Dep’t COTM poly technology institute

Cha pter Three

Scheduling and Development Equipment Costs

INTRODUCTION :
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 numbe r of work activities: These kinds of equipment items
are kept at the site over a period of time and used for 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 eq uipment,
cranes, hoisting equipment, highly specialized, and costly items such as concrete saws fall into this
category.

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 ECONOMICS OF CONSTRUCTION EQUIPMENT
Economics of construction equipment deals with the study of working equipments and to compute
the unit cost of production. This economic evaluation helps in taking a decision to select equipment
to hire it. Unit cost of production is calculated after estimating the best of production by calculating
hourly owner ship and operating cost of the equipment and knowing hourly production of that
equipment.
Equipment Owning and Operating costs (frequently referred to as O & O costs), as the name
implies, are composed of owning costs and operating costs. Owning costs are fixed costs that are
incurred each year whether the equipment is operated or not. Operating costs, however, are incurred
only when the equipment is used.

Hourly working Rate

Hourly working rate of construction equipment comprises the following components:
I) Owning Cost: Owning costs are made up of the following principal elements:
a. Investment (or interest) cost
b. Insurance cost
c. Storage cost
d. Depreciation Cost
e. Major Repair Cost
II) Ope rating Cost: it includes the following Cost
a. Cost of fuel (or power)
b. Cost of Lubricant
c. Servicing and Maintenance Cost
d. Labor Cost
e. Cost of Field Repair
f. Various other over head costs
I) OWNING COST
A. Investment Cost
This is a kind of fixed cost and continuous to be incurred whether the equipment is used or not.
Investment cost comprises of the following:
 Interest on the money invested in the procurement of the equipment
 Various taxes of the equipment
 Insurance expends
 Storage costs
Investment cost (or interest) represents the annual cost (converted to an hourly cost) of the capital
invested in machine. If borrowed funds are utilized, it is simply the interest charge on the funds.
However, if the item of equipment is purchased from assets, an interest rate should be charged equal
rate of return on company investment. Thus investment cost is computed as the product of an interest
rate multiplied by the value of the equipment, then converted to cost per hour. The true investment cost
for specific year of owning is properly calculated using the average value of the equipment during that

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year. However, the average hourly investment cost may be more easily calculated using the value of the
average investment over the life of the equipment
Generally these investment costs are taken as about 10 to 15% of the total cost of the
equipment.
------------ Eq.3.1
The result obtained from the equation should be sufficiently accurate for calculating average hourly
owning cost over the life of the equipment. However, the reader cautioned that the investment cost
calculated in this manner is not the actual cost for specific year. It will be too low in the early years of
equipment life and too high in later years. Thus this method should not be used for making replacement
decision or for other purpose requiring precise investment cost for a particular year.
B. Insurance, Tax, and Storage
Insurance cost represents the cost of fire, theft, accident, and liability insurance for the equipment. Tax
cost represents the cost of property tax and licenses for the equipment. Storage cost represents the cost
of rent and maintenance for equipment storage yards and facilities, the wages of guards and employees
involved in handling equipment in and out of storage, and associated direct overhead.
C. Depreciation
Due to use or obsolescence equipment are loses its value.

Depreciation

Depreciation due to Depreciation due to

physical condition functional

Wear & tear Physical decay Accidental Deferred In adequacy Obsolescenc

maintenance & e
Neglect

1. Depreciation
When ever any machine or equipment performs useful work its wear and tear is bound to occur. This
can be minimized up to some extent by proper care and maintenance but cannot be totally prevented. Its
efficiency also reduces with the laps of time and at one time it becomes uneconomical to be used
further and needs replacement by new unit. Therefore, we can say that efficiency and value of machine
of asset constantly reduces with the laps of time during use, which is known as “depreciation”. Some
money must be set aside yearly from the profits, so that when an equipment becomes uneconomical, it
can be replaced by the new one. Therefore, the initial cost of machine plus installation charges plus
repair charge minus scrap (salvage) value is charged against overheads and spread over the machine’s
use life.
For further understanding depreciation can be classified as under:

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2. Obsolescence
Suppose a contractor purchase a machine for his production but after some duration a better machine
comes in the market, whose production rate is very high and is more economical. Also the old machine
is efficient but becomes out of fashion and uneconomica l due to the new better machine which has
come in the market. This is known as “obsolescence”. Consideration of this factor is of much
important and some money should also be set aside from the profits for this cause. Hence
“obsolescence” is the depreciation of existing machinery or asset due to new and better invention,
design of equipment of processes etc.

Methods of calculation: the following are frequently used method for calculating depreciation
1. Straight line methods
2. Sum-of-Years’-Digits Depreciation
3. Double-Declining Balance Depreciation

1. Straight line methods: The straight- line method of depreciation assumes that an asset loses value
at a constant rate. The annual depreciation rate is calculated by dividing 1 by the recovery period as
follows: this method assumes that lose of value of machine is directly proportional to its age. It means
one should deduct the scrap (salvage) value from the original value and divide the remaining value by
the number of years of useful life.
Then,

Rn ------------ Eq. 3.2

The annual depreciation rate for the straight-line method is constant for all years of the recovery period.
The annual depreciation is calculated by taking the purchase price less the salvage value of the
equipment and multiplying the result by the annual depreciation rate as follows:
Dn = (IC – S) R n ------------------------- Eq. 3.3
By substituting Eq. (3.2) into Eq. (3.3) the annual depreciation is calculated as follows:

Dn ---------------------------- Eq. 3.4

OR Dn
The book value of the asset decreases at a uniform rate each year and is calculated for the end of year n
as follows:
BVn = IC - n (D n ) ----------------------- Eq. 3.5
The book value for an asset at the end of year n is calculated from the previous year’s book value, as
follows:
BVn = BVn-1 – Dn ------------------------ Eq. 3.6
If we were to plot the book values for an asset these values would fall on a straight line; hence, the
name of the method.

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Where:
Rn = the depreciation rate or percentage of depreciation taken in year n.
Dn = the depreciation for year n.
TC = tire or truck cost
N = number of useful life D1=D2=….. D n
IC = initial cost,
S = be the scrap (salvage) value
BVn = the book value or the value of the assets as it is listed on the accounting books at the end of year
n. the book value equals the purchase price less the depreciation recorded to date.
This method of calculating depreciation fund is also k nown as “Fixed installment (payment)” method,
because every year some (fixed) amount is deducted and no consideration is made about the
maintenance and repair charges, which gradually increases as the machine is getting old.

Example -1
A dump truck is purchased for 2,970,000 birr and has an estimated salvage value of 270,000 birr at the
end of the recovery period. Prepare a depreciation schedule for the dump truck using straight- line
method with a recovery period of five years and book value of the machine.
Given: Required
IC = 2,970,000 birr Dn =?
S = 270,000 birr Bvn =?
N = 5 years (life time)
Solution: using Eq. (1), the annual depreciation rate is calculated as follows:

Rn ------------ Eq. 3.2

Using Eq. 3), the annual depreciation is calculated as

Dn ---------------------------- Eq. 3.4

Dn = 540,000 birr
Using equation -4 the book value at the end of year -1 through 5 is calculated as follows
BVn = IC - n (D n ) ----------------------- Eq. 3.5

BV1 = (2,970,000 – 1(540,000) = 2,430,000

BV2 = (2,970,000 – 2(540,000) = 1,890,000
BV3 = (2,970,000 – 3(540,000) = 1,350,000
BV4 = (2,970,000 – 4(540,000) = 810,000
BV5 = (2,970,000 – 5(540,000) = 270,000

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Table -3.1 depreciation schedule for example 1

n Rn Dn (birr) BVn (birr)
0 2,970,000
1 1/5 540,000 2,430,000
2 1/5 540,000 1,890,000
3 1/5 540,000 1,350,000
4 1/5 540,000 810,000
5 1/5 540,000 270,000
Alternatively, they may be calculated from the previous year book value using Eq. 5 as follows:

BV1 = 2,970,000 – 540,000 = 2,430,000

BV2 = 2,430,000 – 540,000 = 1,890,000
BV3 = 1,890,000 – 540,000 = 1,350,000
BV4 = 1,350,000 – 540,000 = 810,000
BV5 = 810,000 – 540,000) = 270,000
Organizing the annual depreciation rates, annual depreciation, and annual book values in the table form
as the depreciation schedule. The depreciation schedule for example -1 is shown in table -1 above
Example – 2
Consider an excavator purchased for 3.1 million birr having a use full life of 5 years. Determine the
depreciation & book value for each of the 5 years using straight line method. Assume a salvage value
of S = 860,000 birr
Solution
Given: purchased cost (initial) = 1.3 million birr
Life time = 5 years
Salvage value = 860,000 birr
Required: the depreciation and book value for each of 5 year

–
Solution:
BVn = IC - n (D n ) ----------------------- Eq. (4)
BV1 = 3,100,000 – 1(448,000) = 2,652,000
BV2 = 3,100,000 – 2(448,000) = 2, 204, 000
BV3 = 3,100,000 – 3(448,000) = 1,750,000
BV4 = 3,100,000 – 4(448,000) = 1,308,000
BV5 = 3,100,000 – 5(448,000) = 860,000

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Example-3
a) A machine was purchased for birr 450,000 on 1 st January, 1991, the erection and installation
work cost birr 70,000. This was replaced by a new one on 31 st Des, 2010. If the scrap value was
estimated as birr 150,000 what should be the rate of depreciation and depreciation fund on 15 th
June, 2000?
b) If after 12 years of running, some assembling is replaced and the replacement cost is birr
150,000 what will be the new rate of depreciation?
Solution: -
A) Given
1. Purchasing cost = 450,000 on 1st Jan, 1991
2. Erection & installation cost = 70,000
3. Replacement 31st Dec, 2010
4. Scrap value = 150,000
Required
i. Rate of depreciation
ii. Depreciation fund on 15th June, 2000
Solution
i. D= , IC= 450,000+70,000 = 520,000 birr
S = 150,000 birr
N= 31st Dec, 2010 - 1st Jan, 1991 = 20 years
= 18,500 birr

ii.Time for depreciation fund 15th June 2000 – 1st Jan 1991 = 9 years 5 month
Depreciation fund = 9* 18,500 = 166,500 birr
B) Given
1. 12 years of running
2. Repair cost = 150.000 birr
Required
i. New rate of depreciation
C new = 520,000 + 150,000 – 12 * 18,500
= 448,000 birr
N new = 20 year -12 year
= 8 years
Solution
= 37,250 birr /year

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Example 4
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: birr 148,000 includes delivery and other costs
. Tire cost: birr 16,000 - Useful life: 7 years - Salvage value: birr 18,000
Solutions:-
Straight-line method: From Equation 2.1, the depreciation in the first year D1 is equal to the
depreciation in all the years of the loader’s useful life:

2. Sum of the Years Digits Method (SOY)

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 depreciatio n method and models
more annual depreciation in the early years of a machine’s life and less in its later years. The
calculation is straight forward and done using the following equation:

Eq. -----------------Eq.3.7
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 (birr), S the salvage value (birr), TC the tire and track costs (birr), and
N the useful life (years).
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: birr 148,000 includes delivery and other costs
. Tire cost: birr 16,000 . Useful life: 7 years . Salvage value: birr 18,000
Solutions:-
 Sum-of-years’-digits method: From Equation 2.1, the depreciation in all years is given below

20,357 birr/year

16,286 birr/year

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12,214 birr/year

8,143 birr/year

4,071 birr/year

 The book value at the end of each year is calculated using equation
BVn = IC – Dn
BV1 = 148,000 – 28,500= 119,500
BV2 = 148,000 – 24,429= 95,071
BV3 = 148,000 – 20,357= 74,714
BV4 = 148,000 – 16,286 = 58,428
BV5 = 148,000 – 12,214 = 46,214
BV6 = 148,000 – 8,143 = 38,071
BV7 = 148,000 – 4,071 = 34,000

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:

Dn = x book value at beginning of year

Or Dn = (BVn-1  TC) ..............eq. 3.8
Where Dn is the depreciation in year n, TC the tire and track costs (birr), N the useful life (years), BVn-
1 the book value at the end of the previous year, and BVn-1  S.
Example 3
Using double declining balance method of depreciation, find the annual depreciation and book value at
the end of each year for a track loader having an initial cost of 1,250,000 birr, a salvage value of
125,000 birr, and an expected life of 5 years
A sample calculation for each method will be demonstrated and the results are shown

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Solutions:-
Using the above equation
The annual depreciation factor = = 0.40
Dn = BVn-1
D1 = 0.40 x 1,250,000 = 500,000
D2 = 0.4 x 750,000 = 300,000
D3 = 0.4 x 450,000 = 180,000
D4 = 0.4 x 270,000 = 108,000
D5 = 0.4 x 162,000 = 64,800 use 37,000
Because a depreciation of 64,800 birr in the fifth year would reduce the book value to less than 125,000
birr (salvage value), only 37,000 birr (162,000 – 125,000) may be taken as depreciation.

Book value
Year Depreciation (End of period)
0 0 1,250,000 birr
1 500,000 750,000
2 300,000 450,000
3 180,000 270,000
4 108,000 162,000
5 37,000 125,000

Problems
1. A crawler tractor cost 2,500,000 birr has an estimated salvage value of 70,000 birr, and has a 5
year life time. Find the annual depreciation and book value at the end of each year use straight line
depreciation method.
2. For the tractor of problem-1, find the annual depreciation and book value at the end of each year
using the sum of the years’ digits method of depreciation.
3. For the tractor of problem-1, find the annual depreciation and book value at the end of each year
using double declining method of depreciation.

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II) Operating Cost

Operating costs are incurred only when equipment is operated. Therefore, costs vary with the amount
of equipment use only and job operating conditions. Operating costs include operators’ wages, which
are usually added as a separate item after other operating costs have been calculated.
The major elements of operating cost include:
 Fuel cost
 Service cost
 Repair cost
 Tire cost
 Cost of special items.
 Operators’ wages

 Fuel cost
The hourly cost of fuel is simply fuel consumption per hour multiplied by the cost per unit of fuel
(gallon or liter). Actual measurement of fuel consumption under similar job condition provides the
best estimate of fuel consumption. However, historical data are not available; fuel consumption may
be estimated from manufacturer’s data or by the use of table 3.2.1 given below provides
approximate fuel consumption factors in gallons per hour per horse power for major types of
equipment under light, average, and sever load conditions

Table 3.2.1 fuel consumption factors (gal/h/hp)

Loading conditions*
Type of equipme nt low average severe
 Clamshell and dragline 0.024 0.030 0.036
 Compactor, self-propelled 0.038 0.052 0.060
 Crane 0.018 0.024 0.030
 Excavator, hoe, or shovel 0.035 0.040 0.048
 Loader
 Track 0.030 0.042 0.051
 Wheel 0.024 0.036 0.047
 Motor grader 0.025 0.035 0.047
 Scraper 0.026 0.035 0.044
 Tractor
 Crawler 0.028 0.037 0.046
 Wheel 0.028 0.038 0.052
 Truck, off- highway 0.014 0.020 0.029
 Wagon 0.029 0.037 0.046

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 Service cost
Service cost represents the cost of oil, hydraulic fluids, grease, and filters as well as the labor
required to perform routine maintenance service. Equipment manufacturers publish consumption
date or average cost factors for oil, lubricants, and filters for their equipment under average
conditions. Using such consumption data, multiply hourly consumption (adjust for operating
conditions) by cost per unit to obtain the hourly cost of the consumable item. Service labor cost may
be estimated based on prevailing wage rates and the planned maintenance program.
Since service cost is related to equipment size and severity of operating conditions, a rough estimate
of service cost may be made based on the equipment’s fuel cost (table 3.2.2).
For example, using table 3.2.2 the hourly service cost of a scraper operated under severe conditions
would be estimated at 50% of the hourly fuel cost.

Table 3.2.2 service cost factors (% of hourly fuel cost)

Ope rating condition service cost Factor

Favorable 20
Average 33
Severe 50

Repair Cost
Repair cost represents the cost of all equipment repair and maintenance except for tire repair and
replacement, routine service, and the replacement of high wear items, such as ripper teeth. It should be
noted that repair cost usually constitutes the largest item of operating expense for construction
equipment.
Life time repair cost is usually estimated as a percentage of the equipment’s initial cost less tires
(table3.2.3). It is then necessary to convert life time repair cost to an hourly repair cost. This may be
done simply by dividing lifetime repair cost by the expected equipment life in hours to yield an average
hourly repair cost. Although this method is adequate for lifetime cost estimate, it is valid for a
particular year of equipment life. As you might expect, repair costs are typically low for new machines
and rise as the equipment ages. Thus it is suggested that equation given below be used to obtain a more
accurate estimate of repair cost during a particular year of equipment life.

………….. Eq. 3.9

This method of operating repair costs is essential the reverse of the sum-of-the-years’-digit method of
depreciation explained earlier, because the year digit used in the numerator of the equation is now used
in a normal sequence (i.e. 1 for the first, 2 for the second year, etc.)
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Table 3.2.3 typical life time repair cost (% of initial cost less tires)

Operating conditions
Type of equipment favorable average severe
 Clamshell and dragline 40 60 80
 Compactor, self-propelled 60 70 90
 Crane 40 50 60
 Excavator, hoe, or shovel 50 70 90
 Loader
 Track 85 90 105
Wheel 50 60 75
 Motor grader 45 50 55
85 90 105
 Tractor
 Crawler
85 90 95
 Wheel
50 60 75
 Truck, off-highway
70 80 90
 Wagon 45 50 55
Example:
Estimate the hourly repair cost for the first year of operation of a crawler tractor costing 3,400,000 birr
and having a 5- year’s life. Assume average conditions and 2000 hourly operation during the year.
Solution
Lifetime repair factor = 0.90 (table 2.3)
Lifetime repair cost = 0.90 x 3,400,000 = 3,060,000 birr

Hourly repair cost = = 102 birr

Tire cost
Tire cost represents the cost of tire repaired and replacement. Among operating costs for rubber tired
equipment, tire cost is usually exceeds only by repair cost. Tire cost is difficult to estimate because of
the difficulty in estimating tire life. As, always historical data obtained under similar operating
conditions provide the best basis for estimating tire life. However, table -3.2.4 may be used as a guide
to approximate tire life. Tire repair will add about 15% to tire replacement cost. Thus the equation
below may be used to estimate tire repair and replacement cost.

Tire cost = 1.15 x ………….Eq. 3.10

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Table 3.2.4 typical tire life (hours)

Ope rating conditions

Type of equipme nt favorable average Severe
Dozers and loaders 3,200 2,100 1,300
Motor grades 5,000 3,200 1,900
Scrapers
Conventional 4,600 3,300 2,500
Twin engine 4,000 3,000 2,300
Push –pull and elevating 3,600 2,700 2,100
Trucks and Wagons 3,500 2,100 1,100

Special Items
The cost of replacing high wear items such as Dozer, Grader, and Scraper blade cutting edges and end
bits, as well as ripper tips, shank, and shank protectors, should be calculated as a separate item of
operating expense. As usual, unit cost is divided by expected life to yield cost per hour.
Operator
The final item making up equipment operating cost is the operator’s wage. Care must be taken to
include all costs, such as worker’s compensation insurance, social security taxes, overtime or premium
pay, and fringe benefits, in the hourly wage figure.
Total Owning and Operating Costs
After owning costs and operating costs have been calculated, these are totaled to yield total owning
operating cost per hour of operation. Although this cost may be used for estimating and for charging
equipment costs to projects, notice that it does not include overhead or profit. Hence overhead and
profit must be added to obtain an hourly rental rate if the equipment is to be rented to others.

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Example :
Calculate the expected hourly owning and operating cost for the second year of operating of the twin-
engine scraper described below.
 Cost delivered = 4,104,000 birr
 Tire cost = 324,000 birr
 Estimated life = 5 years
 Salvage value = 432,000 birr
 Depreciation method = sum of years digits
 Investment (interest) rate = 10%
 Tax, insurance, and storage rate = 8%
 Operating condition = average
 Rated power = 465 hp
 Fuel price = 76.67 birr/gal
 Operator’s wages = 80 birr/h
 Hours operated = 2000h/year

Solution
Owning cost
Depreciation cost:
Eq. -----------------3.9

= 892,800.00 birr
= 446.40 birr/h

Investment, tax, insurance, and storage cost:

Cost rate = investment + tax, insurance, and storage = 10 +8 =18%

Average investment ------------ Eq.3.1

Average investment = = 2,268,000 birr

Investment, tax, insurance, and storage =

Investment, tax, insurance, and storage = = 204.12 birr/h

Total owning cost = 446.40 + 204.12 = 650.52 birr/h

Operating cost
Fuel cost:
Estimated consumption = 0.035 x 465 = 16.3 gal/h ………… (table 3.2.1)
Fuel cost = 16.3 x 16.85 = 274.65 birr/h
Service cost:
Service cost = 0.33 x 572.13 = 188.8 birr /h ………… (table 3.2.2)

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Repair cost:
Life time repair cost = 0.90 x (4,104,000 – 324,000) = 3,402,000 birr ……. (table 3.2.3)

……… (Eq. )

= 226.8 birr/h

Tire cost:
Estimated tire life = 3000 h ……….(table 3.2.4)

Tire cost = 1.15 x

Tire cost = 1.15 x = 124.2 birr/h

Special item cost: None
Ope rator wages = 80 birr/h
Total ope rating cost = 274.65 + 188.8 + 226.8 + 124.2 + 80 = 894.45 birr/h
Total O & O cost
Total O & O cost = total owning cost + total operating cost
Owning and operating cost = 650.52 + 894.45 = 1,544.97 birr/h

Problem
1. Determine the probable average cost per hour over the life of the equipment for owning and
operating a wheel loader under the conditions listed below. Use the straight line method of
depreciation.
 Operator cost = 80 birr/h
 Operating conditions = average
 Delivery price = 1,890,000 birr
 Cost of a set of tires = 108,000 birr
 Expected loader life = 5 years
 Hours operated = 2000h/year
 Estimated salvage value = 864,000 birr
 Fuel cost = 76.66 birr/gal (16.85/l)
 Loader horse power = 120 hp (89.5 kW)
 Rate for interest, tax, insurance, and storage = 15%

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