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Chapter 10
Pricing Equipment
Renting Equipment
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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
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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)
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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)
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= ($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
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Calculate the ownership cost per hour for an excavator:
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ENGINE:
OPERATING FACTOR:
PURCHASE PRICE:
FREIGHT CHARGES:
SALVAGE VALUE:
USEFUL LIFE:
HOURS USED PER YEAR:
MAINTENANCE & REPAIRS:
TIRE COST:
TIRE LIFE:
MAINT. & REPAIRS(TIRES):
EQUIP’T OVERHEAD RATE:
FUEL PRICE:
51 H.P. diesel
60%
$30,000
$2,000
$9,000
7 YEARS
1,600
110% of depreciation
$1,000
2,000 hours
15% of depreciation
11%
$2.50 per gallon
Example 2 – Answer (1 of 2)
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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
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Maintenance and repairs = 110% of annual depreciation
Equipment overheads = 11% x average annual invest
= 0.11($20,500)
Total annual costs:
$8,855
= $3,143
= $3,457
= $2,255
Example 2 – Answer (2 of 2)
• Hourly costs
– Vehicle cost
=
total annual cost
hours used per year
= $6,887 / 1,000
– Fuel cost = fuel consumption x cost of fuel
= 0.90 gals x $2.80 per gal.
– Lube oil = 10% of fuel cost
= 0.1 x $2.52
– Generator cost per hour:
= $6.89
= $2.52
=
$0.25
$9.66