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Cost of Owning and Operating

Construction Equipment

Total Equipment Costs

Ownership Cost
One time initial cost (purchasing)
Fixed costs incurred each year (use or
not use)

Operating Cost
Incurred only when the equipment is used

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I. Ownership Cost
Include:
1.
2.
3.
4.
5.
6.
7.
8.

Initial capital cost

Salvage Value
Depreciation
Investment (or interest) cost
Insurance cost
Taxes
Major repairs and overhauls
Storage cost

I.1. Initial Cost

Initial cost about 25% of the total cost
invested during the equipments useful life
(avg)
Incurred for getting equipment into the
contractors yard, or construction site, and
having the equipment ready for operation
Use as a basis in calculating ownership and
operating costs
Consists the following items:
Price at factory + extra equipment + sales tax
Cost of shipping
Cost of assembly and erection

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I.2. Salvage Value

The cash inflow at the time of the
equipment is disposed
Influenced by:
Equipment condition
The movement of new equipment prices
The equipments possible secondary service
application

Equipment with a diverse and layered

service potential adds the resale value

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I.3. Depreciation
Depreciation
The decline in market value of a piece of
equipment due to age, wear, deterioration,
and obsolescence

Result from:
Physical deterioration occurring from wear
and tear of the machine
Functional decline or obsolescence occurring
over the passage of time

I.3. Depreciation (contd)

The purpose of depreciation in accounting for
equipment cost
Evaluation tax liability
Equipment depreciation calculation as rapidly as
possible to obtain the max tax reduction during the first
years of equipment life

Determining the depreciation component of the

hourly equipment cost

Consideration in the appraisal of

depreciation:
Explicit factors initial cost
Estimated factors salvage value, useful life

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I.4. Investment (or Interest) Cost

Investment (or interest) cost represents the
annual cost (converted into an hourly cost) of
capital invested in a machine
For borrowed funds: The equipment cost is
simply the interest charged on these funds
For purchased with company assets: An interest
rate equals to the RoR on investment should be
charged
Investment cost is computed as the product of interest
rate multiplied by the value of the equipment
Converted into cost per hour of operation

I.4. Investment (or Interest) Cost (contd)

The average annual cost of interest is
based on the average value of the
equipment during its useful life
The average value of equipment:
=

( + 1)
2

If a unit of equipment has salvage value,

the average value during its life:
=

+ 1 + ( 1)
2

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Investment Cost Example

Consider a unit of equipment costing $50,000 with
an estimated salvage value of $15,000 after 5
years.
The average value is:
50,000 5 + 1 + 15,000(5 1)
=
= $36,000
2(5)

I.5. Insurance Costs

Represents the cost due to fire, theft,
accident, and liability insurance for the
equipment
Annual rates are varied
Two types of the cost:
Actual premium payment to insurance
company
Allocation to self-insurance fund maintained
by owner

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I.6. Taxes
Represents the cost of property tax and
licenses for the equipment
Annual basis cost
Assess at percentage rate applied against
the book value
Over useful life, tax decreases as book
value decreases

I.7. Storage Costs

Includes
The cost of rent and maintenance for
equipment storage yards
The wages of guards
The wages of employees involved in moving
equipment in and out of storage
All associated direct overhead

Usually obtained on an annual basis for

the entire equipment fleet

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I.8. Major Repairs and Overhauls

Included as ownership cost due to the
extension of service life after these
activities
Considered as an investment of new
equipment

Total Ownership Cost

All elements of ownership costs are
summed up to yield total ownership cost
per hour of operation
TOC is used for estimating and for
charging equipment cost to projects
TOC does not include job overhead or
profit
If the equipment is to be rented, overhead
and profit should be included to obtain an
hourly rental rate

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Total Ownership Cost Example

Calculate the hourly ownership cost for the second
year of operation of a 465 hp twin-engine scraper.
This equipment will be operated 8 h/day and 250
days/year in average conditions. Use the sum-ofyears-digits method of depreciation as the following
information:

Initial cost $186,000

Tire cost $14,000
Estimated life 5 years
Salvage value $22,000
Interest on the
investment 8%

Insurance 1.5%
Taxes 3%
Storage 0.5%
Fuel price $2.00/gal
Operators wages
$24.60/h

Depreciation in the second year:

4
2 =
186,000 22,000 14,000 = 40,000
15

Hourly depreciation =

40,000
8(250)

= 20.00

Investment cost, tax, insurance, and storage cost:

Cost rate = investment + tax, insurance, and
storage = 8 + 3 + 1.5 + 0.5 = 13%
Average investment =

172,000 5+1 +22,000(51)

2(5)

112,000
Investment, tax, insurance, and storage expense
112,000(0.13)
=
= 7.28
8(250)

Total Ownership Cost = 20.00 + 7.28 = 27.28 $/hr

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II. Operating Cost

Incurred only when the equipment is used
Known as variable costs because
depend on
The number of operating hours,
The types of equipment used,
The location and
Working condition of the operation

Includes:
Maintenance and repair cost
Tire cost
Consumable costs
Fuel cost
Lubricating oil cost

Mobilization and demobilization cost

Equipment operator cost
Special items cost

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II.1. Maintenance and Repair Cost

Constitutes the largest amount of
operating expense for the construction
equipment
Equipment would wear and tear in
construction project, but varies between
The different items of the equipment used
The different job conditions

The costs get higher as the equipment

gets older

The annual cost of maintenance and

repairs expressed as a percentage of the
annual cost of depreciation
The hourly repair cost during a particular
year can be estimated by:
=

1 + 2 + +

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Range of Typical Lifetime Repair

Costs

Repair Cost Example

Estimate the hourly repair cost of the scraper for the second
year of operation. The initial cost of the scraper is $186,000,
tire cost $14,000, and its useful life is 5 years. Assume
average operating condition and 2000h of operation per
year
= 0.90
= 0.90 186,000 14,000 = $154,800
2 154,800
=
= $10,32/
15 2000

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II.2. Tire Cost

Represents the cost of tire repair and
replacement
The life expectancy of rubber tires is far
less than the life of the equipment
The depreciation rate of tires is different from
the depreciation rate of the equipment
The repair and maintenance cost of tires is
different from the repair and maintenance of
the equipment

Tire repair cost can add about 15% to tire

replacement cost:
= 1.15

()

The hourly tire cost can also be derived

using time value of money formula

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Range of Typical Tire Life

Tire Cost Example

Calculate the hourly tire cost is a set of tires can be expected
to last 5,000hr. Tire cost $38,580 per set of four. The
equipment has useful life of 4yr and operates 2,500hr/yr.
Companys cost capital rate is 8%.

Tire Cost Solution

Not considering the time value of money
a. Tire use cost =
b. Tire repair cost

38,580
= $7.716/
5,000
38,580
= 5,000 0.15 = $1.235/

c. Tire operating cost = 7.716 + 1.235 = $8.915/

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Tire Cost Solution

Considering the time value of money
a. Tire repair cost =

38,580
5,000

0.15 = $1.235/

b. The number of tire replacement =

c. First set:

42500
5000

= 2

0.08 1+0.08 4
1+0.08 4 1
38,5800.30192
= $4.659/hr
2,500

= 38,580

d. Second set:
38,580
= 1+0.08 2 = $33,076

0.08 1+0.08
1+0.08 4 1
38,5800.30192
= $3. 995/hr
2,500

= 33, 076

Tire operating cost:

1.235 + 4.659 +
3.995 = $9.889/hr

II.3. Consumable Costs

Consumables are the items required for
the operation of an equipment that gets
consumed in the course of its operation
Including
Fuel cost
Lubricating oil cost
Filters, hoses, strainers, and other small parts
and items that are used during the operation
of the equipment

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II.3.1. Fuel Cost

Incurred when the equipment is operated
Operation under standard conditions
A gasoline engine consumes 0.06
gal/flywheel horsepower hour (fwhp-h)
A diesel engine consumes 0.04 gal/fwhp-h
/ = /

Average Fuel Consumption Factors

(gal/h/hp)

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II.3.2 Lubricating Oil Cost

The quantity of oil required will vary with
The engine size
The capacity of crankcase
The condition of the piston rings
The number of hours between oil changes

The quantity of oil required (gal/h)

Q=

0.006
+
7.4

hp the rated horsepower of engine, c the capacity of crankcase (gal), f the

operating factor, t the number of hours between changes, the consumption rate
0.006 lbs/hp-h, and the conversion factor 7.4 lbs/gal

Fuel Consumption and Cost Example

Calculate the average hourly fuel consumption and hourly fuel
cost for a twin engine scraper. It has a diesel engine rated at
465hp and fuel cost $2.00/gal. During a cycle of 20s, the
engine may be operated at full power, while filling the bowl in
tough ground requires 5s. During the balance of the cycle, the
engine will use no more than 50% of its rated power. Also, the
scraper will operate about 45 min/h on average.

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Fuel Consumption and Cost Solution

For this condition, the approximate amount of fuel
consumption during 1h is:
a. Rated power: 465 hp
b. Engine factor: 0.5
c. Cycle:
Filling the bowl, 5s/20s cycle = 0.250
Rest of cycle, 15/20 0.5 = 0.375
Total cycle = 0.625
d. Time factor: 45 min/60 min = 0.75
e. Operating factor: 0.625 0.75 = 0.47
f. From Table, unfavorable fuel consumption factor = 0.040
g. Fuel consumed per hour:
0.47 465 0.040 = 8.74 gal
h. Hourly fuel cost: 8.74 gal/h $2.00/gal = $17.48/h

Lubricants Consumption and Cost Example

Calculate the average hourly oil requirement for 220-fwhp
dozer. The dozer operates about 50 min/h on average. The
crankcase capacity is 8gal and the company has a policy to
change oil every 150hr

Lubricants Consumption and Cost Solution

Time factor: 50 min/60 min = 0.69
Oil quantity consumed gallon per hour:
220 0.69 0.006
8
+
= 0.18
7.4
150

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II.4. Mobilization and

Demobilization Cost
The cost of moving the equipment from one
job site to another
The costs of mobilization and demobilization
can be large and are always important items
in any job where substantial amounts of
equipment are used
Include

Freight charges (other than the initial purchase)

Unloading cost
Assembly or erection cost (if required)
Highway permits, duties, and special freight costs
(remote or emergency)

II.5. Equipment Operator Cost

Usually added as a separate item and
added to other calculated operating costs
Include
Overtime or premium charges
Workmens compensation insurance
Bonus

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II.6. Special Items Cost

The cost of replacing high-wear items
dozer, grader, and scraper blade cutting and
end bits, as well as ripper tips, shanks, and
shank protectors

Unit cost is divided by the expected life to

yield cost per hour

Ownership Cost for Bidding

As stated before:
Depreciation is used for calculating the hourly
ownership cost of the equipment

There are two methods applied:

Depreciation-Time Value Method
Depreciation-Average Annual Investment
Method

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a. Time Value of Money

Time value of money:
The time value of money explains the change in
the amount of money over time for funds that are
owned (invested) or owed (borrowed)

Interest is the manifestation of the time value

of money
Economic equivalence is a combination of
interest rate and time value of money to
determine the different amounts of money at
different points in time that are equal in
economic value

Notation in Time Value of Money

is a single present worth

is a single future worth
is years (or periods)
is corporate cost of capital rate
is a uniform series
is salvage value at the end of -years

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Time Value of Money Formula

Single-payment compound amount factor
= 1+
Determining the amount of accumulated
after periods from a single present worth
with interest compounded one time per period

Capital recovery factor

=

1+
1+ 1

Calculates the equivalent uniform annual

worth over years for a given in year 0

Sinking fund factor

=

1+ 1

Determines the uniform annual series that is

equivalent to a given future amount

The salvage value cash flow is counted

using the sinking fund factor formula
In calculating ownership cost of
equipment, is Initial Cost () minus Tire
Cost ()

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b. Average Annual Investment

In AAI method:
The cost of money portion of depreciation:

The straight-line depreciation portion:

Total amount of ownership depreciation:

+

Ownership Cost Example

A company with a cost of capital rate of 8% purchases a
$300,000 loader. The expected service life is 4yr and utilized
2,500hr/yr. The tires costs $45,000. The estimated salvage
value at the end of 4yr is $50,000.
Calculate depreciation portion of the ownership cost using
time value and average annual investment method

Time Value Method

a. Equivalent uniform period series for present value:

= 300,000 45,000

0.08 1+0.08 4
1+0.08 4 1

= 255,000 0.30192 = $76,900/yr

b. Equivalent uniform period series for future value:
0.08
= 50,000 1+0.08 4 1 = 50,000 0.0221 = $11,096/yr

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Therefore, the hourly depreciation portion of the machines

ownership cost:
76,990 11,096
= $26.358
2500

Average Annual Investment Method

Annual depreciation portion of the machines ownership cost:
255,000 4 + 1 + 50,000(4 1)
=
24
= $178,125
178,1250.08
Cost of money portion =
= $5.700/hr
2,500
Depreciation = 300,000 45,000 50,000 = $205,000
205,000
Straight-line depreciation portion = 42,500 = $20.500/hr
The total hourly ownership depreciation:
5.700 + 20.500 = $26.200

Ownership Cost Example

Calculate the hourly owning expenses associated with taxes,
insurance and storage.
Assumption:
a. Total percentage of annual taxes, insurance and storage is
3.75%
b. Average annual investment $178,125
Therefore, taxes, insurance and storage hourly expenses:
178,125 0.0375
= $2.672
2,500

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