Chapter 10Pricing Equipment

Renting Equipment • There can be advantages to renting rather than owning construction

equipment; including: – The builder does not have to keep a large collection of equipment for

occasional use.– The builder has continuous access to the newest and most efficient

items of equipment.– There is little or no need for equipment warehouse and storage facilities.– There is no need for the builder to employ equipment maintenance staff.– Accounting for equipment costs can be simpler when equipment is

rented.– There may be significant savings on company insurance premiums when

a builder does not own equipment.

Owning Equipment• The cost of owning equipment (per hour) can be considerably

less than rental rates when the equipment is going to be heavily used.

• To determine ownership cost, the following aspects need to be considered:– Depreciation expense– Maintenance and repair costs– Financing expenses– Taxes– Insurance costs– Storage costs– Fuel and lubrication costs

Depreciation • Depreciation is the process of allocating the acquisition cost of an

asset over its useful life.• Terms used:

– Initial cost: the cost to acquire the item– Useful life: number of years for which it is used– Salvage value: estimated sales price at the end of its life

• Using straight-line depreciation:– Annual depreciation = initial cost - estimated salvage value (vehicle)

estimated useful life (years) • The depreciation rate of tires will be different from that on the vehicle

so it is calculated separately.

Maintenance and Repairs• Maintenance and repair costs are calculated as a

percentage of the annual depreciation costs.

• The percentage varies between 80% and 130%.

• When straight-line depreciation is used, depreciation in the early years will be under-estimated, but this will be offset by the maintenance allowance which will be over estimated at this time.

Equipment Overheads• Equipment overheads include:

– Financing expenses– Taxes– Insurance– Storage costs

• These expenses are often combined to form a total equipment overhead rate that is calculated as a percentage of average annual investment, where:– Average annual investment = total initial cost + salvage value

2

Fuel and Lubrication Costs • Fuel and lubrication oil consumption can be determined by

monitoring field operations.• If data is not available, fuel consumption information may be

obtained from equipment manufacturers.• Operating under normal conditions, a gasoline engine will

consume approximately 0.06 gallons of fuel for each horsepower-hour developed.

• A diesel engine is slightly more efficient at 0.04 gallons of fuel for each horsepower-hour.

• An operating factor is used to account for times when the engine is not operating at full throttle.

• Lube oil is allowed for at 10% of fuel cost.

Pricing Equipment – Example 1• Calculate the ownership cost per hour for a generator powered

by a 20 H.P. gasoline engine based on the following:– ENGINE: 20 H.P. gasoline– OPERATING FACTOR: 75%– PURCHASE PRICE: $20,000– FREIGHT CHARGES: $600– SALVAGE VALUE: $4,000– USEFUL LIFE: 6 YEARS– HOURS USED PER YEAR: 1,000– MAINTENANCE & REPAIRS: 100% of depreciation– EQUIP’T OVERHEAD RATE: 11%– FUEL PRICE: $2.80 per gallon

Example 1 – Answer (1 of 2)

• Average annual investment = (total cost + salvage value) / 2= ($20,000 + $600 + $4,000)/2= $12,300

• Fuel Consumption = 20 x 0.06 x 75% gallons/hour= 0.90 gallons/hour

• The annual cost of depreciation, maintenance and repairs, and equipment overheads can now be calculated:

– Annual costs:– Depreciation = initial cost - estimated salvage value/Estimated life (years)

• = ($20,600 - $4,000) / 6 = $2,767• Maintenance and repairs = 100% of annual depreciation = $2,767• Equipment overheads = 11% x average annual invest.

= 0.11($12,300)= $1,353

• Total annual costs:$6,887

Example 1 – Answer (2 of 2)

• Hourly costs• Vehicle cost = total annual cost • hours used per year

• = $6,887 / 1,000 = $6.89• Fuel cost = fuel consumption x cost of fuel• = 0.90 gals x $2.80 per gal. = $2.52• Lube oil = 10% of fuel cost• = 0.1 x $2.52 = $0.25• Generator cost per hour: $9.66

Pricing Equipment – Example 2• Calculate the ownership cost per hour for an excavator:

– ENGINE: 51 H.P. diesel – OPERATING FACTOR: 60%– PURCHASE PRICE: $30,000– FREIGHT CHARGES: $2,000– SALVAGE VALUE: $9,000– USEFUL LIFE: 7 YEARS– HOURS USED PER YEAR: 1,600– MAINTENANCE & REPAIRS: 110% of depreciation– TIRE COST: $1,000– TIRE LIFE: 2,000 hours– MAINT. & REPAIRS(TIRES): 15% of depreciation– EQUIP’T OVERHEAD RATE: 11%– FUEL PRICE: $2.50 per gallon

Example 2 – Answer (1 of 2)• Average annual investment = (total cost + salvage value) / 2• = ($30,000 + $2,000 + $9,000)/2• = $20,500• Fuel consumption = 51 x 0.04 x 60% gallons/hour• = 1.22 gallons/hour• The annual cost of depreciation, maintenance and repairs, and equipment

overheads can now be calculated:• Annual costs:

– Depreciation = initial cost – tire cost - estimated salvage– Value estimated life (years)

= ($32,000 -$1,000 - $9,000) / 7 = $3,143• Maintenance and repairs = 110% of annual depreciation = $3,457• Equipment overheads = 11% x average annual invest

= 0.11($20,500) = $2,255• Total annual costs: $8,855

Example 2 – Answer (2 of 2)

• Hourly costs– Vehicle cost = total annual cost

hours used per year= $6,887 / 1,000 = $6.89

– Fuel cost = fuel consumption x cost of fuel= 0.90 gals x $2.80 per gal. = $2.52

– Lube oil= 10% of fuel cost= 0.1 x $2.52 = $0.25

– Generator cost per hour: $9.66