Construction Equipment Management: Part Two 1

Construction Equipment
Management
Part two
1. Cost of Owning and Operating Construction Equipment
Construction Equipment
Equipment Performance Factors
• Size
• Power
• Traction
• Reach/Range
• Speed
• Versatility
• Interdependence
General Perspective
• Equipment costs may range from 5% to 10% of overall construction
costs for buildings.
• Equipment costs may exceed 40% of overall construction costs for
public works projects.
• Therefore, the contractor’s success will depend on his or her ability to
forecast the type of construction that will occur in the future and to
collect a suitable equipment types.
• A contractor views equipment as paying for itself. Otherwise the
contractor may go bankrupt.
Acquisition Alternatives
Acquisition Alternatives
Equipment Records
• Records must be kept for collecting and maintaining accurate
equipment records for evaluating machine performance, establishing
operating cost, analyzing replacement questions, and managing
projects.
• Simple daily record of whether a machine was in use or idle should
be maintained.
• Records are needed for: Replacement Decisions, Bidding
Determination of rental rates and Tax preparation.
• A separate account of costs should be kept for each machine
Equipment Records
• Each operator should maintain a daily log, which includes:
1. Hours worked
2. Type of work
3. Amount of fuel and lube
4. Maintenance performed
Introduction
• Total equipment costs comprise two separate components:
1. Ownership costs and
2. Operating costs.
• Ownership costs are fixed costs that are incurred each year, regardless
of whether the equipment is operated or idle.
• Operating costs are the costs incurred only when the equipment is
used.
OWNERSHIP COST
• Ownership costs are fixed costs.
• Almost all of these costs are annual in nature and include:
1. Initial capital cost
2. Depreciation
3. Investment (or interest) cost
4. Insurance cost
5. Taxes
6. Storage cost
INITIAL COST
• Initial cost consists of the following items:
1. Price at factory + extra equipment + sales tax
2. Cost of shipping
3. Cost of assembly and erection
• On an average, initial cost makes up about 25% of the total cost

invested during the equipment’s useful life.
DEPRECIATION
• Depreciation represents the decline in market value of a piece of
equipment due to age, wear, deterioration, and obsolescence.
• Therefore, Depreciation can result from:
1. Physical deterioration occurring from wear and tear of the machine
2. Economic decline or obsolescence occurring over the passage of
time
DEPRECIATION
• To determine the equipment costs by considering its depreciation,
three main categories need to be determined which are:
1. Initial cost: The amount needed to acquire the equipment
2. Useful life: The number of years it is expected to be of utility value
3. Salvage value: The expected amount the asset will be sold at the
end of its useful life
DEPRECIATION
• However, 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.
• Any assessment of depreciation, therefore, requires these values to
be estimated.
• Among many depreciation methods, the straight-line method,
double-declining balance method, sum-of-years’-digits method, and
Modified Accelerated Cost Recovery System (MACRS) are the most
commonly used in the construction equipment industry and will be
discussed in this chapter.
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),
and D1 = D2 =…….= Dn.
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.
Sum-of-Years’-Digits Depreciation
• 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 ($), and N the useful life (years).
Double-Declining Balance Depreciation
• The double-declining balance depreciation is another method for
calculating an accelerated depreciation rate.
• It produces more depreciation in the early years of a machine’s useful
life than the sum-of-years’-digits depreciation method.
• This is done by depreciating the ‘‘book value’’ of the equipment
rather than just its initial cost. The book value in the second year is
merely the initial cost minus the depreciation in the first year.
• Then the book value in the next year is merely the book value of the
second year minus the depreciation in the second year, and so on
until the book value reaches the salvage value.
Double-Declining Balance Depreciation
• The estimator has to be careful when using this method and ensure
that the book value never drops below the salvage value:
• Where Dn is the depreciation in year n, TC the tire and track costs ($),
N the useful life (years), BVn1 the book value at the end of the
previous year, and BVn1 ≥ S.
Example
• Compare the depreciation in each year of the equipment’s useful life
for each of the above depreciation methods for the following bucket
loader:
• . Initial cost: $148,000 includes delivery and other costs
• . Tire cost: $16,000
• . Useful life: 7 years
• . Salvage value: $18,000.
Solution
• A sample calculation for each method will be demonstrated and the
results are shown in Table 1.
1. 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:
Solution
2. Sum-of-years’-digits method: the depreciation in the first year D1
and the second year D2 are:
Solution
• Double-declining balance method: The depreciation in the first year
D1 is
• The ‘‘book value’’ at the end of Year 1 = $148,000 - $16,000 - $37,714

= $94,286.
Solution
• 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.
Solution

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Construction Equipment

• On an average, initial cost makes up about 25% of the total cost

• where Dn is the depreciation in year n, IC the initial cost ($), S the

• Where Dn is the depreciation in year n, year n digit is the reverse order: n

• The ‘‘book value’’ at the end of Year 1 = $148,000 - $16,000 - $37,714

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