Heavy Construction Equipment and

Machinery

Bahir Dar University

MSc in Construction Technology and Management

TADESSE AYALEW (PhD)

Addis Ababa University
January 2020

1
 Course Content
O2 Introduction
Equipment Cost
Ownership Cost

Cost of Operating Construction

Equipment

Methods of Calculating Equipment

Cost

2
 2.1 Introduction
The Plant, equipment and tools used in construction operations are
priced in the following three categories;
1. Small tools and consumables
2. Equipment usually shared by a number of work activities
3. Equipment used for specific tasks

Total equipment cost comprises two separate components

 Ownership cost
 Operating cost
3
 2.2 Ownership Cost

Ownership costs are fixed costs. Almost all of these costs

are annual in nature and include:
 Initial Cost

 Depreciation

 Investment Cost

 Insurance Tax and Storage Cost

4
A. Initial 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 contractor‟s yard, or

construction site, and having the equipment ready for operation.

 Many kinds of ownership and operating costs are calculated using initial
cost as a basis, and normally this cost can be calculated accurately. Initial
cost consists of the following items:
 Price at Factory + extra equipment + sales tax

 Cost of shipping

 Cost of assembly and erection

5
 B. Depreciation

 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 or obsolescence occurring over the passage of time

 In the appraisal of depreciation, some factors are explicit while other

factors have to be estimated. Generally the asset costs are known which
include:
 Initial cost

 Useful life

 Salvage value
6
 B. Depreciation

 How ever, there is always some uncertainty about the exact length of the

useful life of the asset and about the precise amount of salvage value,
which will be realized when the asset is disposed. The Depreciation
methods are
 Straight line method

 Sum of year digit method

 Sinking fund method

 Declining balance method

7
 B. 1 Straight line method

 It is the simplest to understand as it makes the basis 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
Dn = (C – S) / N
Where Dn = Depreciation in year n
C = The initial cost
S = The salvage value

N = The useful life (years)

8
 B. 2 Sum of year digit method

 It tries to model depreciation that actual market value of a piece of

equipment after 1year is less than the amount predicted by SL method.
Thus more annual depreciation in the early years of a machine‟s life and
less in its later years. The depreciation in a given year can be expressed
by the following equation
Dn = (year n digit) * (C – S) / ∑N
Where Dn = Depreciation in year n
year n digit = The reverse order
C = The initial cost
S = The salvage value

9 N = The useful life (years)

 B. 3 Declining balance method

 The depreciation for a given year is calculated on the basis of the un

depreciated balance (instantaneous book value), rather than the original

cost. Further the method does not take into account any salvage value
of the asset. The factor can be determined using simple interest formula
and also special tables developed for the purpose.
Dn = (M/N) * BVn-1 BVn = BVn-1 - Dn

Where Dn = Depreciation in year n

M = constant (Generally 2)
N = The useful life (years)
BVn-1 = Opening book value at year n
10
 B.4 Sinking fund method

 The method works in terms of a “sinking fund factor”, which is

determined on the basis of the initial and salvage values of the asset, the
service life and rate of (compound) interest. The factor can be
determined using simple interest formula and also special tables
developed for the purpose.
Dn = (C – S ) * f
Where Dn = Depreciation in year n
C = The initial cost
S = The salvage value
f = sinking fund factor
N = The useful life (years)
11
 Example 2.1

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.

12
 Solution

 Straight-line method:, the depreciation in the first year D1 is

equal to the depreciation in all the years of the loader‟s useful

life:

13
 Solution (Cont…)

 Sum-of-years‟-digits method, the depreciation in the

first year D1 and the second year D2 are:

 Double-declining balance method: From Equation 2.2,

the depreciation in the first year D1 is

14
 Solution (Cont…)

15
 C. Investment (Interest) cost

 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 investment cost is simply the interest charged on

these funds.

 If it is purchased with company assets, an interest rate that is

equal to the rate of return on company investment should be

charged.
16
 C. Investment (Interest) cost(Cont..)

 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).
17
 Example 2.2

Consider a unit of equipment costing $50,000 with an

estimated salvage value of $15,000 after 5 years.

Solution
 Using the above equation, the average value is;

18
 D 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.
 The average rates for interest, insurance, tax, and storage found in the
literature are listed in the following Table. These rates will vary
according to related factors such as the type of equipment and location
19 of the job site.
 D Insurance tax and storage
costs

20
 Summary of ownership cost
 The total equipment ownership cost is calculated as the sum of

depreciation, investment cost, insurance cost, tax & storage cost.

 This should expressed as an hourly cost and 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, profit and

overhead should include to obtain an hourly rental rate.

21
Example 2.3
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 and 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
22
Solution

23
 2.3 COST OF OPERATING CONSTRUCTION
EQUIPMENT
 Ownership costs are also called “variable” cost. 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.
 Maintenance & Repair cost

 Tire cost
 Consumable cost
Equipment Operator cost
 Special Items cost

24
Mobilization & Demobilization cost
 2.3.1 Maintenance and Repair Cost
 The cost of maintenance and repairs usually constitutes the largest

amount of operating expense for the construction equipment.

 The annual cost of maintenance and repairs may be expressed as a

percentage of the annual cost of depreciation or it may be

expressed independently of depreciation. The hourly cost of
maintenance and repair can be obtained by dividing the annual
cost by its operating hours per year. The hourly repair cost during
a particular year can be estimated by using the following formula

25
 2.3.1 Maintenance and Repair Cost (Cont…)
The lifetime repair cost is usually estimated as a percentage of the
equipment‟s initial cost deducting the cost of tires. It is adjusted by
the operating condition factor obtained from the following Table

26
 Example 2.4
Estimate the hourly repair cost of the scraper in Example 2.3 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 2000 h of operation per year.

Solution

27
 2.3.2 Tire Cost
 The tire cost represents the cost of tire repair and replacement. Because
the life expectancy of rubber tires is generally far less than the life of the
equipment on which they are used on, the depreciation rate of tires will
be quite different from the depreciation rate of the rest of the vehicle.

 Table 2.4 lists the typical ranges of tire life found in the most
recent literature on the subject for various types of equipment.
Tire repair cost can add about 15% to tire replacement cost. So,
the following equation may be used to estimate tire repair and
replacement cost:

28
 2.3.2 Tire Cost

29
 2.3.3 CONSUMABLE COSTS

 Consumables are the items required for the operation of a

piece of equipment that literally gets consumed in the course

of its operation. These include, but are not limited to, fuel,
lubricants, and other petroleum products. They also include
filters, hoses, strainers, and other small parts and items that
are used during the operation of the equipment.

30
 2.3.3.1 Fuel
 Fuel consumption is incurred when the equipment is

operated. The hourly cost of fuel is estimated by multiplying

the hourly fuel consumption by the unit cost of fuel.

 The amount of fuel consumed by the equipment can be

obtained from the historical data. When the historical data is

not available, Table 2.5 gives approximate fuel consumption
(gal/h) for major types of equipment.

31
 2.3.3.1 Fuel

32
 Example 2.5
 Calculate the average hourly fuel consumption and hourly
fuel cost for a twin- engine scraper in Example 2.3. 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.

33
 Solution
 For this condition, the approximate amount of fuel consummated
during 1 h is determined as follows:
 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
From Table 2.5: use „„unfavorable‟‟ 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.
34
 2.3.3.2 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
[6]. The quantity of oil required can be estimated by using the following formula:

 where q is the quantity consumed (gal/h), 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.
 The consumption data or the average cost factors for oil, lubricants, and filters for
their equipment under average conditions are available from the equipment
35 manufacturers.
 2.3.4 MOBILIZATION AND DEMOBILIZATION COST

 This is the cost of moving the equipment from one job site to
another. It is often overlooked because of the assumption that the
previous job would have already paid for it.
 These costs 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).
 The hourly cost can be obtained from the total cost divided by the
operating hours.

36
 2.3.5 EQUIPMENT OPERATOR COST
 Operator‟s wages are usually added as a separate item and added

to other calculated operating costs. They should include overtime

or premium charges, workmen‟s compensation insurance, social
security taxes, bonus, and fringe benefits in the hourly wage
figure.

37
 2.3.6 SPECIAL ITEMS COST

 The cost of replacing high-wear items, such as dozer, grader,

and scraper blade cutting and end bits, as well as ripper tips,
shanks, and shank protectors, should be calculated as a
separate item of the operating cost.

 As usual, unit cost is divided by the expected life to yield cost

per hour.

38
 2.4 METHODS OF CALCULATING OWNERSHIP AND
OPERATING COST

 The most common methods available are the caterpillar

method, Association of General Contractors of America (AGC)

method, the Equipment Guide Book (EGB) method, the data
quest method, the Corps of Engineers method, and the Peurifoy
method.

39
EXAMPLE 1

40
SOLUTION

41
 SOLUTION

42
 SOLUTION

43
 SOLUTION

44
 Example 2

45
 Solution

46
47
 Summary

48
 Example 3

49
 Solution

50
 Example 4

51
52
 Summary

53
Over all Summary

54
 Further Reading
 Read the basic principles behind each methods from the following books

 For better understanding about the calculation read Appendix of the first book

55
56
 Examples 5
Example 5.1 Example 5.2
Assume a contractor has purchased The same contractor has purchased
a new Caterpillar D8R Bulldozer a new Caterpillar 950G Wheel
with a delivered duty paid price of loader with a delivered price of
birr 9,750,000 ETB Calculate the birr 4,500,000ETB. Moreover, the
hourly cost of the specified
price of tires is birr 15,000 per
Bulldozer.
tire, which is birr 60,000 for 4
tires.

57 Calculate the hourly cost of both equipment

 Solution for the dozer
A. Delivered price …………………… Birr 9,750,000

B. Cost of tires…………………………Birr 0.00 (Crawler mounted)

C. Delivered price less cost of tires (P).………Birr 9,750,000

D. Assume the Bulldozer will be engaged partly in works such as borrow material
production and common excavation with medium impact as well as in heavy rock
ripping and dozing hard rock with high impact conditions
 Estimated economic life = Assume 10 Years

E. Estimated annual utilization…….. 2000 Hrs

F. Estimated salvage value.…….(S = 10% delivered price)

G. S = 0.1 * 9,750,000 = Birr 975,000

58
G. Estimated cost of capital…………….………………… (I = 8.5%)

H. Equivalent annual equipment cost of delivered price less cost of tires

A1 = P * [ I (1+I)n] / [(1+I)n – 1]

A1 = 9,750,000 * [0.085(1+0.085)10] / [(1+0.085) 10 – 1] A1 =

1453068.857 Birr/Year

I. Equivalent annual salvage value

A2 = S * I / [(1+I)n – 1]

A2 = 9,750,000 * 0.075 / [(1+0.085) 10 – 1]

A2 = 67303.75 Birr/Year
J. Dozer Depreciation Cost per hour (DDC)
DDC = (A1 – A2) / E
DDC = (1453068.857 – 67303.7)/2000 = 692.88 Birr/Hr
59
 1-B) Insurance charges:

 Most local insurance companies charge between 0.75 to 1% of the

equipment book value for heavy duty equipments and between 1 to 1.5%
for light duty equipments such as small vehicles.
 A. Delivered price……..……………………….…….Birr 9,750,000
 B. Annual insurance charges…………..………1% of delivered price

 C. Estimated annual utilization………………..…..………2000 Hrs

 D. Dozer Insurance Cost per hour (DIC) = B/C

 DIC= 0.01* 9,750,000 /2000

 DIC = 48.75 Birr/Hrs

60
 1-C) Property Tax

 Different countries have different tax regulations whereby equipment owners pay

annual property tax for their equipments.

 Currently there are no such tax regulations in Ethiopia but there is a registration fee

for heavy duty construction equipments every two years.

A. Registration fee per two years.………………….Birr 2,000.00

B. Estimated annual utilization……………………………2000 Hrs

C. Dozer Property Tax per hour (DPT) = A/(2*B)

DPT = 2000/(2*2000)

DPT = 0.5 Birr/Hr

61
 1-D) Erection and Installation costs:

 The initial erection and installation costs shall be considered in

calculating the equipment owning costs.
 These costs are usually applied to equipments which are transported in
pieces from the supplier‟s place and need to be assembled at the
contractor‟s place such as crushers, batching plants and so on.
 For this particular case the cost of erection and installation will be zero
since both equipments does not need to be erected or installed.
 Dozer Erection and Installation Costs per hour (DEIC)=0.00
Birr/Hr
62
 1-F) Summarized equipment owing cost

 Once the equipment depreciation cost, insurance charges, property

tax, erection and installation costs and cost of major repairs and
overhauls are identified, all these costs will be summed to get the
hourly owning cost of the equipment
 Hourly owning costs…………DDC+DIC+DPT + DEIC +
DMROC
 Hourly owning costs = 692.88 + 48.75 + 0.50 + 0.00 + 0.00
= 698.13 Birr/hr

63
 2- EQUIPMENT OPERATING COSTS

 Equipment operating costs are costs in which the owner of the

equipment expends throughout the economic life of the equipment

when it is working.

 These costs include mainly the costs of fuel, lube oils, filters, grease,

normal repairs, tires, undercarriage and special high wear items.

64
 2-A) Fuel

 Based on the estimated fuel consumption data provided by Caterpillar

Performance Hand Book the fuel cost of the given dozer can be

computed as follows
 Assumed Load factor ……………….Medium
 Estimated fuel consumption………….33 Ltr/Hr
 Fuel cost ……………………….… 11.90 Birr/Ltr
 Dozer Fuel Cost per hour (DFC) = B*C
 DFC = 392.70 Birr/Hr

65
 2-B) Cost of lube oils, filters and grease:

 The cost of lubricants (lube oils), filters and grease will mainly depend on the
maintenance practice of the equipment owner and conditions of the work
location.
 Some equipment owners follow the equipment manufacturers‟ guideline
concerning time periods between lube oils, filters and grease changes while
others establish their own preventive maintenance guidelines.
 Therefore, depending on the equipment owner‟s preventive maintenance
schedule or the equipment manufacturer‟s service guideline, the cost of lube
oils, filters and grease will be calculated based on the number of changes over
the economic life of the equipment.

66
1-B-1) Cost of lube oils
Lube oils include lubricants required for Crankcase/Engine, Transmission, Final
drives and Hydraulic control systems.
A. Estimated consumption of Engine oil………………...……0.129 Ltr/Hr

B. Price of Engine oil………………………………………..68.79 Birr/Ltr

C. Estimated consumption of Transmission oil……………..0.144 Ltr/Hr

D. Price of Transmission oil…………………………...………74.61 Birr/Ltr

E. Estimated consumption of Final drives oil…….……..……0.015 Ltr/Hr

F. Price of Final drives oil….………………………….……..70.36 Birr/Ltr

G. Estimated consumption of Hydraulic oil…………………...0.038 Ltr/Hr

H. Price of Hydraulic oil……………………..………………. 70.36 Birr/Ltr

I. Dozer Lube Oils Cost per hour (DLOC) = A*B + C*D + E*F + G*H

DLOC = 23.47 Birr/Hr

67
1-B-2) Cost of filters
Filter costs include the costs of Lube oil filters, Fuel filters and Air filters. The cost of
filters depends entirely on the number of filter changes over a specified working time of
the equipment.
A. Scheduled Engine oil filter changes ……………………….every 250 Hrs
B. Price of Engine oil filter………………………………..……….807.93 Birr/Pc
C. Scheduled Transmission oil filter changes ………………..every 500 Hrs
D. Price of Transmission oil filter…………………………….…….1529.63 Birr/Pc
E. Scheduled Hydraulic oil filter changes ……………………..every 500 Hrs
F. Price of Hydraulic oil filter……………………………….….…….1822 Birr/Pc
G. Scheduled Primary fuel filter change ……………………….every 2000 Hrs
H. Price of Primary fuel filter…………………………………….…..665.58 Birr/Pc
I. Scheduled Final fuel filter change ……………………….……..every 500 Hrs
J. Price of Final fuel filter………………………………………...…...1209.16 Birr/Pc
K. Scheduled Primary air filter change …………………………every 2000 Hrs
L. Price of Primary air filter………………………………………….3055.16 Birr/Pc
M. Scheduled Secondary air filter change ………………………every 1000 Hrs
N. Price of Secondary air filter……………………………..………3050.00 Birr/Pc
O. Dozer Cost of Filter per hour (DCF) = B/A + D/C + F/E + H/G + J/I + L/K +
N/M

68 DCF = 17.26 Birr/Hr

 1-B-3) Cost of grease
The total consumption of grease depends on the size of the equipment,
working environment of the equipment and the frequency of greasing by the
equipment owner. Even though it is very difficult to estimate the
consumption of grease in the absence of historical records, it can be assumed
that on average one fitting may take about 0.02Kg as per recommendations
from Ries Engineering which is the local dealer for Caterpillar products
 A. Estimated grease consumption…………..……….0.006 Kg/Hr
 B. Price of grease…………………………………..131 Birr/Kg
 C. Dozer Grease Cost per hour (DGC) = A*B
 DGC = 0.78 Birr/Hr

69
1-C) Cost of tires:
Cost of tires is one of the major operating costs for wheel mounted equipments. Tire costs

include the cost of tire replacement and its repair. It is actually difficult to estimate tire

economic life because of the tire wear variability depending on the site surface conditions,

speed, wheel position, working load, maintenance conditions, road grades and curves as well

as operator‟s skill. The best way to estimate tire economic life is to use the equipment owner‟s

tire utilization records for each type of equipment. In the absence of such accurate records, it

is better to use tire economic life guide lines prepared both by the equipment and tire

manufacturers. As provided in the Caterpillar Performance Hand Book , the economic life of

tires is categorized into three zones (A- based on the working applications.

A. Dozer Tire Cost per hour (DTC) = 0.00 Birr/Hr (Crawler Mounted)

70
 1-D) Cost of normal repair
Normal repairs are all the repair cost during the life time of the equipment excluding
undercarriage as well as major repair and overall. Accurate estimated cost of normal
repairs can be obtained from previous records of the equipment owner. However, in
the absence of such accurate data, the equipment manufacturers‟ guideline can be used
to estimate the hourly equipment cost of normal repairs. In the Caterpillar
Performance Hand Book, the hourly normal repair costs are calculated using the basic
repair factor from charts provided based on the work application of the equipment
which are rated as Zone A (moderate), Zone B (average) and Zone C (Severe).
Moreover, extended-life multipliers will be used if the estimated economic life of the
equipment is greater than 10,000 Hrs and these extended-life multipliers are given for
each equipment depending on their economic life.

71
  The cost of normal repair cost provided in the caterpillar Hand book includes costs
of parts and labors.
A. Work application……..………………………Zone B (Average)
B. Basic repair factor…………………………….7.5 USD/Hr
C. Estimated economic life……………………….20,000 Hrs
D. Extended life multiplier…………………………1.3 (since economic life is
greater than 10,000)
E. Hourly normal repair cost of parts = 0.7*B*D
F. Hourly normal repair cost of labor = 0.25*0.3*B*D
G. Dozer Normal Repair Cost per hour (DNRC) = E + F
DNRC = 7.55 USD/Hr
Using the selling rate of the commercial bank of Ethiopia
1 USD =16.74 Birr
DNRC = 16.74*7.55 = 126.387 Birr/Hr
72
 1-E) Cost of high wear items:
 High wear items are these items having very short economic life as

compared to the basic equipment. Some of these items include cutting

edges, ripper tips, bucket teeth, body liners, cables, router bits and so on.
 Assume a dozer is ripping 30% of its working time and the estimated

economic life of the ripper is 50 Hours. Moreover, the ripper is purchased

for Birr 1500. Establish the hourly cost of the ripper
A. Economic life of ripper as compared with the dozer operating time
50/0.3 = 167 Hr
B. Hourly cost of ripper
1500/167 = 8.982Birr/Hr

73
 Summary of Operating Costs

 As discussed earlier, the equipment operating cost includes the cost of fuel,

lubricants, filters, grease, tires, undercarriage, normal repairs and high wear
items and all these costs will be summed to get the operating cost of the
equipment. Accordingly, the operating cost of the dozer can be summarized as
follows
 Hourly operating costs

 = DFC + DLOC + DCF + DGC + DTC + DUC + DNRC

 Hourly operating costs

= 392.70 + 23.47 + 17.26 + 0.78 + 0.00 + 52.48 + 126.387

Hourly operating costs = 560.597 Birr/Hr
74
 3. OPERATOR’S SALARY AND BENEFITS

 Based on the principles of direct labor hourly cost estimation, the annual

operator‟s salary and benefits shall be summed up and divided by the annual
utilization of the equipment to get the hourly cost of operators.
 In determining the annual operator‟s salary and benefits, the following costs,

but not limited to, shall be assessed properly. Once, the annual salary and
benefits are calculated for the equipment operators, the hourly cost of
operators can be computed as follows:
A. Total annual salary and benefits………………. 62,310.44 Birr
B. Annual equipment utilization………………………2000 Hrs
C. Hourly operator‟s cost = A/B = 31.16 Birr/Hr
75
 Table – Operator’s annual salary and benefits cost breakdown

SALARY AND BENEFITS OPERATOR BY EQUIPMENT CLARIFICATIONS AND REMARKS

Dozer Wheel Loader

A Basic salary 24,000.00 `18,000.00 12 x Monthly basic salary

B Overtime pay 7,500.00 5,625.00 313 x 2 = 626 hours/year
C Project allowance 9,600.00 7,200.00 40% (A)
D Hardship allowance 7,200.00 5,400.00 30% (A)
E Food allowance 1,440.00 1,440.00 120 x Twelve months
F Medical insurance 360.00 270.00 1.5% (A)
G Bonus 4,000.00 3,000.00 2 x Monthly basic salary
H Provident fund 2,400.00 1,800.00 10% (A)
I Annual leave 3,143.77 2,357.83 20 + 21 = 41 working days
J Severance pay 2,666.67 2,000.00 (1 + 1/3) months

Total annual salary and benefits

(A+B+C+D+E+F+G+H+I+J) =62,310.44 47,092.83
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 Summary of all costs
The equipment hourly cost for owned equipments is then the sum of
the equipment owning costs, equipment operating costs and the
operator‟s salary and benefits.
A. Hourly owning costs…………………….………. 698.13 Birr
B. Hourly operating costs…………………….…..…560.59 Birr
C. Hourly operator‟s costs…………………………....31.16 Birr
D. Hourly Bulldozer costs = A + B + C = 1289.88 Birr

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 Additional
 There are also cases where contractors may lease their equipments to

other construction companies. Therefore, contractors and leasing

companies are also interested to establish their equipment rental rates
from time to time. In establishing these equipment rental rates, in
addition to the equipment owning costs, equipment operating costs
and operator‟s costs, contractors and equipment leasing companies
need to understand the following cost components and include any
additional costs to establish their equipment rental rates.
 Overhead costs
 Profit and income tax
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 4) OVERHEAD COSTS
 In addition to the Equipment owning and operating costs as well as cost of

operators, the equipment owner‟s overhead costs shall be included in

determining the overall equipment hourly costs. Overhead costs widely vary
between equipment owners depending on organizational structure, number
of staffs employed at head office and project sites, salary and benefit scales,
office facilities and so on.
A. Hourly owning costs…………………….………. 698.13 Birr
B. Hourly operating costs…………………….……560.59 Birr
C. Hourly operator‟s costs…………………………….31.16 Birr
D. Hourly overhead costs = 0.15*(A+B+C)

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Hourly overhead costs = 193.482 Birr
 5) EQUIPMENT BREAKEVEN COST

 Equipment breakeven cost is the sum of equipment owning costs, operating

costs, operator‟s costs and overhead costs. Accordingly, the hourly breakeven
costs for the dozer is;
A. Hourly owning costs…………………….………. 698.13 Birr
B. Hourly operating costs…………………….……560.59 Birr
C. Hourly operator‟s costs…………………………….31.16 Birr
D. Hourly overhead costs ………………………….193.482Birr
E. Hourly breakeven costs = A + B + C + D
Hourly breakeven costs = 1483.36 Birr
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 6) PROFIT AND INCOME TAX

 Obviously equipment owners are investing their capital to get

maximum possible profit from the contracts to be performed. The

profit margin depends entirely on the market competitiveness and
company strategies.

 Moreover, any equipment leasing company operating a profitable

business in Ethiopia shall pay 30% of its gross profit as income tax as
per the Income tax proclamation No. 286/2002.

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  For completeness of the exercise in establishing the equipment rental cost of
the equipments in this example , assume the net profit margin to be 10% of
the equipment breakeven cost. Accordingly, gross profit has to be calculated
and added to the equipment breakeven cost to establish the rental rate of
equipments.
 Let C be the equipment breakeven cost
 Gross Profit = X% * C
 Net Profit = 10% * C
 Income tax = 0.3 * Gross profit
 Gross Profit = Net Profit + Income tax
 X% * C = 10% * C + 0.3 * X% * C
 X% = 10% + 0.3 * X%

 X% = 14.29%
A. Hourly breakeven costs = 1483.36 Birr

82 B. Hourly gross profit = 0.1429*A= 211.97 Birr

 7) EQUIPMENT RENTAL RATES
If the equipment owner wants to rent his equipment to others, equipment rental rates
shall be calculated when the equipment is running and in its idle situation. Running
equipment rental rate includes the breakeven costs plus the gross profit. While idle
equipment rental rate includes only the equipment owning costs, operator‟s costs and
overhead costs. Therefore, contractors or equipment leasing companies can easily
determine the rental rates of their equipments as far as the following hourly costs are
properly calculated for each equipment.
 Equipment hourly owning costs
 Equipment hourly operating costs
 Operator‟s hourly costs
 Overhead hourly costs
 Hourly gross profit

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  As an illustration, let‟s demonstrate to calculate the equipment idle

rental rate and the equipment running rental rate the dozer;
Dozer Idle Rental Rate per hour

A. Hourly owning costs…………………….….……. 698.13 Birr

C. Hourly operator‟s costs…………………………….31.16 Birr
D. Hourly overhead costs …………………….…….193.482Birr
Hourly idle dozer rental rate = 922.772 Birr

Dozer Running Rental Rate per hour

A. Hourly breakeven costs = 1483.36 Birr (including operating cost)

B. Hourly gross profit = 211.97 Birr

Hourly running dozer rental rate = 1695.33 Birr

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 Assignment-1 (to be submitted on January 5,2020
No Description Values No Description Values
1 Purchasing price 5 000 000,00 23 Scheduled Transmission oil filter changes every 500 Hrs
10% of purchasing Price of Transmission oil filter
2 Salivage value price 24 1529.63 Birr/Pc
3 Cost of tire 15,000.00 birr each 25 Scheduled Hydraulic oil filter changes every 500 Hrs
4 Estimated economic life of tire 2500 hrs 26 Price of Hydraulic oil filter 1822.00 Birr/Pc
Estimated economic life of the Scheduled Primary fuel filter change
5 equipment 10years 27 every 2000 Hrs
6 Estimated annual utilization 1500 hrs 28 Price of Primary fuel filter 665.58 Birr/Pc
7 Estimated cost of capital 10% 29 Scheduled Final fuel filter change every 500 Hrs
8 Insurnace charge 1% of purchasing price 30 Price of Final fuel filter 1209.16 Birr/Pc
9 Property tax (registration fee) 2000 Birr/2 years 31 Scheduled Primary air filter change every 2000 Hrs
10 Assumed load factor Medium 32 Price of Primary air filter 3055.16 Birr/Pc
11 Estimated fuel consumption 20lit/hr 33 Scheduled Secondary air filter change every 1000 Hrs
12 Fuel cost 19 birr/lit 34 Price of Secondary air filter 3050.00 Birr/Pc
13 Estimated consumption of Engine oil 0.120 Ltr/Hr 35 Estimated grease consumption 0.004 Kg/Hr
14 Price of Engine oil 68.79 Birr/Ltr 36 Price of grease 131Birr/Kg
Estimated consumption of Basic repair factor
15 Transmission oil 0.034 Ltr/Hr 37 4.5 USD/Hr
16 Price of Transmission oil 74.61 Birr/Ltr 38 Extended life multiplier 1,25
Estimated consumption of Final Total annual cost of operator’s wage and
17 drives oil 0.036 Ltr/Hr 39 benefits 55,500 birr/year
18 Price of Final drives oil 70.36 Birr/Ltr
Estimated consumption of Hydraulic
19 oil 0.076 Ltr/Hr
20 Price of Hydraulic oil 70.36 Birr/Ltr
21 Scheduled Engine oil filter changes every 250 Hrs
85 22 Price of Engine oil filter 807.93Birr /Pc
 Thank you
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