £800 over six years and we have £133 6s. 8d. as the
amount per annum. What that really means is that the operator must provide, out of his earnings, £133 6s. 8d. every year so that he will be able to replace the vehicle when it is worn out.
One more calculation has to be made relating to this £1,000 and that is the interest on capital outlay. At 4 per cent, it is £40 per annum. That is the amount the haulier would have been able to draw if, instead of buying a vehicle, he had invested the £1,000. Until he has got that £40 per annum back he cannot be said to be making a real profit on his operations.
The Net Weekly Wage
There is one more preliminary calculation to make before I proceed to set out the operating costs in detail. It relates to wages. The net weekly wage to be paid to the driver of a vehicle carrying a 5-ton load is £7 Is. There must also be provision for holidays with pay, National Insurance contributions and the premium to be paid for insurance against claims under the Workmen's Compensation Act.
The days of holidays number 21 in a year out of a total of 287 working days, and to pay for that, on the understanding that another man is engaged to drive the vehicle while the regular driver is on holiday, means an extra 10s. per week. National Insurance Contributions account for another 5s. 8d. per week, and insurance under the Workmen's Compensation Act another is. 4d. Altogether 17s. per week must be added to the basic wage to provide for those extras and the wage is therefore not £7 Is. but £7 18s. per week.
Now I can set out the details of the operating costs of the vehicle, beginning with the standing charges, those expenses which do not vary with mileage. They are seven in number: licence, levy, wages, garage rent, insurance, depreciation and interest.
Standing Charges
I shall set them out on a weekly basis. The licence, or Excise tax, is (assuming that the vehicle just comes within the 3 tons unladen weight limit, which is a fair assumption) 14s. per week. The levy is 35. 11d. Wages I have just shown to be £7 18s. Garage rent we can reckon as being 10s. per week. Insurance will average £1 a week. Depreciation has been calculated at £133 6s. 8d; per annum, which is £2 13s. 4d. per week reckoning, as is usual; on a 50-week year. Interest, also reckoned above, is £40 per annum or 16s. per week. The total is £13 15s. 3d.
Now I want you to pause a little here, and let that figure sink in. It represents a sum which has to be found, week by week. And that is not all. There is another fixed sum still to be considered, that of establishment costs or overheads. You may regard it as the cost of running your business. It is the total of all sorts of expenditure, unavoidable and otherwise and amounting, over the year, to quite a large sum. It is money spent on things which are not directly concerned with the operation of the vehicle and are not therefore included in the seven items dealt with already.
I cannot give any hard and fast rule for calculating establishment costs. When I am compiling " ' The Commercial Motor' Tables of Operating Costs" I use an average amount which I have found, over the years, to be about right. It so happens, however, that I have by me the actual figures relating to the business of a haulier who is engaged on just the sort of business I am writing about, namely, carrying for municipalities.
He has four 5-tonners. The costs are set out in Table I.
The owner who has no idea of his establishment costs may take it from me that they are more than the £684 6s. shown. I am quite sure this operator has left some items out and that the total is nearly £884. If the reader takes £684 as his expenditure he is giving something away. That amount will serve my purpose, however.
There are four vehicles in this fleet so that it can be said that the establishment costs are around £170 per annum per vehicle, which is £3 8s. per week, reckoning on a 50-week year. That amount must be added to the /13 15s. 3d., making £17 3s. 3d.
The very lowest rate of profit which a haulier should allow is 15 per cent. on cost. Fifteen per cent. of £17 3s. 3d. is £2 I Is. 6d. The payment the haulier should receive per week on account of fixed charges only (the charge per mile, to be calculated later and added to the fixed charge) is £19 14s. 9d.
Most of these municipal quotations are on an hourly basis, and before I go any farther I think it would be a good plan to work out what the hourly charge should be. The standing charge per hour, reckoning on a 44-hour week, must be not less than 9s. Again I emphasize that there is no provision in that amount for mileage.
Irregular Working
But suppose, as is likely, that the haulier does not get work to keep his vehicle operating a regular 44 hours per week. He may get 44 hours, or even more, some weeks, but will not be able to keep that up for long. His average throughout the year may be no more than 40 hours, or even, as I have often noted, 36 hours.
If he is to cover his costs, his rates must go up accordingly, for his fixed charges do not alter. That is an important point, and it was because of that I stressed, at the beginning of this letter, the fact that the work is seldom on a long-term contract, but is irregular and sometimes infrequent and of short duration.
If the operator manages to work 40 hours per week as his average throughout the year, to get the hourly charge he must divide that weekly figure of £19 14s. 9d. by 40 instead of by 44. Doing so, he arrives at the conclusion that the hourly rate must not be less than 9s. 10d. If the average week is only 36 hours, as it may well be, the hourly rate must go up to lls.
Now I must leave you for a while, promising to write to you again next week to deal with the mileage charge and some other relevant matters arising in connection with the rather tricky problem of quoting for municipal haulage. Meanwhile, will you please go through such figures as you happen to have, and compare them with what I have set down in this letter. If your figures differ from mine to any appreciable extent, write to me and let me know. Perhaps I shalt be able to show you where you are wrong, or perhaps you will show me.-Yours truly, S.T.R.