Equipment Utilization Hides A Pricing Problem

A row of heavy machines parked behind a chain link fence in a work yard.

The dispatcher kept the month on a whiteboard in the corner of his office, one row for each unit and one column for each day, and when I walked in the grid was almost solid. Thirty rows of ink. Four empty squares in the whole month.

When I walk a yard I introduce myself as Rosser Newton and then ask one question that usually ends the small talk. What did an hour sell for. He had the first number on the wall behind him and had to go to a computer in the next room for the second one.

Nothing in that office was broken. The trucks ran, the crews worked, the invoices went out on time. What nobody in the building could tell me that morning was whether the hours had been priced to pay for the trucks.

What Does Equipment Utilization Actually Measure?

Utilization measures how much of the capacity a company owns was actually working, and it measures nothing else. The rate is an output index expressed as a percentage of a capacity index, which is a statement about volume and says nothing about what the volume earned.

The arithmetic is plain enough that it gets trusted too easily. Take the hours a unit could reasonably work in a month, count the hours it sat on a job, divide one into the other. The denominator is a decision somebody made years ago about what to own. The numerator is a decision a dispatcher made last month about what to accept.

Both numbers are real, and neither one carries a price. That is why the figure travels so well. A lender, a buyer, an operator and a director can all read the same percentage across a table and nod at it for four different reasons.

Why Can High Utilization Hide A Pricing Problem?

Because a fleet can run every available hour at a price that does not cover the cost of owning the fleet. Full utilization on a thin margin produces a busy yard, a tired crew, and a company one soft month away from trouble.

Put numbers on it. Thirty units, each billing roughly 80 hours in a month, comes to 2,400 billable hours. At $190 an hour the month brings in $456,000. Direct cost of $150 an hour for crew, fuel, consumables and the maintenance those hours cause takes $360,000 of that straight back out. The yard, the dispatcher, the insurance and the reserve against replacing iron run $85,000 more. A perfect month clears $11,000.

Now hold the same yard at $205 an hour and watch 300 hours walk across the street to somebody cheaper. Revenue falls to $430,500 and direct cost falls to $315,000, so after the same $85,000 the company keeps $30,500. Fewer hours, a slower week the crews will grumble about, and nearly three times the money.

I would rather own a fleet that worked seven hours in ten at a price that pays for its own replacement than one that worked every hour and funded nothing. I know how that sounds in a yard where a good month is measured by how tired everybody is. An experienced operator will tell me the second yard loses its place in the dispatch order at its largest customer and never gets it back, and he may be right.

A full grid tells you the iron moved. It does not tell you the work was worth doing.
A close up of a weathered hour meter set into the rusted panel of a work machine.

The Number I Ask For Before The Utilization Report

Revenue per operating hour and direct cost per operating hour, on one page, for the same month, with the trailing twelve months beside them. Two lines. Any company that bills by the hour can produce them, and most have never been asked to.

A summary number gets mistaken for a verdict on price all the time, and utilization is the version of that mistake oilfield services happens to prefer. Many executives and analysts still read a high profit margin as proof that the pricing is good, and the same instinct reads a full grid as proof that the yard is earning. A company that reports utilization alone has folded volume and price into one figure and lost the half that decides whether the year works.

The pair also moves through a cycle in a way the single number cannot. When pricing softens, revenue per hour turns before utilization does, because the first thing a customer asks for is a better rate and the second thing is fewer hours. A board watching only the grid finds out a quarter late. This is the same argument I made about building a price from your own cost sheet, read from the other end.

When Is Running Below Cost The Right Call?

When holding a crew together through a soft quarter is worth more than the margin given up to do it. A crew that scatters takes months and a hiring premium to rebuild, and the company that let it go is the one that cannot answer the phone when the work comes back.

I have argued the other side of that too hard and been wrong about it. I pushed a management team to hold price through a slow stretch, on the theory that work taken below cost teaches a customer what a company is worth, and we held it, and the two best supervisors in the yard left for somebody who could keep them busy. The pricing discipline was sound. The judgment around it was not, because I had priced the iron and forgotten that the crews were the asset with legs.

So the rule carries a condition. Hours sold below full cost are defensible while a company can name the crew it is protecting and the month it expects to stop, and they stop being defensible the moment nobody can produce either answer.

Any owner is welcome to argue with Rosser Newton about where that line sits, and the good ones usually do. What none of them can do is settle it from the whiteboard alone.

A yard that never rests is a fact about the schedule. Whether it was a good month is a fact about the price, and the two sit on different pages.

Photos by Annabelle Allimonos and Robert Stump on Unsplash

Sources

Federal Reserve Board Industrial Production and Capacity Utilization G.17
Why High Profit Margins Don't Prove Smart Pricing

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