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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 ( use or
not use) 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.
Init Initia iall capi capita tall cost cost Salv Salvag age e Value alue Depr Deprec ecia iati tion on Inves Investm tmen entt (or inte intere rest st)) cost cost Insu Insura ranc nce e cos costt Taxes Majo Majorr repai repairs rs and and ove overh rhau auls ls Stor Storag age e cost cost
I.1. Initial Cost • Initial cost about 25% of the total cost invested during the equipment’s e quipment’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: initial cost – Explicit factors – 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: =
( 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 Operator’s wages
$24.60/h
Depreciation in the second year: = 186,000 22,000 14,000 = 40,000
Hourly depreciation =
, ()
= 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 =
, + +,(−) ()
=
112,000 Investment, tax, insurance, and storage expense =
,(.) ()
= 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: =
× 12⋯
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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/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: = 1.15 ×
(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 a. Tire use cost =
,
= $7.716/ℎ
, ,
b. Tire repair cost =
,
× 0.15 = $1.235/ℎ
c. Tire operating cost = 7.716 1.235 = $8.915/ℎ
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Tire Cost Solution Considering the time value of money a. Tire repair cost =
, ,
× 0.15 = $1.235/ℎ
b. The number of tire replacement =
×
= 2
c. First set: •
= 38,580
•
=
. +.
+. − ,×. ,
= $4.659/hr
d. Second set: , = $33,076 • = +. •
= 33, 076
•
=
. +.
+. − ,×. ,
Tire operating cost: 1.235 4.659 3.995 = $9.889 /hr
= $3. 995/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 ℎ /ℎ = ℎ /ℎ × 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=
ℎ × × 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 – 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 • 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 – =
+ + −
– Calculates the equivalent uniform annual worth over years for a given in year 0
• Sinking fund factor – =
+ −
– 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: • ℎ
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
. +. +. −
= 255,000 × 0.30192 = $76,900 /yr b. Equivalent uniform period series for future value: • •
= 50,000
.
+. −
= 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) = 2×4 = $178,125 ,×. = $5.700/hr Cost of money portion = , Depreciation = 300,000 45,000 50,000 = $205,000 , Straight-line depreciation portion = ×, = $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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