CHAPTER-4

CONSTRUCTION
EQUIPMENT COST
 INTRODUCTION
Construction equipments required for the execution of a
certain construction project are either owned or rented
from equipment leasing companies.
There are three basic ways of securing construction
equipments. These are Buying (Direct Ownership),
Renting or Leasing.
Direct Ownership
 Direct Ownership has the advantage of guarantying use
and control of equipment when ever demanded but
requires continuity of work for it to payback its cost
because such equipments are very expensive. Beside, their
maintenance services require adequate attention.
 Direct Ownership
 If a construction company foresees the use of
construction equipment continuously, direct
ownership will bring down its competitive cost of
bidding to increase the chance of acquiring/winning
projects.
Rental Services
 Rental Services are short term provisions of
construction equipments from renting organizations
for the purpose at hand.
 This is particularly advantageous if the job is of
short duration and a construction company do not
foresees continuity of similar works.
 Lease
 Lease is a long term agreement for the use of an
asset. It provides an alternative to direct ownership,
 During the lease term, the leasing company (lessor)
always owns the equipment and the user (lessee)
pays the owner to use the equipment.

In the process of construction cost estimation, the

contractor will normally assume the intended
construction activities performed using his own
equipments or rented equipments from others, if
equipments are required for the execution of
activities.
 INTRODUCTION…cont’d
 When using owned equipments in the activity cost estimate
breakdowns, contractors shall calculate the associated hourly costs
to operate each equipment on the intended project during the
equipment’s economic life.

 However, if rented equipments are assumed in the activity cost

breakdowns, contractors shall obtain equipment hourly rental rates
directly from equipment leasing companies.

 Therefore, a contractor must develop the hourly equipment costs

for each of his own equipments based on the associated costs
during the economic life of the equipments.
 INTRODUCTION…cont’d
These associated equipment costs are mainly
classified into three categories as follows:

 Equipment owning costs

 Equipment operating costs

 Operator’s salary and benefits

1. EQUIPMENT OWNING COSTS

 Equipment owning costs are all these costs in which the owner
of the equipment expends throughout the economic life of the
equipment whether the equipment is working or not.

 These costs include mainly the depreciation cost of the

equipment with the consideration of its salvage value,
Erection and installation costs, major repairs and
overhauling costs, property taxes and insurance charges.
1. EQUIPMENT OWNING COSTS
A. DEPRECIATION COST
 The depreciation: is defined as “the decrease in market value of an asset
over time” through wear, deterioration or obsolescence

 In order to calculate the hourly equipment depreciation cost, the

contractor shall calculate the total equipment delivered price which is
the total cost of the equipment expended by the contractor until the
equipment is delivered at his workshop starting from the date of
purchase from his suppliers.

 It includes the initial purchase price, insurance charges,

transportation costs and any applicable taxes.
 1. EQUIPMENT OWNING COSTS
A. DEPRECIATION COST

 The depreciation cost can be calculated in many different ways

such as the straight line, declining balance, sum of years-digits
and unit production methods.

 In this case, it is better to use the unit production depreciation

method to calculate the equipment depreciation cost which
actually relates the depreciation cost with the real utilization of
the equipment.
 Examples

Example 1 Example 2
Assume a contractor has The same contractor has
purchased a new Caterpillar D8R purchased a new Caterpillar
Bulldozer with a delivered duty 950G Wheel loader with a
paid price of birr 9,750,000 delivered price of birr 4,500,000
ETB. Calculate the hourly cost
ETB. Moreover, the price of tires
of the specified Bulldozer.
is birr 15,000 per tire, which is
birr 60,000 for 4 tires.

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 and Estimated economic life = Assume 10 Years

E. Estimated annual utilization…….. 2000 Hrs

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

S = 0.1 * 9,750,000 = Birr 975,000
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 = 1,453,068.857 Birr/Year
I. Equivalent annual salvage value

A2 = S * i / [(1+i)n – 1]

A2 = 975,000 * 0.085 / [(1+0.085) 10 – 1]

A2 = 65773.5 Birr/Year
J. Dozer Depreciation Cost per hour (DDC)
DDC = (A1 – A2) / E
DDC = (1,453,068.857 – 65773.5)/2000 = 693.65 Birr/Hr
1. EQUIPMENT OWNING COSTS
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

1. EQUIPMENT OWNING COSTS
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

 1. EQUIPMENT OWNING COSTS
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
 1. EQUIPMENT OWNING COSTS
E. MAJOR REPAIR COST:

 While minor or field repairs are carried out during day to day
working of the equipment, the major repairs are carried out after the
substantial use of the equipment.

 Major repairs and overhauls are the replacement of the major parts of
the equipment because of the excessive wear through a long period of
use and since they require a heavy amount expenditure, they are met
from the major repair fund.

 Usual practice is to consider this major repair cost as a percentage of

straight line depreciation cost and is generally taken as 80-200% of
the cost of depreciation depending on the type of equipment
1. EQUIPMENT OWNING COSTS
E. MAJOR REPAIR COST:
SLM D= (9,750,000-975,000)/10= 877500
Taking 100% of 877500 as repair cost
=877500
DMRC=877500/2000
= 438.75 birr/hr
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…DC+DIC+DPT + DEIC+ DMRC

 Hourly owning costs = 692.88 + 48.75 + 0.50 + 0.00 +

438.75= 1180.88 birr/hr

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.
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 …………………………….… 17.90 Birr/Ltr

 Dozer Fuel Cost per hour (DFC) = B*C

 DFC = 590.70 Birr/Hr

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.
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

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
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
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.

1-C. Cost of tires:

 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.

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

Mounted)
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.
1-D. Cost of normal repair
 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.
 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
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
Assuming that:
1 USD =27 Birr
DNRC = 27*7.55 = 203.85 Birr/Hr
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
 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 + DHIC + DNRC

 Hourly operating costs

= 590.7 + 23.47 + 17.26 + 0.78 + 0.00 + 8.982 +203.85

Hourly operating costs = 845.042 Birr/Hr

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

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(dismissal 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 (dozer)

= 47,092.83 (wheel loader)
 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…………………….………. 1180.88 Birr

B. Hourly operating costs…………………….………..845.042 Birr

C. Hourly operator’s costs…………………………….31.16 Birr

D. Hourly Bulldozer costs = A + B + C

Hourly Bulldozer costs = 2057.082 Birr

 Additional cost
 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
 Breakeven costs
 Profit and income tax
 Equipment rental rates
 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…………………….……1180.88 Birr
B. Hourly operating costs…………………….……845.042 Birr
C. Hourly operator’s costs…………………………….31.16 Birr
D. Hourly overhead costs = 0.15*(A+B+C)

Hourly overhead costs = 308.5623 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…………………….………. 1180.88 Birr

B. Hourly operating costs…………………….……845.042 Birr

C. Hourly operator’s costs…………………………….31.16 Birr

D. Hourly overhead costs …………………………. 308.5623 Birr

E. Hourly breakeven costs = A + B + C + D

Hourly breakeven costs = 2365.64 Birr

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.
 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 = 2365.64 Birr
B. Hourly gross profit = 0.1429*A= 338.05 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
and Hourly breakeven costs
 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…………………….….……. 1180.88 Birr

C. Hourly operator’s costs…………………………….31.16 Birr

D. Hourly overhead costs …………………….……. 308.5623 Birr

Hourly idle dozer rental rate = 1520.6023 Birr

Dozer Running Rental Rate per hour

A. Hourly breakeven costs = 2365.64 Birr (including operating cost)

B. Hourly gross profit = 338.05 Birr

Hourly running dozer rental rate = 2703.69 Birr

THANK YOU!