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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. Initial capital cost

2. Salvage Value

3. Depreciation

4. Investment (or interest) cost

5. Insurance cost

6. Taxes

7. Major repairs and overhauls

8. Storage cost

I.1. Initial Cost

• Initial cost about 25% of the total cost invested during the equipment’s useful life (avg)

• Incurred for getting equipment into the contractor’s 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 equipment’s 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 (cont’d)

• 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 (cont’d)

• The average annual cost of interest is

based on the average value of the

equipment during its useful life

• The average value of equipment:

• If a unit of equipment has salvage value,

the average value during its life:

𝐴𝐴𝐼 =𝐼𝐶(𝑛 + 1)

2

𝐴𝐴𝐼 =𝐼𝐶 𝑛 + 1 + 𝑆(𝑛 − 1)

2𝑛

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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:

𝐴𝐴𝐼 =50,000 5 + 1 + 15,000(5 − 1)

2(5)= $36,000

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

• 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

I.7. Storage Costs

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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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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-of-

years’-digits method of depreciation as the following

information:

• Insurance 1.5%

• Taxes 3%

• Storage 0.5%

• Fuel price $2.00/gal

• Operator’s wages

$24.60/h

• Initial cost $186,000

• Tire cost $14,000

• Estimated life 5 years

• Salvage value $22,000

• Interest on the

investment 8%

Total Ownership Cost Example

Depreciation in the second year:

𝐷2 =4

15186,000 − 22,000 − 14,000 = 40,000

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(5−1)

2(5)=

112,000

Investment, tax, insurance, and storage expense

=112,000(0.13)

8(250)= 7.28

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:

𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 =𝑌𝑒𝑎𝑟 𝑑𝑖𝑔𝑖𝑡

1 + 2 + ⋯ + 𝑛×

𝐿𝑖𝑓𝑒 𝑡𝑖𝑚𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡

𝐻𝑜𝑢𝑟𝑠 𝑜𝑝𝑒𝑟𝑎𝑡𝑒𝑑

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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

𝐿𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 = 0.90

𝐿𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 = 0.90 186,000 − 14,000 = $154,800

𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 =2

15

154,800

2000= $10,32/ℎ

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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:

• The hourly tire cost can also be derived

using time value of money formula

𝑇𝑖𝑟𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑎𝑛𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 1.15 ×𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎 𝑠𝑒𝑡 𝑜𝑓 𝑡𝑖𝑟𝑒𝑠

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑖𝑟𝑒 𝑙𝑖𝑓𝑒 (ℎ)

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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.

Company’s cost capital rate is 8%.

Tire Cost Solution

Not considering the time value of money

a. Tire use cost =38,580

5,000= $7.716/ℎ𝑟

b. Tire repair cost =38,580

5,000× 0.15 = $1.235/ℎ𝑟

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

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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/ℎ𝑟

b. The number of tire replacement =4×2500

5000= 2𝑠𝑒𝑡𝑠

c. First set:

• 𝐴 = 38,5800.08 1+0.08 4

1+0.08 4−1

• 𝐴 =38,580×0.30192

2,500= $4.659/hr

d. Second set:

• 𝑃 =38,580

1+0.08 2 = $33,076

• 𝐴 = 33, 0760.08 1+0.08 4

1+0.08 4−1

• 𝐴 =38,580×0.30192

2,500= $3. 995/hr

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

𝑇ℎ𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑓𝑢𝑒𝑙/ℎ = 𝑡ℎ𝑒 𝑓𝑢𝑒𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛/ℎ × 𝑡ℎ𝑒 𝑓𝑢𝑒𝑙 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡

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 =ℎ𝑝 × 𝑓 × 0.006

7.4+

𝑐

𝑡

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

7.4+

8

150= 0.18

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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

– Workmen’s 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

• 𝑃 is a single present worth

• 𝐹 is a single future worth

• 𝑛 is years (or periods)

• 𝑖 is corporate cost of capital rate

• 𝐴 is a uniform series

• 𝑆 is salvage value at the end of 𝑛-years

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Time Value of Money Formula

• Single-payment compound amount factor

– 𝐹 = 𝑃 1 + 𝑖 𝑛

– Determining the amount of 𝐹 accumulated

after 𝑛 periods from a single present worth 𝑃

with interest compounded one time per period

• Capital recovery factor

– 𝐴 = 𝑃𝑖 1+𝑖 𝑛

1+𝑖 𝑛−1

– Calculates the equivalent uniform annual

worth 𝐴 over 𝑛 years for a given 𝑃 in year 0

• Sinking fund factor

– 𝐴 = 𝐹𝑖

1+𝑖 𝑛−1

– Determines the uniform annual series 𝐴 that is equivalent to a given future amount 𝐹

• The salvage value cash flow is counted using the sinking fund factor formula

• In calculating ownership cost of equipment, 𝑃 is Initial Cost (𝐼𝐶) minus Tire Cost (𝑇𝐶)

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b. Average Annual Investment

• In AAI method:

– The cost of money portion of depreciation:

• 𝐴𝐴𝐼 × 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑒

– The straight-line depreciation portion:

• 𝐼𝐶 − 𝑆 − 𝑇𝐶

– Total amount of ownership depreciation:

• 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 +𝑠𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑙𝑖𝑛𝑒 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑜𝑟𝑡𝑖𝑜𝑛

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:

• 𝐴 = 300,000 − 45,0000.08 1+0.08 4

1+0.08 4−1

• 𝐴 = 255,000 × 0.30192 = $76,900/yr

b. Equivalent uniform period series for future value:

• 𝐴 = 50,0000.08

1+0.08 4−1= 50,000 × 0.0221 = $11,096/yr

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Therefore, the hourly depreciation portion of the machine’s

ownership cost: 76,990 − 11,096

2500= $26.358

Average Annual Investment Method Annual depreciation portion of the machine’s ownership cost:

𝐴𝐴𝐼 =255,000 4 + 1 + 50,000(4 − 1)

2 × 4

𝐴𝐴𝐼 = $178,125

Cost of money portion =178,125×0.08

2,500= $5.700/hr

Depreciation = 300,000 − 45,000 − 50,000 = $205,000

Straight-line depreciation portion =205,000

4×2,500= $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

2,500= $2.672