Equipment Program Puts Money in the Bank
City’s Equipment Program Puts Money in the Bank
As an experienced municipal fleet manager, Mark Stinson is well aware of the duties his position involves. His responsibilities in Lee’s Summit, MO, include overseeing some 339 pieces of equipment, ranging from street department concrete saws to an articulated truck at the sanitary landfill.
But just as important, Stinson knows what his responsibilities should not include. As he puts it: “We are not in the business of repairing machines.”
To ensure this Kansas City suburb stays out of the repair business, Lee’s Summit purchases all of its heavy equipment for 13 separate departments with a guaranteed repair cost.
“We are set for everything but geared mainly for routine maintenance,” Stinson says. “We change the fluids, hoses, cylinders, and wear items, but all repairs are the vendor’s responsibility. They don’t cost us a dime.”
“The machines Lee’s Summit purchased from its local Caterpillar dealer carry a repair cost of $0 during the contract period,” says Eric Turner, Caterpillar government sales manager. “Knowing this in advance helps in computing the exact cost of ownership over time.”
Not only does Lee’s Summit know what its re-pair cost will be for each machine, it knows the price a vendor will pay for the machine when the city is done with it. This foundation of the municipality’s Life Cycle Costing program allows officials to accurately budget true machine costs and provide maximum service to taxpayers.
Lee’s Summit takes that principle even further. Provisions in its bid invitations require the winning vendor to provide parts within 48 hours and complete any repairs within three days. Failure to do so requires the vendor to provide the city with a free loaner machine.
“I can’t imagine buying machinery any other way,” notes Russ Pankey, Lee’s Summit procurement officer. “It’s a process the city council endorses and one that gets the city the best deal for the taxpayers. I like the way it’s set up and wouldn’t change anything.”
Pankey and Stinson share a mutual respect that may not always exist between operations and procurement.
“We work very closely with the procurement department, and Russ is there to look out for me,” Stinson says. “I tell him what I need, and I’m confident he’ll get the best deal.”
Stinson knows when he needs a new machine thanks to the city’s Vehicle Equipment Replacement Program (VERP).
The program, which has been in place since 1988, establishes a proprietary savings account for each machine. For example, if a machine is to be replaced after five years, annual contributions to the VERP will equal 20 percent of the replacement cost.
Stinson and Pankey use formulas to determine the payment per year, per department, and per vehicle. That payment goes into a vehicle replacement account, earns interest, and builds a balance.
“At the end of the vehicle’s life span, we’ve got the money available to purchase a replacement,” Stinson says.
The accounts are not to be used for any other procurement or municipal need.
“Use of the money for other purposes is really frowned upon because it is very difficult to get that fund balance put back in the account,” Stinson says. “The only way that the money can be touched for other purposes would be by order of the city administrator and the council.”
“The program forces us to look at each machine and its expected life span,” Pankey says. “The buy-back guarantee is a critical part of the program since that money we receive goes into the account for the replacement machine.”
Pankey adds, “The companies that we buy backhoes and other heavy equipment from always have a guaranteed repurchase built into the bid.”
At the end of the five-year term, the city has the option to sell the piece back for the price agreed upon in the contractor’s bid or to keep the piece. In the latter case, the contractor is no longer obligated to buy the equipment back for that guaranteed price.
If the city expects to replace a just-purchased machine in five years for $150,000, it establishes a VERP account. At face value, that would mean setting aside $30,000 a year. But if the city receives $80,000 as a buy-back for the machine it just replaced, that reduces the amount of needed VERP contributions to $70,000, or just $14,000 a year.
“The department has to have the full amount needed to buy the new machine,” Pankey says. “If it decides it needs a bigger machine as a replacement, the department has to go through the full council approval process to get it.”
That process begins at the start of the year when Stinson looks at a printout of each vehicle due for replacement in the coming year. He then pulls the maintenance records to get an idea of each vehicle’s condition. He and Pankey analyze the market price of those machines and may decide to try to sell the machine themselves or keep it if it has fewer hours or use than anticipated. Those are options the Life Cycle Costing program provides municipalities.
“Maintenance records are the heart of the issue,” Stinson asserts. “They can tell you everything about a machine and its potential value to you. Most important, there’s no way you can justify equipment purchases to the city council without complete maintenance records.”
According to Stinson, “The system is very time-consuming on the administrative side, but this program that we have in place is really good.”
With maintenance records in hand, Stinson and Pankey meet with the department requesting the machine, and the three “play devil’s advocate,” according to Pankey. Once a decision is made to purchase a new machine, the invitation for bid goes on the Internet.
All those pieces fit together to form the foundation of a typical city council approval by consent order.
“All of this requires a common sense, good working relationship with our suppliers,” Pankey says. “We can’t do it without that.”
“There is really money to be made by doing it this way,” Pankey says. “It’s hard to get it started in the beginning because there has to be a commitment made.”
Pankey suggests starting with one or two vehicles or pieces of equipment. Eventually, the entire fleet could be in the program.
“I just couldn’t image doing it any other way,” Pankey adds.
The program was started in Lee’s Summit before either Stinson or Pankey joined the city staff. The city made some financial decisions at the inception of the program in the 1980s and set aside much more money than needed for one or two pieces.
Prior to the VERP, Lee’s Summit had no official plan for vehicle replacement.
“When a piece of equipment was so worn out that it couldn’t be kept going, the departments tried to find the replacement money wherever they could,” Stinson says.
To Stinson, seeing quarter-million-dollar machine purchases being approved perfunctorily by a city council makes him count his blessings.
Stinson’s past fleet experience includes working for entities that did not take equipment life expectancy into account. When equipment broke down, officials would check the budget and go before council to request replacement money.
“It wasn’t fun, and I won’t do it again,” Stinson says.
VERP has allowed the city to reduce the number of employees performing vehicle maintenance work, and “consequently, we have reduced our labor costs,” Pankey says.
Pankey suggests that those municipalities not already using an equipment replacement fund should explore the possibility.
“It’s a great way to replace vehicles on a cyclical basis, and it ensures that you have an operating fleet all the time,” he adds.
“There’s a fine line every good fleet manager tries to walk,” Pankey continues. “He wants the optimum life from a machine, but doesn’t want to keep it after the point of diminishing returns. With Life Cycle Costing and VERP, I can walk that tightrope with ease.”
How to Start a Vehicle Replacement Fund
Officials in Lee’s Summit, MO, implemented a Vehicle Equipment Replacement Program (VERP) that establishes a “savings account” for each piece of equipment in the municipality’s fleet. Every year, the city contributes money to each account with the goal of having the complete funding for the next machine available before replacement time. To prepare, Lee’s Summit did its homework on replacement times, repair costs, and buy-back prices.
Key Points to consider:
Visit Caterpillar’s Governmental Bid Spec site, intended to streamline the governmental buying process, at http://www.GovBidSpec.com.