PRICING
CONSTRUCTION
EQUIPMENT
Equipment and tools used in construction
operations are priced in three different categories
in the estimate.
First, hand tools up to a certain value together with
IINTRODUCTION
blades, drill bits, and other consumables used in
FIRST
the work are priced as a percentage of the total
CATEGORY
labor price of the estimate. This percentage,
referred to as the “Small Tools Allowance,” is
included in the estimate.
The second category consists of larger items of
equipment that are usually shared by a number of
work activities; the kind of equipment items that
IINTRODUCTION are kept at the site over a period of time and used
SECOND only intermittently on the work in progress.
CATEGORY
Examples: would include items such as air
compressors, bagger mixers and electrical
generators and the like.
The third category of equipment comprises items
that are used for specific tasks on the project such
as digging a trench or hoisting materials into place.
This equipment is priced directly for that work it is
IINTRODUCTION to be used on. The equipment is not kept on-site
THIRD for extended periods, but is shipped to the site,
CATEGORY used for its particular task, and then immediately
shipped back to its source.
Examples: Excavation equipment, cranes, hoisting
equipment, and other costly, highly specialized
items such as concrete saws.
Pricing equipment calls for unit prices expressed in
terms of hourly, weekly, or monthly rates for each
item of equipment.
In the situation in which the contractor’s
IINTRODUCTION equipment is rented, the pricing process is
PRICING straightforward as the rental rates obtained from
EQUIPMENT rental companies that can be used directly for the
time the equipment is required.
Where the equipment is owned by the contractor,
ownership costs have to be calculated.
A contractor does not necessarily have to own any construction equipment in
order to carry on business. In most parts of the country there are many
companies who are in the construction equipment rental business offering
competitive rental rates on a large selection of equipment.
There can be distinct advantages to renting equipment:
1. The contractor does not have to maintain a large inventory of specialized
IINTRODUCTION plant and equipment where individual items are used infrequently.
2. The contractor has continuous access to the newest and most efficient
RENTING items of equipment available.
EQUIPMENT 3. There is little or no need for equipment warehouse and storage facilities.
4. There is a reduced need for the contractor to employ maintenance staff and
operate facilities for their use.
5. Accounting for equipment costs can be simpler when equipment is rented.
6. There may be significant savings on company insurance premiums when a
contractor is not maintaining an inventory of plant and equipment.
However, when the construction operations of a
contractor generate a steady demand for the use of
certain items of equipment, there can be distinct
financial benefits gained by owning equipment.
IINTRODUCTION There can also be a marketing advantage to the
contractors who own their own equipment due to
OWNING
the perception that these contractors are more
EQUPMENT
financially stable and committed than others who
own no equipment.
In fact, some clients require contractors, who bid
on their projects, to list on the bid the company-
owned equipment they propose to use in the
project. This information is utilized in the owner’s
assessment of a qualified bidder.
IINTRODUCTION
Where a comparison of equipment ownership with
OWNING
the rental, strictly on the basis of cost is needed,
EQUPMENT
the full cost per unit of time of owning an item of
equipment has to be determined.
To estimate the full ownership cost, the following
aspects of equipment ownership have to be
considered:
1. Depreciation expense
ASPECTS OF 2. Maintenance and repair costs
EQUIPMENT 3. Financing expenses
OWNERSHIP
4. Taxes
5. Insurance costs
6. Storage costs
7. Fuel and lubrication cost
The term “depreciation” refers to the decline in the
market value of an asset.
To accountants, the term has to do with allocating
the acquisition cost of an item over the useful life
of that asset.
1. DEPRECIATION The two most common methods in determining
depreciation:
1. Straight-Line Depreciation
2. Declining Balance Depreciation
The straight-line method:
Depreciation on a straight-line basis is allocated
equally per year over the useful life of the asset,
thus the annual depreciation amount is constant
DEPRECIATION and is equal to the cost of the asset minus any
STRAIGHT- salvage value divided by the years of life of the
LINE asset:
DEPRECIATION
Example 1: The total initial cost of an excavator is 250,000.
The useful life is expected to be 5 years, and the estimated
salvage value at the end of this period is 150,000. What is
the annual depreciation?
DEPRECIATION
Annual Depreciation = (250,000 – 150,000)/ 5 yrs
STRAIGHT-
LINE = 20,000
DEPRECIATION
Example
When using straight-line depreciation, the
depreciation in any particular year, D(n), can be
calculated with following formula:
DEPRECIATION
STRAIGHT-
LINE
DEPRECIATION
There are two valid criticisms can be made of the
straight-line method of depreciation:
First, it does not reflect the fact that depreciation
usually occurs at an accelerated rate in the early
DEPRECIATION years of the life of an asset;
STRAIGHT-
Second, that this method of calculating
LINE
depreciation does not account for the intensity of
DEPRECIATION
use of the asset.
With the declining-balance method of depreciation,
the annual depreciation amounts decline as the
asset gets older. Using this method of calculation,
the depreciation in any given year, D(n), is
DEPRECIATION calculated by applying the following formula:
DECLINING-
BALANCE
DEPRECIATION
The rate of depreciation (d) required to obtain a
particular salvage value (S) at the end of N years of
life can be calculated using this formula:
DEPRECIATION
DECLINING-
BALANCE
DEPRECIATION
Example 2: If we consider the same equipment item
described in Example 1, calculate the depreciation rate. The
total initial cost of an excavator is 250,000. The useful life
is expected to be 5 years, and the estimated salvage value
at the end of this period is 150,000.
DEPRECIATION
DECLINING-
BALANCE
DEPRECIATION
Example
d = 0.09711 = 9.71%
Depreciation in year 1 = 250,000 x 9.71%
= 24,280
The annual depreciation table of the same equipment item
described in example 1:
DEPRECIATION
DECLINING-
BALANCE
DEPRECIATION
Example
The costs of maintenance and repairs of plant and
equipment comprise a factor that cannot be
ignored when considering ownership costs.
Equipment owners must consider that good
2. MAINTENANCE maintenance, periodic wear measurement, timely
attention to recommended service, and daily
AND REPAIR
cleaning, can extend the life of equipment and
COST
reduce the operating costs by minimizing the
effects of adverse conditions.
The contractor who owns equipment should set up
facilities with workers qualified to perform the
necessary maintenance operations on equipment.
Construction operations can subject equipment to
considerable wear and tear, but the amount of
wear varies between different items of equipment
used and between different job conditions.
2. MAINTENANCE The contractor formulating equipment operating
AND REPAIR prices should adjust the rates for maintenance and
COST repairs according to the conditions the equipment
Causes is to work under.
Again, in estimating, good records of previous costs
in this area will improve the quality of the
estimator’s assessment of probable maintenance
costs.
Maintenance and repair costs are calculated as a
percentage of the annual depreciation costs for each
item of equipment.
When depreciation is calculated using the straight-line
method, the result is a constant amount being charged
2. MAINTENANCE yearly for depreciation and then a second constant
AND REPAIR amount is allowed for maintenance and repairs.
COST Realistically, depreciation will be high in the early years
Comparison of ownership, while actual maintenance and repair
costs in these years should be low. The relative values
of yearly depreciation and maintenance costs will
gradually reverse until, in the later years, low
depreciation will be accompanied by high maintenance
and repair bills.
Whether the owner of construction equipment
purchases the equipment using cash or whether the
purchase is financed by a loan from a lending
institution, there is going to be an interest expense
involved.
3. FINANCING The interest expense is the cost of using capital; where
cash is used, it is the amount that would have been
EXPENSES
earned had the money been invested elsewhere, that
interest expense is, the forgone interest revenue.
Where the purchase is financed by a loan, the interest
expense is the interest charged on the loan.
In both cases the interest expense can be calculated by
applying an interest rate to the owner’s average annual
investment in the unit.
The average annual investment is approximately
midway between the total initial cost of the unit and
its salvage value. Thus:
3. FINANCING
EXPENSES The interest rate used to calculate the financing
expense will vary from time to time, from place to
place and also from one company to another
depending mostly on its credit rating and how good
a deal it can get from the lending institution.
Significant variations can be expected in the cost of
the annual taxes, insurance premiums, and storage
costs together with fees for licenses required and
other fees expended on an item of equipment.
Where these expenses are known, they should
4. TAX, show ownership costs of the equipment.
INSURANCE AND
In the case where information on these costs is not
STORAGE COSTS available, they may be calculated as a percentage
of the average annual investment cost of the piece
of equipment.
The interest expense rate and the rate for taxes,
insurance, and storage costs are often combined to
give a total equipment overhead rate.
Fuel consumption and the consumption of lubrication
oil can be closely monitored in the field.
Data from field observations will enable the estimator
to accurately predict future rates of consumption under
similar working conditions.
5. FUEL AND However, if there is no access to this information,
LUBRICATION consumption can be predicted where the size and type
COSTS of engine are known and the likely engine operating
factor is estimated.
This operating factor is an assessment of the load
under which the engine is operating.
An engine continually producing full-rated horsepower
is operating at a factor of 100%.
However, construction equipment never operates at
100% level for extended periods, so the operating
factor used in calculating overall fuel consumption
is always a value less than 100%.
5. FUEL AND The operating factor is yet another variable with a
wide range of possible values responding to the
LUBRICATION
many different conditions that might be
COSTS
encountered when the equipment under
consideration is used.
Again, there is no good substitute for hard data
carefully obtained in the observation of actual
operations in progress.
Example: When operating under normal conditions, namely, at a
temperature of 60ºF, 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 gal. of
fuel for each horsepower-hour developed.
Regarding the excavator mentioned in Example 1, if the unit was
5. FUEL AND equipped with a diesel engine rated at 120 hp. operating at a
factor of 50%, the fuel consumption can be determined thus:
LUBRICATION
COSTS
EXAMPLE
The amount of lubricating oil consumed will vary with the size of
the engine, the capacity of the crankcase, the condition of the
engine components, the frequency of oil changes, and the
general level of maintenance. An allowance in the order of 10% of
the fuel costs is used as an average value.
Whether a contractor decides to rent or own the
equipment used on its projects, the cost of
operating the equipment has to be considered.
In some situations rentals may be available that
include an operating engineer as part of the rental
6. EQUIPMENT agreement. This variety of rental agreement is
OPERATOR COST sometimes available for excavation equipment, and
it can be a preferred alternative when the rental
company offers a high-caliber equipment operator
who is familiar with the particular excavation unit
and is capable of high productivity.
More often than not, however, equipment is rented
without an operator.
So, if the contractor is using company-owned
equipment, the labor costs for operating the equipment
have to be calculated and added to the estimate.
The usual way to price these costs is to apply an
operator’s hourly wage alongside the equipment hourly
6. EQUIPMENT rate and then use the expected productivity of the
OPERATOR COST equipment to determine a price per measured unit for
labor and a price per measured unit for equipment.
Note that the unit prices for labor and for equipment
should always be considered separately as the labor
prices have to be included in the total labor content of
the estimate.
Example: Where the hourly cost of an excavator is
PhP 172.00 per hour, the wage of an operator for
this equipment is PhP 40.00 per hour, and the
expected productivity of the excavator is 50 cu.m.
6. EQUIPMENT per hour, the unit prices for labor and equipment
OPERATOR COST would be calculated thus:
Labor Equipment
EXAMPLE
40.00/ 50 cu.m 172.00/ 50 cu.m
PhP 0.80 per cu.m PhP 3.44 per cu.m
These unit prices can now be applied to the total
quantity of excavation that this equipment is
expected to perform to estimate the equipment
operator cost.
PRICING
CONSTRUCTION
EQUIPMENT
