KADHIM FALAH NADHIM

the cost of owning and

operating construction
estimation
equipment

KADHIM FALAH NADHIM

GROUP B

Fourth Year of Study

MORNING STUDIES

2019-2020
KADHIM FALAH NADHIM

The cost of owning and operating construction equipment

INTRODUCTION: (1)

A thorough understanding of both estimated and actual costs of operating and owning equipment
drives profitable equipment management. This chapter develops that understanding in detail and
helps the reader understand the calculations that go into determining the fundamental costs for an
equipment-intensive project. Plant, equipment, and tools used in construction operations are
priced in the following three categories in the estimate:
1. Small tools and consumables: Hand tools up to a certain value together with blades, drill bits,
and other consumables used in the project are priced as a percentage of the total labor price of
the estimate.
2. Equipment usually shared by a number of work activities: These kinds of equipment items are
kept at the site over a period of time and used in the work in progress.
3. Equipment used for specific tasks: These are capital items and used in projects such as digging
trench or hoisting material into specified slots. This equipment is priced directly against the take-
off quantities for the Project it is to be used on. The equipment is not kept on-site for extended
periods like those in the previous classification, but the equipment is shipped to the site, used for
its particular task, and then immediately shipped back to its original location. Excavation
equipment, cranes, hoisting equip ment, highly specialized, and costly items such as concrete
saws fall into this category.

Factors affecting the cost include(1):

 Cost of equipment delivered to the owner.

 The severity of the conditions under which it is used.
 The care with which it is maintained and repaired.
 The number of hours used.
 The demand for used equipment (salvage value = SV)
OWNERSHIP COST(2)

Ownership costs are those costs that the contractor incurs whether the equipment is used on a job
or not. Ownership costs include depreciation, interest, taxes, licensing, insurance, and storage.
These costs are estimated on an annual basis and divided by the number of hours that the
equipment is expected to work during the year. The more hours the equipment works, the lower
the hourly ownership cost. Conversely, when the equipment works only a few hours a year, the
ownership cost can be quite high
KADHIM FALAH NADHIM

Ownership costs are fixed costs. Almost all of these costs are annual in nature and include:

 Depreciation
 Investment (or interest) cost
 Insurance cost
 Taxes
 Storage cost
Depreciation(1)
Depreciation is the loss in value of equipment resulting from use or age (useful life). Assume a
unit of equipment will decrease in value from its original total cost at a uniform rate. There are 3
three methods for influential the cost of depreciation.

1. Straight-Line Depreciation
Straight-line depreciation is the simplest to understand as it makes the basic assumption that the
equipment will lose the same amount of value in every year of its useful life until it reaches its
salvage value. The depreciation in a given year can be expressed by the following equation:
IC−S−T C
Eq.1 D n=
N
where Dn is the depreciation in year n, IC the initial cost ($), S the salvage value ($), TC the tire
and track costs ($), N the useful life (years), and D1 =D2 = …= Dn.

2. Sum-of-Years’-Digits Depreciation
The sum-of-years’-digits depreciation method tries to model depreciation assuming that it is not
a straight line. The actual market value of a piece of equipment after 1 year is less than the
amount predicted by the straight-line method. Thus, this is an accelerated depreciation method
and models more annual depreciation in the early years of a machine’s life and less in its later
years. The calculation is straightforward and done using the following equation:

Eq.2 Dn=¿¿

where Dn is the depreciation in year n, year n digit is the reverse order: n if solving for D1 or 1 if
solving for Dn, IC the initial cost ($), S the salvage value ($), TC the tire and track costs ($), and
N the useful life (years).
KADHIM FALAH NADHIM

3. Double-Declining Balance Depreciation

The double-declining balance depreciation is another method for calculating an accelerated
depreciation rate. It produces more depreciation in the early years of a machine’s useful life than
the sum-of-years’-digits depreciation method. This is done by depreciating the ‘‘book value’’ of
the equipment rather than just its initial cost. The book value in the second year is merely the
initial cost minus the depreciation in the first year. Then the book value in the next year is merely
the book value of the second year minus the depreciation in the second year, and so on until the
book value reaches the salvage value. The estimator has to be careful when using this method
and ensure that the book value never drops below the salvage value:
2
Eq.3 D n= (BVn-1-TC)
N
where D n is the depreciation in year n, TC the tire and track costs ($), N the useful life (years),
BV n1 the book value at the end of the previous year, and BVn1 > S.

Example 1 Compare the depreciation in each year of the equipment’s useful life for each of
the above depreciation methods for the following wheeled front-end bucket loader:

 . Initial cost: $148,000 includes delivery and other costs

 . Tire cost: $16,000
 . Useful life: 7 years
 . Salvage value: $18,000

A sample calculation for each method will be demonstrated and the results are shown in Table 1.
Straight-line method: From Equation 1 the depreciation in the first year D 1 is equal to the
depreciation in all the years of the loader’s useful life:

148000−18000−16000
D1¿ 7
=16286$/year

Sum-of-years’-digits method: From Equation 2 the depreciation in the first year D1 and the
second year D2 are:

7
D 1= (148000−18000−16000) =28500$
1+2+3+4 +5+6+ 7
KADHIM FALAH NADHIM

6
D 2= (148000−18000−16000) =24429$
1+2+3+ 4+5+6+ 7

Double-declining balance method: From Equation 3, the depreciation in the first year D1 is
2
D1= (148000-16000)=37714$
7
and the ‘‘book value’’ at the end of Year 1 = $148,000-$16,000-$37,714 = $94,286. However, in
Year 6, this calculation would give an annual depreciation of $7,012 which when subtracted
from the book value at the end of Year 5 gives a book value of $17,531 for Year 6. This is less
than the salvage value of $18,000; therefore, the depreciation in Year 6 is reduced to the amount
that would bring the book value to be equal to the salvage value or $6,543, and the depreciation
in Year 7 is taken as zero, which means that the machine was fully depreciated by the end of
Year 6

TABLE 1
Depreciation Method Comparison for Wheeled Front-End Loader
Year
Method 1 2 3 4 5 6 7
SL (Dn) $16,286 $16,286 $16,286 $16,286 $16,286 $16,286 $16,286
SOYD (Dn) $28,500 $24,429 $20,357 $16,286 $12,214 $8,143 $4,071
DDB (Dn) $37,714 $26,939 $19,242 $13,744 $9,817 $6,543 $0
DDB (BV) $94,286 $67,347 $48,105 $34,361 $24,543 $18,000 $18,000

INVESTMENT (OR INTEREST) COST(1)

Investment (or interest) cost represents the annual cost (converted into an hourly cost) of capital
invested in a machine . If borrowed funds are utilized for purchasing a piece of equipment, the
equipment cost is simply the interest charged on these funds. However, if the equipment is
purchased with company assets, an interest rate that is equal to the rate of return on company
investment should be charged. Therefore, investment cost is computed as the product of interest
rate multiplied by the value of the equipment, which is then converted into cost per hour of
operation.
The average annual cost of interest should be based on the average value of the equipment during
its useful life. The average value of equipment may be determined from the following equation:

I C ( n+1 )
p=
2
where IC is the total initial cost, P the average value, and n the useful life (years). This equation
assumes that a unit of equipment will have no salvage value at the end of its useful life. If a unit
KADHIM FALAH NADHIM

of equipment has salvage value when it is disposed of, the average value during its life can be
obtained from the following equation:
I C ( n+1 )+ S (n−1)
p=
2n

where IC is the total initial cost, P the average value, S the salvage value, and n the useful life
(years)

Example 2 Consider a unit of equipment costing $50,000 with an estimated salvage value
of $15,000 after 5 years.
Using Equation (2.5), the average value is

50000 ( 5+1 ) +15000(5−1)

p=
2∗5

=36000$

INSURANCE TAX AND STORAGE COSTS(1)

Insurance cost represents the cost incurred due to fire, theft, accident, and liability insurance for
the equipment. Tax cost represents the cost of property tax and licenses for the equipment.
Storage cost includes the cost of rent and maintenance for equipment storage yards, the wages of
guards and employees involved in moving equipment in and out of storage, and associated direct
overhead.
Calculated as a percentage of the average value of the machine as in investment cost

TABLE 2
Average Rates for
Investment Costs
Average Value
Item
(%)
Interest 3–9
Tax 2–5
Insurance 1–3
Storage 0.5–1.5

TOTAL OWNERSHIP COST

Total equipment ownership cost is calculated as the sum of depreciation, investment cost,
insurance cost, tax, and storage cost. As mentioned earlier, the elements of ownership cost are
often known on an annual cost basis. However, while the individual elements of ownership cost
are calculated on an annual cost basis or on an hourly basis, total ownership cost should be
KADHIM FALAH NADHIM

expressed as an hourly cost. After all elements of ownership costs have been calculated, they can
be summed up to yield total ownership cost per hour of operation. Although this cost may be
used for estimating and for charging equipment cost to projects, it does not include job overhead
or profit. Therefore, if the equipment is to be rented to others, overhead and profit should be
included to obtain an hourly rental rate.

Example 3 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

 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

 Solution:

4
Depreciation in the second year D 2= (186000−22000−14000) =40000$
15
40000
¿ =20 $ /h
8(250)

Investment cost, tax, insurance, and storage cost:

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

186000(5+1)+22000 (5−1)
Average investment = =120400 $
2∗5
KADHIM FALAH NADHIM

120400(0.1 3)
Investment, tax, insurance, and storage = =7.826 $/h
8∗250

Total ownership cost = 20+ 7.826 = 270826$/h

OPERATING COST(1)
Operating costs of the construction equipment, which represent a significant cost category and
should not be overlooked, are the costs associated with the operation of a piece of equipment.
They are incurred only when the equipment is actually used. The operating costs of the
equipment are also called ‘‘variable’’ costs because they depend on several factors, such as the
number of operating hours, the types of equipment used, and the location and working condition
of the operation.
The operating costs vary with the amount of equipment used and job-operating conditions. The
best basis for estimating the cost of operating construction equipment is the use of historical data
from the experience of similar equipment under similar conditions. If such data is not available,
recommendations from the equipment manufacturer could be used.

ELEMENTS OF OPERATING COST(1,2,3)

Operating cost is the sum of those expenses an owner experiences by working a machine on
a project. Typical expenses include

 Fuel
 Lubricants, filters, and grease
 MAINTENANCE AND REPAIR COST
 TIRE COST

Fuel(1)
Fuel consumption is incurred when the equipment is operated. When operating under standard
conditions, a gasoline engine will consume approximately 0.06 gal of fuel per flywheel
horsepower hour (fwhp-h), while a diesel engine will consume approximately 0.04 gal. A
horsepower hour is a measure of the work performed by an engine.
Fuel cost for gasoline in litter = 0.23 × hp × OF× fuel cost

Fuel cost for gasoline in gal = 0.06 × hp × OF× fuel cost

Fuel cost for diesel in litter = 0.15 × hp × OF× fuel cost

KADHIM FALAH NADHIM

Fuel cost for diesel in gal = 0.04× hp × OF× fuel cost

Example 4 Calculate the average hourly fuel consumption and hourly fuel cost for a
twinengine scraper in Example 3. It has a diesel engine rated at 465 hp and fuel cost $2.00/gal.
During a cycle of 20 s, the engine may be operated at full power, while filling the bowl in tough
ground requires 5 s. 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. For this condition, the
approximate amount of fuel consummated during 1 h is determined as follows:
Solution:
Rated power: 465 hp
Engine factor: 0.5
Filling the bowl, 5 s/20 s cycle = 0.250
Rest of cycle, 15/20 * 0.5 = 0.375
Total cycle = 0.625
Time factor, 45 min/60 min = 0.75
Operating factor, 0.625* 0.75 = 0.47
fuel consumption factor = 0.040
Fuel consumed per hour: 0.47(465)(0.040) = 8.74 gal
Hourly fuel cost: 8.74 gal/h ($2.00/gal) = $17.48/h.

Lubricating Oil Cost

The quantity of oil required by an engine per change will include the amount added during the
change plus the make-up oil between changes. It will vary with the engine size, the capacity of
crankcase, the condition of the piston rings, and the number of hours between oil changes. It is a
common practice to change oil every 100 to 200 h The quantity of oil required can be estimated
by using the following formula
0.006∗hp∗o f c
When q(gal/hr) q= +
7.4 t

0.0027∗hp∗o f c
When q(litter/hr) q= +
0.89 t

where q is the quantity consumed (gal/h), hp the rated horsepower of engine, C the capacity of
crankcase (gal), OF 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. The consumption data or
the average cost factors for oil, lubricants, and filters for their equipment under average
conditions are available from the equipment manufacturers.

MAINTENANCE AND REPAIR COST

KADHIM FALAH NADHIM

The cost of maintenance and repairs usually constitutes the largest amount of operating expense
for the construction equipment. Construction operations can subject equipment to considerable
wear and tear, but the amount of wear varies enormously between the different items of the
equipment used and between different job conditions. Generally, the maintenance and repair
costs get higher as the equipment gets older. Equipment owners will agree that good
maintenance, including periodic wear measurement, timely attention to recommended service
and daily cleaning when conditions warrant it, can extend the life of the equipment and actually
reduce the operating costs by minimizing the effects of adverse conditions. All items of plant and
equipment used by construction contractors will require maintenance and probably also require
repairs during the course of their useful life. The contractor who owns the equipment usually sets
up facilities for maintenance and engages the workers qualified to perform the necessary
maintenance operations on the equipment

Tires(3)
The cost of tires can be quite high on an hourly basis. The cost of tires, replacement, repair, and
depreciation should be figured separately. The cost of the tires is depreciated using straight-line
depreciation over the useful life of the tires, and the cost of tire repairs is taken as a percentage of
the tire depreciation, based on past experience.

Example 5 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?
Tire depreciation = $5,000/3,500 hours = $1.43 per hour
Tire repair = 15% × $1.43 per hour = $0.21 per hour
Tire cost = $1.43 per hour + $0.21 per hour
Tire cost = $1.64 per hour
Other wear items, such as cutting teeth, are estimated in the same manner as tires.

Example 6 Estimate the cost of owning and operating a piece of equipment on a project
with the following costs:
Actual cost (delivered)—$52,100 including tires Useful life—7 years at 1,400 per year

Horsepower rating—150 hp Total interest—8 percent per year

Cost of tires—$4,500 Insurance—$1,200 per year

Salvage or scrap value—$1,563 Taxes—$1,500 per year

Storage—$800 per year Fuel cost—$3.10 per gallon

Consumption rate—0.06 gallons per hp per hour Power utilization—62 percent

KADHIM FALAH NADHIM

Use factor—70 percent Lubrication—4 quarts oil at

$6.25 Oiler labor—2 hours labor at $46.50 Lubrication
schedule—every 150 hours

Oil filter—$12.50 Grease—1 tube per 10 hour shift at

$7.50 Air filter—$17.98 changed every 300 hours Life of tires—
4,000

hours Repair to tires—12 percent of depreciation

Repairs to equipment (repair reserves)—65 percent of purchase price (without tires)
KADHIM FALAH NADHIM

Figure Fixed Costs.

Example 7 Using the following information, determine the ownership and operating costs
for a hydraulic excavator:
KADHIM FALAH NADHIM

Actual cost (delivered)—$172,600 Horsepower rating—245 hp Salvage value—$17,200

Useful life—8 years at 1,600 hours per year Total interest—6.5 percent per year Taxes—$3,020 per
year Insurance—$2,589 per year Storage—$2,157 per year Fuel cost—$3.65 per gallon
Fuel consumption rate—0.04 gallons per hp perhour Power utilization—60 percent
Use factor—50 minutes per hour (83.33 percent) Lubrication—7 quarts of oil at $4.65
per quart
Oiler labor—2.9 hours at $31.27 Lubrication schedule—every 150 hours
Oil filter—$10.95 Grease—1 tube per 8 hour shift at $8.50 Air filter—$22.50 changed
every 450 hours
Repairs to equipment—75 percent over useful life

Solution
KADHIM FALAH NADHIM
KADHIM FALAH NADHIM
KADHIM FALAH NADHIM

References
1. Construction Equipment Management for Engineers ,Estimators, and Owners
DOUGLAS D. GRANSBERG CALIN M. POPESCU RICHARD C. RYAN
2. Construction Planning, Equipment and Methods by Robert L. Peurifoy, Garold D.
Oberlender
3. Estimating in Building Construction Eighth Edition Steven J. Peterson Frank R.
Dagostino