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Guide To Custom Farmwork and Short-Term Equipment Rental
Table of Contents
IntroductionThis Factsheet provides the following decision-making tools for farm managers and custom farmwork operators to manage the use of equipment and work time to meet production and profit goals:
Hiring custom farmwork provides an option for farm managers to purchase fieldwork and other services instead of owning the equipment and doing the work. In this Factsheet, a multi-year equipment lease is considered to give the farm manager the same day-to-day control as ownership. For more information on multi-year lease agreements see the OMAFRA Factsheet Leasing Farm Equipment, Order No. 01-003. For equipment owners, providing custom farmwork services can be the focus of a business, a sideline farming enterprise that spreads equipment ownership costs over more acres, or a marketing tool to complement the sale of other farm inputs. Equipment Use OptionsOptionFarm with owned equipment or multi-year equipment lease Advantages
Disadvantages
Hire custom farmwork Advantages
Disadvantages
OptionShort-term equipment rental Advantages
Disadvantages
Survey Of Custom Farmwork And Short - Term Equipment Rental Rates Charged In 2006The Survey of Custom Farmwork and Short-term Equipment Rental Rates Charged in 2006, (see related links at the end of the Factsheet) reports on a survey of the rates charged in 2006 by 300 Ontario custom farmwork operators. The survey included:
The custom rate charged included the equipment, fuel, and operator cost but excluded the cost of material applied. The survey shows what rates were charged in 2006 across Ontario. The rates shown should be used as a guide in making management decisions. There is no assurance that using the "average" rates reported here will cover the cost of providing the service. Custom operators should carefully calculate all costs and returns before setting prices. See Guide to Calculate Custom Farmwork and Short-term Rental Equipment Rate Charges. Ranges are given for the rates, as there are many factors that can cause variations in the rates charged. Rates are influenced by:
The Survey of Short-term Equipment Rental Rates Charged in 2006, summarizes two sources of short-term tractor rental rates. The first source is seventeen reports from custom operators. The second source, used with permission, is taken from Iron Solutions' Eastern Canada Winter 2006 Official Guide. These rates are from a survey of tractor rental rates charged by Eastern Canadian machinery dealers in 2006. Survey DetailsResults are summarized on a provincial basis and also by 6 smaller regional areas. Where available the provincial average 2003 rates are also listed. The 2003 survey is the previous survey to the 2006 survey. Average RatesAn average rate is given when there are at least 3 reports. The greater the number of reports, the greater the summary reflects the market rates. What are percentiles and how can you use them? Survey AreasProvincial Summary (All Areas) Area 1 Area 2 Area 3 Area 4 Area 5 Area 6
Figure 1. Survey Areas Guide To Calculating Custom Farmwork And Short-term Equipment Rental Rate ChargesWhere a farm manager uses the equipment in his or her own operation as well as providing custom farmwork to others, the costs should be calculated using the total of own farm and custom acreage and operation hours. Example calculations are based on market prices and Tables 4, 5, and 6 found in this Factsheet. The OMAFRA Factsheet Budgeting Farm Machinery Costs, Order No. 01-075, provides additional machinery cost information. Downloadable spreadsheet versions of the Custom Farmwork Rate Calculator and the Short-term Equipment Rental Rate Calculator are available as part of the Computer Management Tools section of the Agricultural Business Management Section of the OMAFRA Web site www.ontario.ca/omafra Table 1. Custom Farmwork Rate Calculator
Table 2. Short-term Equipment Rental Rate Calculator
Example 1. Custom Farmwork Rate CalculationThe following example calculates a custom farmwork rate for a combine with corn and soybean heads expected to be traded in 5 years. Life (years) = 5
In this example, if the operator combines 1,600 acres at $36/acre, the return to management is $7,000 ($4.38/acre or $35/machine hr.), and the return to labour is $3,910 ($2.44/acre or $19.55/machine hr). The custom farmwork operator also earns a return of 5% interest on the owner's equity in the machinery. Cash Flow ConsiderationsThe above example calculates machinery costs and returns to management, labour and investment. The estimated annual depreciation and interest costs total $35,625. From a cash flow point of view the depreciation is not a draw on the bank line. However, in the case of financing, loan payments are a cashflow requirement. Actual loan principal and interest payments will depend on the amount financed and will be different than the figures in the example. It is possible to cash flow actual expenses at a lesser rate than the example but this would come at the cost of lower returns: to management, operator labour, and to the owner's equity tied up in the machine. The capital cost of the equipment (purchase-trade in values) and the number of acres worked are the 2 largest factors affecting price rate, and therefore have the biggest impact on profitability. Table 3 shows how volume of acres affects the per acre costs in order to receive total returns equal to the 1,600 acres used in the previous example. Table 3. Cost per Acre Comparison
Example 2 Short-term Equipment Rental Rate CalculationThe following example calculates a short-term rental rate for the same combine with corn and soybean heads used in Example 1.
Table 4, Trade-in Values as a Percent of Purchase Cost and Table 5, Accumulated Repair Costs as a Percent of Purchase Price provide information used in the example calculations. Table 4. Trade-in Values as a Percent of Purchase Cost
Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999 Group 1: Combines, self-propelled forage harvesters. Group 2: Swathers, mower-conditioners, rotary hay mowers, rotary mower-conditioners. Group 3: Forage harvesters, balers, bale elevators, tub grinders, augers, grinder-mixers, forage boxes, roller mills. Group 4: Planters, drills, sprayers. Group 5: Moldboard plows, chisel plows, cultivators, v-rippers. Group 6: Disks, harrows, hoes. Group 7: Manure spreaders, miscellaneous equipment. Table 5. Accumulated Repair Costs as a Percent of Purchase Price
Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999 Example 3. Accumulated Repair Cost CalculationNew Combine Cost$240,000 Projected use8,000 acres or 200 hours per year over 5 years Estimated accumulated repair costs at 1,000 hours4.2 % of purchase cost (estimated using Table 5) Repair costsApprox. $10,000 ($240,000 X 4.2%) over 5 yr for an average of $2,000/yr Used MachineryWhen calculating the depreciation on used machinery, use the actual price paid for the machine minus its expected trade-in or salvage value, divided by the expected life of the machine on your farm. Increase repair rates to levels appropriate for the age or number of hours on the machine. Expect to have higher than normal repair expenses in the first year of ownership of a used machine as you bring it back into top operating shape. Table 6. Performance, Horsepower and Fuel Requirements of Selected Farm Equipment
Factors To Consider In A Custom Farmwork AgreementCustom hiring is a business arrangement. Write the terms of the arrangement in a formal agreement. If unwritten, the terms are more likely to be misunderstood in the case of a dispute. While written custom hiring agreements have not been common in the past, increased demands for nutrient management plans, quality assurance programs, and environmental stewardship records give added incentive beyond the business benefits of written agreements. Consider the following in a custom hiring agreement. TimelinessSignificant losses can occur if an operation is not started or completed on time. To facilitate planning, a custom hiring agreement should include a schedule of operations for both parties. Such a schedule would be subject to weather conditions and crop maturity. OperationsWrite into the agreement the exact operations to be performed by each party and the machine, materials and labour to be supplied by each. Rate ScheduleStipulate the rate for each operation to be performed on the basis of acreage, time (hour, day, week) or total operation performed. ManagementState that both the custom operator and the owner will adhere to appropriate and accepted farming practices in his or her respective part of the farming operations. The contract provides an opportunity to clarify management roles and responsibilities, create mutual understanding and provide a dispute resolution mechanism.
Environment MattersWhile the owner is ultimately responsible for activities occurring on the property, regulatory authorities can charge any one of the owner, the tenant farmer, or the contract operator for causing environmental damage. It is the responsibility of each party to understand his or her environmental responsibilities. Where the custom farmwork operation carries the risk of an environmental spill, such as in manure or pesticide application, it is important that a contingency plan exists that identifies the containment and cleanup process, which party has the authority to initiate the contingency plan and to which party the clean up costs are assigned. Terms of PaymentStipulate terms of payment for custom operations. Bill the client upon the completion of each custom operation, indicating actual units (hours, acres, etc.) completed, the rate charged per unit, the total charge and the date payment is due. TerminationInclude a minimum period for notice of termination in a custom hiring agreement. State penalties, if any, for termination or for failure to give appropriate notice of termination. Other ConsiderationsInsuranceA custom operator may be considered differently than a farmer when insuring equipment. It is advised that this point be clarified with the insurance company if one considers doing custom work or renting out equipment. Workplace Safety and Insurance BoardCustom operators are responsible to carry appropriate WSIB coverage for their employees. The WSIB issues Clearance Certificates to employers to document this WSIB employee coverage. WSIB coverage is optional for sole proprietors, partners, independent operators and executive officers of a corporation. A WSIB Independent Operator Ruling documents that the custom operator is not considered to be an employee of the farmer by the WSIB. The WSIB deems the operator of the equipment to be an employee of the farmer during the custom farmwork unless the custom equipment operator has either a WSIB Clearance Certificate or a WSIB Independent Operator Ruling. Farmers should ask the custom operator to see a copy of a WSIB Clearance Certificate or WSIB Independent Operator Ruling prior to the work. If there is no Clearance Certificate or Independent Operator Ruling, custom operators should itemize the labour component of the custom rate charge on the bill so that the farmer can pay the required WSIB premiums on the equipment operator’s labour. For further information regarding WSIB responsibilities contact the WSIB at 1-888-259-4228. Licences and CertificationsThe custom operator should maintain, as required, any regulated certifications or licenses for the equipment and equipment operators involved in the custom work. Sample Custom Farmwork AgreementThis form can provide the custom operator and the farm manager with a guide for developing an agreement to fit their individual situation. This form is not intended to take the place of legal advice pertaining to contractual relationships between the two parties Date contract signed ___________________ Name of Custom Operator of address , hereinafter referred to as the "custom operator", agrees to conduct the following types of machine operations on the described farm land of name of Farmer of address , hereinafter referred to as the "owner"*. *Note: If the farm manager is a tenant farmer and not the owner of the land where the custom work will occur it may be preferable to replace "owner" with "farmer".
Note: Be specific about what each machine operation includes (i.e. combining - does it include grain cart, G.P.S. services, trucking to on farm storage or elevator?) The custom operator agrees to provide the following materials at the stated prices:
Other services/conditions if any: (e.g. Environmental Spill Contingency responsibilities.) Management The custom operator will:
ScheduleThe custom operator agrees to complete the said machine operations according to the following schedule weather and crop maturity permitting:
Owner's ResponsibilitiesThe owner agrees to supply the following at the same location and during the time stated in this agreement: Description of Machine Operatione.g. tractor, grain cart and operator MaterialsOther(e.g. Environmental Spill Contingency responsibilities) ManagementThe owner agrees to provide to the custom operator timely and reasonable access to the properties listed. The owner agrees to adhere to appropriate and acceptable farm practices and legislation in the management of the crop or land prior to the operation contracted with the custom operator. Terms Of PaymentThe custom operator will supply an itemized invoice upon completion of said machine operations. Payment is due by the owner upon receipt of the invoice. Overdue accounts past 30 days subject to a 2% per month interest charge. TerminationGrounds for Termination of Agreement - If either party fails to carry out substantially the terms of this agreement in due and proper time, the agreement may be terminated by the other party by serving a written notice citing the instance(s) of default and specifying a termination date of number of days from the date of such notice. The penalty for default will be name the penalty unless otherwise mutually agreed upon. Dispute Mechanism - OptionalArbitration of DifferencesDisagreements Will Be Submitted to an Arbitrator (s) - Any differences between the parties as to their several rights or obligations under this agreement that are not settled by mutual agreement after thorough discussion, shall be referred to the arbitration of a single arbitrator, if the parties hereto agree upon one; otherwise to three arbitrators, one to be appointed by each party and a third to be chosen by the first two named before they enter upon the business of arbitration. The award and determination of such arbitrator or arbitrators, or any two of such three arbitrators, shall be binding upon the parties hereto and their respective heirs, executors, administrators and assigns. Cost of the arbitration will be charged at a rate of 50% to the owner and 50% to the operator. The terms owner and custom operator shall include the trustees, administrators and assigns of the owner and custom operator, respectively.
SummaryContracting custom farmwork will continue to provide farm managers with an option to manage machinery costs and technical skills. Developing clear custom farmwork contracts is a benefit to both the farm manager and the custom operator. This publication is intended as general information and not as specific advice concerning individual situations. Although it outlines factors to consider in a custom farmwork agreement, all individual custom farmwork agreements should be discussed with your lawyer. The Government of Ontario assumes no responsibility for persons using this publication as a custom farmwork agreement. References
Toll Free: 1-877-424-1300 Local: (519) 826-4047 E-mail: ag.info.omafra@ontario.ca |
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