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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:
𝐼𝐶(𝑛 + 1)
𝐴𝐴𝐼 =
2
• If a unit of equipment has salvage value,
the average value during its life:
𝐼𝐶 𝑛 + 1 + 𝑆(𝑛 − 1)
𝐴𝐴𝐼 =
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:

50,000 5 + 1 + 15,000(5 − 1)
𝐴𝐴𝐼 = = $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-of-
years’-digits method of depreciation as the following
information:
• Initial cost $186,000 • Insurance 1.5%
• Tire cost $14,000 • Taxes 3%
• Estimated life 5 years • Storage 0.5%
• Salvage value $22,000 • Fuel price $2.00/gal
• Interest on the • Operator’s wages
investment 8% $24.60/h

Depreciation in the second year:

4
𝐷2 = 186,000 − 22,000 − 14,000 = 40,000
15
40,000
Hourly depreciation = = 20.00
8(250)
Investment cost, tax, insurance, and storage cost:
Cost rate = investment + tax, insurance, and
storage = 8 + 3 + 1.5 + 0.5 = 13%
172,000 5+1 +22,000(5−1)
Average investment = =
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:
𝑌𝑒𝑎𝑟 𝑑𝑖𝑔𝑖𝑡 𝐿𝑖𝑓𝑒 𝑡𝑖𝑚𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡
𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 = ×
1 + 2 + ⋯+ 𝑛 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
2 154,800
𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 = = $10,32/ℎ
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:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎 𝑠𝑒𝑡 𝑜𝑓 𝑡𝑖𝑟𝑒𝑠
𝑇𝑖𝑟𝑒 𝑟𝑒𝑝𝑎𝑖𝑟 𝑎𝑛𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 1.15 ×
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑖𝑟𝑒 𝑙𝑖𝑓𝑒 (ℎ)

• 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.
Company’s cost capital rate is 8%.

Tire Cost Solution

Not considering the time value of money
38,580
a. Tire use cost = = $7.716/ℎ𝑟
5,000
38,580
b. Tire repair cost = 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
38,580
a. Tire repair cost = × 0.15 = $1.235/ℎ𝑟
5,000
4×2500
b. The number of tire replacement = = 2𝑠𝑒𝑡𝑠
5000
c. First set:
0.08 1+0.08 4
• 𝐴 = 38,580 1+0.08 4 −1
38,580×0.30192
• 𝐴= 2,500
= $4.659/hr
d. Second set:
38,580
• 𝑃 = 1+0.08 2 = $33,076 Tire operating cost:
0.08 1+0.084 1.235 + 4.659 +
• 𝐴 = 33, 076 1+0.08 4 −1 3.995 = $9.889/hr
38,580×0.30192
• 𝐴= = $3. 995/hr
2,500

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)
ℎ𝑝 × 𝑓 × 0.006 𝑐
Q= +
7.4 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 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
– 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
𝑖 1+𝑖 𝑛
–𝐴=𝑃
1+𝑖 𝑛 −1
– Calculates the equivalent uniform annual
worth 𝐴 over 𝑛 years for a given 𝑃 in year 0

• Sinking fund factor

𝑖
–𝐴=𝐹
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:
0.08 1+0.08 4
• 𝐴 = 300,000 − 45,000 1+0.08 4 −1
• 𝐴 = 255,000 × 0.30192 = $76,900/yr
b. Equivalent uniform period series for future value:
0.08
• 𝐴 = 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 machine’s

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

Average Annual Investment Method

Annual depreciation portion of the machine’s ownership cost:
255,000 4 + 1 + 50,000(4 − 1)
𝐴𝐴𝐼 =
2×4
𝐴𝐴𝐼 = $178,125
178,125×0.08
Cost of money portion = = $5.700/hr
2,500
Depreciation = 300,000 − 45,000 − 50,000 = $205,000
205,000
Straight-line depreciation portion = 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
= $2.672
2,500

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