In today’s increasingly cutthroat business environment, paving contractors of all sizes are in the hunt for competitive advantages. While larger contractors pursue high-ticket business acquisitions, technology upgrades and market diversification, many small- and medium-sized contractors limit their strategic thinking to modest innovations that, predictably, yield meager dividends. In the process, some smaller pavers dismiss taking the single most affordable step that can lead to more control over their competitiveness and profitability: producing their own asphalt.
There is no universal point at which contractors become more profitable by producing asphalt rather than purchasing it. Any combination of financial and operational factors can represent the break-even point in a plant purchasing analysis. Even though they may lack this specific information, most contractors know when it’s time to consider producing their own mix.
What’s at stake
A substantial percentage of paving contractors supply their own mix. The remainder buy their asphalt from producers at retail prices that include profits to the seller between $5 and $20 per ton.
But mix cost alone isn’t the only factor that affects buyers’ profitability. Jon Patti, sales representative for Huntertown, Ind.-based Asphalt Drum Mixers Inc. (ADM), a manufacturer of drum mix plants, points out that 95% of asphalt producers are paving contractors, as well. This means that contractors who buy their mix are dependent on their competitors not only for fair asphalt prices, but also for mix quality and delivery scheduling. If these seem to be important business issues over which to give control to the competition, they are.
For years, Brice Zeller’s business savvy made his company, Yuma, Ariz.-based Zeller’s Excavating and Paving, a successful contractor to the city and county. Zeller was competitive in spite of the extra costs that he commonly paid for retail asphalt and trucking, plus his crew’s frequent need for overtime when mix was delivered according to his supplier’s paving priorities and not his own. Zeller decided he had given away enough control of his business when he won a large contract at the Yuma Marine Corps Air Station. Most contractors are glad to win contracts, but delivery scheduling conflicts with his supplier forced Zeller to do much of the air station’s paving at night and pay overtime wages to stay on schedule.
Obtaining credible advice
The first step Zeller took to gain control of his business mirrored what most contractors in his situation do—he struck out on his own to evaluate and price asphalt plants. Zeller looked at new and used plants from a lot of manufacturers, but found the plants were not in what he thought was his price range or fit his production needs.
"It is important for contractors considering asphalt production to work with a plant manufacturer with a history of successfully moving pavers into asphalt production," said Patti. Such a manufacturer will do more than just quote prices and specs. A knowledgeable manufacturer will guide contractors through an exploration of all critical facets of their own business—asphalt purchases, other paving equipment owned, production capacities, personnel capabilities, labor rates, finances, markets, competitors, suppliers, goals—to determine first whether a plant purchase is justified. If so, much of this same information is used then to select the right plant size and configuration.
Crunching the numbers
Early on in a purchase analysis contractors must determine how much they can afford to spend on an asphalt plant.
"The best source of information about your investing range is a lease company," said ADM’s Steve Shawd, who works with Patti. "Knowing what your limits are going into the analysis can reduce a lot of legwork by eliminating false assumptions from the beginning."
As with all capital outlays, return on investment can make or break a buying decision. Close comparison of prices, operating costs and production capacities of the plants being considered ensure that a contractor’s money will work hard for the business. The return on investment (ROI) for asphalt plants can be less than three years to more than 10 years, depending on the proposed plant’s size, level of sophistication and added features. Return also is affected by the percentage of profits plowed back into paying off the plant. Asphalt plants typically offer a quicker ROI than comparably priced equipment because of the overall efficiencies gained when contractors have total control of their asphalt supply.
Paving companies that walk through the analysis and cannot justify buying an asphalt plant, whether due to business volume, market forces or tight finances, can work to keep their mix supplies at the volume and quality needed to be competitive and profitable. With detailed information about their operations from the plant purchase analysis in hand, non-producing contractors are at least better prepared to develop additional mix sources if possible and to negotiate more favorable pricing and delivery terms from suppliers.
Plant selection
In addition to their current asphalt purchases and operational capacities, contractors who decide to become producers must take into consideration several new factors—business growth through increased efficiencies and new sales opportunities now available—when selecting plant size. A knowledgeable plant manufacturer will carefully walk first-time producers through the process of determining the right drying and mixing technology, production and storage capacity, portability, material transfer conveyors, recycled asphalt systems, additive options and environmental requirements, said Patti.
According to Patti, many plant buyers start out planning to supply mix only for themselves, but the majority, in fact, end up selling asphalt mix as retail suppliers. Knowing this, plant buyers must consider not only their own business and capabilities when determining plant size, they also must look at their potential customers’ capabilities.
As important as it is to buy sufficient plant capacity, Patti described buying too much capacity as "overshooting your headlights." Producers may try to base their plant size on the production capacity of a local supplier, for instance, rather than examining their own potential usage, Patti said. But mostly, producers will under-buy because they don’t take into account how much more asphalt they will be able to lay down once they have control of their supply.
"We recently talked to a contractor who has a Cat paver that does 140 tph and comfortably 120 tph," said Patti. "He wants a 110 tph plant. This does not make sense when he is making 45,000 to 55,000 tons per year."
Portability must be considered if jobs are many miles apart or if there is relatively little growth or population density in a contractor’s market. Or a contractor may move production to different areas during specific seasons. State highway jobs that demand more complex mix designs, including Superpave, can require additional cold feed bins, weigh conveyors and lab equipment. And, of course, the rising price of asphalt cement makes the use of recycled asphalt a very attractive option to control costs.
Since purchasing its own asphalt plant, Zeller’s Excavating and Paving has achieved a complete turnaround on efficiency. The company is bidding on larger jobs and is expanding its project base.
"Not only do we now have the mix we need when we need it, we also have a retail product that can be sold to other contractors," said Zeller.
