Chapter 8

Equipment

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 Outline

• General
• Operating costs
• Depreciation
• Interest
• Ownership costs
• Rental costs
• Miscellaneous tools
• Cost accounting
• Mobilization
• Checklist
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 General

 One problem an estimator faces is the selection of equipment suitable to use for a given
project. The equipment must pay for itself. Unless a piece of equipment will earn money for
the contractor, it should not be used.

 Figuring the cost of equipment required for a project presents the same problems to
estimators as figuring labor. It is necessary for the estimator to decide what equipment is
required for each phase of the work and for what length of time it will have to be used.

 Equipment that is required throughout the project is included under equipment expenses,
because it cannot be charged to any particular item of work.
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 General

 If the equipment is to be used for a time and then will not be needed again for a few weeks,
the estimator should ask the following:

 What will be done with it?

 Will it be returned to the main yard?

 Is there room to store it on the project?

 If rented, will it be returned so that the rental charge will be saved?

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 General

 Equipment required for one project only or equipment that might be used infrequently may
be purchased for the one project and sold when it is no longer needed.

 it is impossible for contractors to own all types and sizes of equipment, the selection of
equipment will be primarily from that which they own. However, new equipment can be
purchased if the cost can be justified. If the cost of the equipment can be charged off to one
project or written off in combination with other proposed uses of the equipment, the
equipment will pay for itself and should be purchased.

 For example, if a piece of equipment costing $15,000 will save $20,000 on a project, it
should be purchased regard- less of whether it will be used on future projects or whether it
can be sold at the end of the current project
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 Operating Costs

 The costs of operating the construction equipment should be calculated on the basis of the working
hour since the ownership or rental cost is also a cost per hour. Included are items such as:

o Fuel,

o Grease,

o Oil,

o Electricity,

o Miscellaneous Supplies,

o And Repairs
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 Operating Costs

 Operators’ wages and mobilization costs are not included in equipment operation costs.

 Costs for power equipment are usually based on the horsepower of the equipment

 Typically, equipment is operated between 30 and 50 minutes per hour. This is known as the
system efficiency or use factor and is expressed as a percentage of the hour that the
equipment is operating. For example, 45 minutes per hour would be 75 percent (0.75) and 50
minutes per hour would be 83 percent (0.83).

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 Operating Costs

 When operating, the engine will probably operate at 55 to 80 percent of full capacity, or 55
to 80 percent of its available power will be utilized. This is known as power utilization and
reduces fuel consumption.

 Fuel costs are calculated using Formula 8-1.

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 Operating Costs

 Example 8-1 fuel cost

• What is the estimated fuel cost of a 120-horsepower payloader? A job condition analysis indicates
that the unit will operate about 45 minutes per hour (75 percent) at about 70 percent of its rated
horsepower.

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 Operating Costs

 Lubrication. The amount of oil and grease required by any given piece of equipment varies
with the type of equipment and job conditions.

 A piece of equipment usually has its oil changed and is greased every 100 to 150 hours
Under severe conditions, the equipment may need much more frequent servicing.

 Any oil and grease consumed between oil changes must also be included in the cost.

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 Operating Costs

Example 8-2 equipment lubrication

• A piece of equipment has its oil changed and is greased every 120 hours. It requires six
quarts of oil for the change. The time required for the oil change and greasing is estimated at
2.5 hours

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 Operating Costs

 Tires. The cost of tires can be quite high on an hourly basis. Because the cost of tires is part
of the original cost, it is left in when figuring the cost of interest, but taken out for the cost
of repairs and salvage values.

 The cost of tires, replacement, repair, and depreciation should be figured separately.

 The cost of the tires is depreciated over the useful life of the tires, and the cost of repairs is
taken as a percentage of the depreciation, based on past experience

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 Operating Costs

Example 8-3 tires

• Four tires for a piece of equipment cost $5,000 and have a useful life of about 3,500 hours;
the average cost for repairs to the tires is 15 percent of depreciation. What is the average
cost of the tires per hour

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 Depreciation

 As soon as a piece of equipment is purchased, it begins to decrease (depreciate) in value.

 As the equipment is used on the projects, it begins to wear out, and in a given amount of
time it will have become completely worn out or obsolete.

 If an allowance for depreciation is not included in the estimate, there will be no money set
aside to purchase new equipment when the equipment is worn out. This is not profit, and the
money for equipment should not be taken from profit.

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 Depreciation

 On a yearly basis, for tax purposes, depreciation can be figured in a number of ways. But for
practical purposes, the total depreciation for any piece of equipment will be 100 percent of
the capital investment minus the scrap or salvage value, divided by the number of years it
will be used.

 For estimating depreciation costs, assign the equipment a useful life expressed in years,
hours, or units of production, whichever is the most appropriate for a given piece of
equipment.

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 Depreciation

Example 8-4 example depreciation

 If a piece of equipment had an original cost of $67,500, an anticipated salvage value of

$10,000, and an estimated life of five years, what would be the annual depreciation cost?

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 Depreciation

Example 8-4 example depreciation cont.

 If the piece of equipment should last 10,000 machine work hours, the hourly cost would be
found as follows:

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 Interest

 Interest rates must be checked by the estimator. The interest should be charged against the
entire cost of the equipment, even though the contractor paid part of the cost in cash.

 Contractors should figure that the least they should get for the use of their money is the
current rate of interest.

 Interest is paid on the unpaid balance. On this basis, the balance due begins at the cost price
and decreases to virtually nothing when the last payment is made. Since the balance on
which interest is being charged ranges from 100 to 0 percent, the average amount on which
the interest is paid is 50 percent of the cost.

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 Interest

Where
C = Amount of loan
I = Interest rate
L = Life of loan

 The formula used to figure the interest cost per hour would be

Where

H = Useful life of equipment (working hours)

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 Ownership Costs

 To estimate the cost of using a piece of equipment owned by the contractor, the estimator must consider:

• Depreciation,

• Major repairs,

• And overhaul as well as interest,

• Insurance,

• Taxes,

• And storage.
These items are most often taken as a percentage of the initial cost to the owner. Also to be added later is the cost
for fuel, oil, and tires. The cost to the owner should include all freight costs, sales taxes, and preparation charges.
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 Ownership Costs

 Example 8-5 Cost Of Ownership

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

Assumptions:
Actual cost (delivered)—$47,600
hour
Horsepower rating—150 hp
Cost of tires—$4,500
Salvage or scrap value—3 percent
Useful life—7 years or 14,000 hours
Total interest—8 percent per year
Length of loan—7 years
Total insurance, taxes, and storage—6 percent per year
Fuel cost—$1.10 per gallon
Consumption rate—0.06 gallons per hp per
Power utilization—62 percent
Use factor—70 percent
Lubrication—4 quarts oil at $1.25
Oiler labor—2 hours labor at $16.50
Lubrication schedule—every 150 hours
Life of tires—4,000 hours
Repair to tires—12 percent of depreciation
Repairs to equipment—65 percent over useful life

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 Ownership Costs

 Example 8-5 Cost Of Ownership Cont.

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

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 Ownership Costs

 Example 8-5 Cost Of Ownership Cont.

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

• See Figure 8.1 for the total fixed cost.

FIGURE 8.1. Fixed Costs.

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 Ownership Costs

 Example 8-5 Cost Of Ownership Cont.

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

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 Ownership Costs

 Example 8-5 Cost Of Ownership Cont.

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

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 Ownership Costs

 Example 8-5 Cost Of Ownership Cont.

Estimate the cost of owning and operating a piece of equipment on a project with the following costs:

 See Figure 8.2 for the total operating cost.

 FIGURE 8.2. Operating Costs.

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 Rental Costs

 If a project is a long distance from the contractor’s home base or if the construction involves
the use of equipment that the contractor does not own and will not likely use after the
completion of this one project, the estimator should seriously consider renting the
equipment.

 In considering the rental of equipment, the estimator must investigate the available rental
agencies for the type and condition of equipment available, the costs, and the services the
rental firm provides.

 The estimator must be certain that all terms of rental are understood, especially those
concerning the repair of the equipment.
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 Rental Costs

 Equipment is generally rented for a short time, and lease agreements are arranged when that
time extends to one year or more.

 Rental rates are usually quoted by the month, week, or day. These costs must be broken
down into costs per hour or per unit of work so that they may be accurately included in the
estimate and checked during construction.

 The rental charge will be based on a day of eight hours (or less). If the equipment is to be
used more than eight hours per day, a proportional charge will be added.

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 Rental Costs

 The other costs of operating the equipment must be added ; usually these include:

• Mobilization,

• Repairs (except ordinary wear and tear),

• Day-to-day maintenance,

• The costs of fuel,

• Insurance,

• Taxes,

• And cleaning.
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 Miscellaneous Tools

 Examples of miscellaneous tools are:

• Wheelbarrows,

• Shovels, Picks,

• Crowbars,

• Hammers,

• Hoses,

• Buckets,

• And Ropes.
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 Miscellaneous Tools

 The mechanics that work on the projects have their own small tools, but the contractor will
still need a supply of miscellaneous tools and equipment.

 The estimator should list the equipment required and estimate its cost.

 The life of this type of equipment and tools is generally taken as an average of one year.

 Loss of miscellaneous tools and equipment due to disappearance (theft) is common, and all
attempts must be made to keep it under control.

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 Cost Accounting

 Especially in heavy construction, the cost accounting is important since the contractor has a
great deal of money invested, and the equipment costs become a large percentage of the
costs of the project. It is important that equipment costs be constantly analyzed and kept
under control

 Small, miscellaneous equipment and tools are not subjected to this cost control analysis and
are generally charged to each project on a flat-rate basis.

 The procedure for determining equipment expenses varies from contractor to contractor, but
the important point is that the expenses must be determined. Generally the equipment
expense is broken down into a charge per hour or a charge per unit of work.
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 Cost Accounting

 Field reports of equipment time must include only the time during which the equipment is in
use.

 When excessive idle time occurs, estimators must check to see whether it can be attributed
to:

• Bad weather,

• Poor working conditions,

• Or management problems on the project.

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 Cost Accounting

 Management problems sometimes include poor field supervision, poor equipment

maintenance, poor equipment selection, and an excessive amount of equipment on the
project.

 A report on quantities of work performed is required if a cost per unit of work is desired.

 Generally the work is measured on a weekly basis; sometimes the work completed is
estimated as a percentage of the total work to be performed. This type of report must be
stated in work units that are compatible with the estimate.

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 Mobilization

 The estimate must also include the cost of transporting all equipment required for the
project to the job and then back again when the work is completed. Obviously, this cost will
vary with the:

• Distance,

• Type and amount of equipment,

• Method of transportation used,

• And the amount of dismantling required for the various pieces of equipment.
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 Mobilization

 Mobilization costs must also be considered for rental equipment since it must be brought to
the job site.

 The cost of erecting some types of equipment, such as:

• Hoists,

• Scaffolding,

• Or cranes,
must also be included, as well as the costs of loading the equipment at the contractor’s yard
and unloading it at the job site.
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 Checklist

 Equipment that may be required throughout the project includes the following :

• Lifting cranes

• Hoisting towers

• Lift trucks

• Hoisting engines

• Scaffolding

• Heaters
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 Web Resources

www.irs.gov

www.constructionbook.com

www.rsmeans.com

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 Assignments

1. What are the advantages to a small contractor of renting equipment instead of owning?

2. What operating costs must be considered?

3. Why must mobilization be included in the cost of equipment?

4. Why is it important that reports from the field pertaining to equipment be kept?

5. If there is excessive idle time for equipment on the job, to what factors may this be attributed?

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