Construction Engineering

Construction Equipment & Machinery Management - I

Lecture # 03
 Machinary Costs
Plant, equipment, and tools used in construction operations are
priced in the following three categories in the estimate:
i. Small tools and consumables
ii. Equipment usually shared by a number of work activities
iii. Equipment used for specific tasks
For contractors in the heavy civil construction industry, the cost
of owning and operating equipment is a key part of doing
business in a profitable manner. For this the focus is on
estimating the cost of owning and operating construction
equipment of the third category cited above.
 Machinary Costs
Total equipment costs comprise two separate
components, those are:

 Ownership costs

 Operating costs
 Ownership Costs
Ownership costs are fixed costs. Almost all of these
costs are annual in nature and include:
 Initial capital cost
 Depreciation
 Investment (or interest) cost
 Insurance cost
 Taxes
 Storage cost
 Initial Capital Cost
On an average, initial cost makes up about 25% of the total
cost invested during the equipment’s useful life. This cost
is incurred for getting equipment into the contractor’s
yard, or construction site, and having the equipment ready
for operation. Initial cost consists of the following items:

 Price at factory + extra equipment + sales tax

 Cost of shipping
 Cost of assembly and erection
 Depreciation Cost
Depreciation represents the decline in market value of a
piece of equipment due to age, wear, deterioration, and
obsolescence. Depreciation can result from:

 Physical deterioration occurring from wear and

tear of the machine
 Economic decline occurring over the passage of
time
 Depreciation Cost
It is important to understand that the term depreciation as
used in this learning session is meant to represent the
change in the assets value from year to year and as a
means of establishing an hourly ‘‘rental’’ rate for that
asset.
Among many depreciation methods, the straight-line
method, double-declining balance method, and sum-of-
years’-digits method are the most commonly used in the
construction equipment industry.
 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:

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)
 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:

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).
 Double-Declining Balance Depreciation
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.

where Dn is the depreciation in year n, TC the tire and track costs ($), N the useful
life (years), BVn-1 the book value at the end of the previous year, and BVn-1≥ S.
 Assignment
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.
 INVESTMENT (OR INTEREST) COST

Investment (or interest) cost represents the annual cost

(converted into an hourly cost) of capital invested in a machine.
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.
 INVESTMENT (OR INTEREST) COST
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:

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 of equipment
has salvage value when it is disposed of, the average value during its
life can be obtained from the following equation: where S is salvage
value
 INVESTMENT (OR INTEREST) COST: Example
Consider a unit of equipment costing $50,000 with an estimated
salvage value of $15,000 after 5 years. Using Equation in previous
slide, the average value is
 INSURANCE ,TAX AND STORAGE COSTS
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.
 TOTAL OWNERSHIP COST
Total equipment ownership cost is calculated as the
sum of depreciation, investment cost, insurance cost,
tax, and storage cost.
As a practice, 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 expressed as an hourly cost.
 Assignment
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%

Estimated life: 5 years Taxes: 3%

Tire cost: $14,000 Storage: 0.5%

Salvage value: $22,000 Fuel price: $2.00/gal

Interest on the Operator’s wages:

investment: 8% $24.60/h
 Operating Costs
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.
 Operating Costs
The operating costs vary with the amount of
equipment used and job-operating conditions.
However following may be few components
 MAINTENANCE AND REPAIR COST
 TIRE COST
 CONSUMABLE COSTS
 Fuel Cost
 Lubricating Oil Cost
 MOBILIZATION AND DEMOBILIZATION COST
 EQUIPMENT OPERATOR COST
 SPECIAL ITEMS COST
 METHODS OF CALCULATING OWNERSHIP AND OPERATING COST
The most common methods available are
i. The caterpillar method,
ii. Association of General Contractors of America (AGC)
method,
iii. The Equipment Guide Book (EGB) method,
iv. The Data-quest method,
v. The Corps of Engineers method, and
vi. The Peurifoy method
 End Note

“One machine can do the work of fifty

ordinary men. No machine can do the
work of one Project Manager”
THANK YOU!