BIG CONTRACTS Lower Profits?
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A Haulier Should Not Forfeit Part of His Legitimate Earnings For the Sake of Gaining Work : Rate-cutting is Particularly Rife in Contracting for Municipal Haulage, When Operators Seem to Conduct a Dutch Auction Among Themselves
ANEW aspect of quoting for haulage work emerged from a long letter I recently received. I am personally acquainted with the writer, whom I would describe as a working haulier with a fair number of vehicles, but not so many as to make it necessary for him to spendall his time in his office and lose touch with the practical problems of his craft. He is still close enough to his work to appreciate the difficulties of the small man, yet is operating in a big enough way himself to be able to take the wider view which is so essential in appraising those problems. Finally, and a most essential factor for consideration, he is making a success of his business.
His letter was long and I will deal with the bulk of it. The point I wish to consider at the moment is indicated by this sentence: " Some hauliers seem to think that because some jobs, county council contracts for example, run into several thousand tons, the work can be done for less than half price."
Fallacy for Small Haulier
There lies a suggestion that 5,000 tons can be carried at less cost per ton than 50 and a haulier is therefore safer in quoting a low price for a big contract than he is for a small one. Some of them, according to my correspondent. quote much less, even half of a fair and reasonably profitable rate. That is a fallacy, or at least it is a fallacy so far as the average haulier is concerned. For him it is practically as expensive, per ton, to haul 5,000 tons as it is to haul 50, because he has no means whereby the handling of a big contract can be organized to cheapen the process.
Lacking such means, he is not justified in cutting his price: if his price for the 50 tons is based on knowledge of costs, he cannot do the job for a lower charge per ton simply because there is a large quantity involved. It is only necessary to consider the real cost of haulage to realize how small are the economies which can be effected.
First, the Operating costs. The same type of lorry will be used whether the job is small or large: Let us assume that it is a 5-tonner. Its cost per mile, provided the weekly mileage remains substantially unaltered, will be the same week by week. It will be unchanged whatever the size of the contract.
Business Suicide
Establishment expenses will be the same, for it will not be safe to close the office, dispense with the telephone, cease to advertise, and otherwise behave as though the business were ended just because a six-month contract has been acquired. If the haulier does those things, woe betide him when the contract is completed and further work is wanted. He will have to start all over again. Indeed, I would go further and say that a man who turns all his vehicles on to one job is committing business suicide. At least he will have to rebuild his business again after the contract is finished.
There still remains the question of' profit. The haulier must ask himself: "Am I prepared to forego any legitimate profit in order to obtain this contract?" If his reply is in the affirmative, if he is prepared to give some of his living B24 away to the local council or road contractor, I have no more to say beyond that the next time he quotes he will find one of two things happen. Either he will be expected to give up a little more of his hard-earned cash, or some competitor, slightly more foolish than he is, will do it and get the job.
There ought to be a limit to what can be done in the way of lowering prices to get a contract. Certainly there are many operators who are willing to go to that limit: many go beyond. That there is no need for cut-throat competition of this kind is evident from the experience of this correspondent of mine, to whose letter I will again turn.
Down to 2s. 10d. a Ton
There was one job on offer from the local council, he wrote, for the cartage of road material from the railway station goods yard to 11 miles each side of that station. This, I take it, means that the road was being remade over a stretch 31 miles long, the station being in the middle. For this my friend quoted 3s. 4d. per ton. Another quotation was requested for cartage from the same goods yard to the next section of the work, the distance varying from two to four miles. Here my friends quoted 4s: 6d. per ton. The contractor who got the contract did the job at a flat rate of 2s. 10d, per ton.
My friend says that as regards the second of these two examples, he would be able to make an average of four journeys per eight-hour day carrying 5 tons each trip, thus making sure of a revenue of £4 10s. per day, or, making an allowance for two loads on Saturday, £24 15s. per week. The mileage covered would be 132 and provision would have to be made for the wages of a second man. Apparently the load had to be hand-loaded from the railway wagons and delivered by hand at the far end of the journey.
Material Manhandled
This output he considered to be good and I must say I agreed with him, bearing in mind all the facts and especially to providing for the extra man because the material was manhandled at both ends of the journey.
On the assumption that he uses 5-ton lorries for the work, his running costs, according to the current issue of '" The Commercial Motor' Tables of Operating Costs," amount to £6 5s_ 8d. per week. That is at 111d. per mile. His standing charges total £16 14s. per week, made up as follows: licence, 12s.; levy, 3s.; wages, driver, £7 3s.; wages, mate, £6 19s.; garage rent, 9s. 6d.; vehicle insurance, 16s. 6d.; interest. on first cost, 1 Is. The total cost is £16 14s. plus the running costs, £6 Ss. 8d., so that bare operating cost of the vehicle is roughly £22. There is thus left only £2 15s. to cover establishment costs and profit. There is insufficient margin to provide for either of those items. The minimum profitable revenue should be, first the vehicle operating cost, shown to be £22; add establishment costs at £2 10s. and profit at £5 per week; total £29 10s. As the tonnage carried is 110, the minimum rate should be 5s. 41d. per ton.
I wrote to my friend and told him what the rate should be, telling him also that he was rate-cutting. I asked him what he was going to do about it. I have not yet had a reply and somehow I do not think I shall.
There is no real evidence to show that the competitor of my friend is rate-cutting. Assuming that there is no national agreement on a rate for this class of work, there is no rate-cutting if the operator concerned, against whom a charge is being made, can demonstrate that he is making a fair and reasonable profit. It is possible that he is able to quote a lower rate because he is working in a more efficient manner than his competitors. If, for example, he uses a 6-tonner with an oil engine he is in a position to charge much lower rates than a man who uses 5-tonncrs running on petrol.
According to the Tables, the running cost per mile of a i-ton oiler is 101d. per mile. The mileage run on the job tie are discussing has been shown to be 132 per week, so hat the running cost per week, 132 times 101d. is £5 15s. 6d. The standing charges comprise; tax, I4s.; levy, 3s.; wages (driver), £7 7s.; wages (mate), £6 19s.; garage rent, /s. 6d.; vehicle insurance, 16s. 6d.; interest, 15s. Total, 17 4s. Total operating costs, i.e. running costs plus landing charges, £22 19s. 6d.
The tonnage per week, assuming as before that the number if journeys per week is 22, four per day for five days and wo on Saturday, is 132. The net cost per ton is thus 3s. 7d., pproximately. That figure contains no allowance for estab;shment costs. Something must be added for profit. Suppose m take the former to be £3 per week and the latter £5; le fixed charges plus running costs and profit become 30 19s. 6d, At that rate the charge must be 4s. gd. per ton. 'he revenue is still less than that required to provide the Kpected profit margin.
Overtime Cost Now suppose that overtime is worked sufficient to enable a extra journey to be run each day, including Saturday. he number of journeys will be increased to five each day Id three on Saturday, 28 in all. The extra cost of overtime ill be £1 17s. 6d. per week for the driver and El 15s. 3d. T the mate, 13 12s. 9d. in all. That brings the standing targes up to £20 16s. 9d.
The running costs will also increase because the weekly ileagc is now 168. At 101d. per mile the cost per week is 7s. The total operating cost per week is £28 3s. 9d. Add for establishment costs and £5 profit, and the weekly venue required is £36 3s. 9d. To obtain that the charge r ton must be at least 4s. 2d. The estimated figure was
4s. 6d. per ton so that it is clear that with overtime the job would be profitable.
Another instance quoted in this letter is worthy of reference because it is so obviously one of those cases in which hauliers play a game of Dutch auction among themselves, their tenders being based on the principle that if "Jones can do it for five bob a ton I can certainly work for four and a tanner." Haulier succeeds haulier, each quoting less and less than his predecessor until the work is done at a giveaway price by the successful tenderer.
There was another contract for the haulage of road materials. The distance was eight miles. My friend quoted 65. 3d. per ton. A competitor offered to do the work for 5s. 9d. A third thought 5s. would be enough. None of the three got the job, so that it is reasonable to assume that the final price was less than 5s.
Terminal Delays
Eight miles out and eight miles back would entail 40 minutes travelling time. Allow an hour and 20 minutes for terminal delays. (My friend told me that that is the average.) The time per round journey is thus two hours. That allows of four complete journeys per day and two on Saturdays, 22 per week. The tonnage carried in a 5-tonner is thus 110 per week. The mileage is 352.
Two men are employed and their wages, including provision for employees' insurances and holidays with pay, total £14 6s. per week. The other fixed charges are: tax, 12s. per week; levy, 3s.; garage rent, 9s. 6c1.; vehicle insurance, 16s. 6d.; interest on capital outlay, Ils. The total is £16 18s.
Add £2 10s. for establishment expenses and £4 10s. for profit. That gives us the fixed minimum expenditure: there are still the running costs to be added. For 352 miles at 1114. per mile, they are £16 17s. 4d. To earn a reasonable profit the total revenue must be £40 15s. 4c1.
It is therefore abundantly clear that whoever got the contract will, some time soon, be sorry he did. My correspondent concluded his letter by stating that on a similar occasion, when he was offered a job at a cut rate, he turned it down notwithstanding that he had four lorries standing idle at the time, all of them in working order. He added: ".I find for all that I get a reasonable amount of work,"
That is probably because he can afford to give more reliable service than the man who has to skimp things to keep going. One of the obvious things to skimp is expenditure on maintenance and that inevitably leads to breakdowns with failure to meet customer requirements. S.T.R.