ADDIS ABABA UNIVERSITY

AAiT- SCHOOL OF CIVIL AND ENVIRONMENRAL

ENGINEERING

CONSTRUCTION EQUIPMENT

CHAPTER-3
CONSTRUCTION EQUIPMENT MANAGEMENT
 CONTENTS
1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
GENERAL

 EQUIPMENT PLANNING
 EXTENT OF MECHANIZATION

USE OF MACHINES V/S USE OF MANUAL LABOUR

FORECASTING EQUIPMENT REQUIREMENT

 SCIENTIFIC PLANNING

 SELECTION OF EQUIPMENT

 FORWARD PLANNING

 PURCHASE OF EQUIPMENT

WORKSHOP INSTALLATION

SPARE PARTS MANAGEMENT

MAINTENANCE MANAGEMENT
 CONTENTS
1. EQUIPMENT MANAGEMENT IN CONSTRUCTION PROJECTS
DOWN-TIME AND AVAILABILITY
OPERATION AND UTILISATION

 MANAGEMENT TECHNIQUES

 REDUCTION OF CONSTRUCTION COST

 DECISION-MAKING

2. ECONOMICS OF CONSTRUCTION EQUIPMENT

GENERAL

OWNING COSTS
OPERATING COSTS

STANDARD COSTING

COST- ACCOUNTING

REPLACEMENT OF EQUIPMENTS
1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.1 GENERAL
The cost of equipment in a project varies from 10 to 30% of the total

cost of the project, depending upon the extent of mechanization.

In modern fully mechanized projects the cost of equipment goes up to

30%.
30%
Proper planning,
planning selection,
selection procurement,
procurement installation,
installation operation,
operation
maintenance and equipment replacement policy plays an important
role in equipment management for the successful completion of the
project.
Equipment manager’s main task is to reduce downtime,
downtime achieve
optimum equipment utilization and increase production at minimum
cost.

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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.1 GENERAL
Equipment engineer should coordinate with various wings of the

organization in discharging his job of:

 Equipment planning,
 Balancing,
 Selection of equipment and its utilization,
 Personnel selection and training,
 Financial planning,
 Preventive maintenance and
 General supervision.
Thus equipment management integrates and continuously interacts

with human, technical, financial and production system in order to

achieve top efficiency and cost effectiveness.
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.2 EQUIPMENT PLANNING
Modern construction projects are complex in nature and success of a

project depends greatly on proper and scientific planning.

Before starting every project its planning is done with great care, as the

efficiency of the whole project largely depends upon its planning.

While planning a project we must very carefully decide about the extent

of use of construction equipments.

1.3 EXTENT OF MECHANIZATION
Extent to which mechanization in a project should be planned depends

upon the following main factors:

1.Manpower:
Manpower Type of manpower required by the project for its execution,
is first decided and whether this type of manual labour is cheaply and
sufficiently available round the year.
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.3 EXTENT OF MECHANIZATION
2.Completion period:
period Completion period plays a deciding role about the
extent of mechanization, since less the completion period more the
mechanization.
3.Nature of work:
work Nature of work includes adverse weather, climatic
conditions, topography, toughness, handling of large quantities of
construction material for long distance.
4.Availability of money:
money Since cost of equipment is too high and to be
spent initially, it needs heavy investment in the beginning. Therefore
availability of money is a main factor in deciding the extent of
mechanization.
5.Availability of Indigenous Equipment:
Equipment After sales service, repair
facilities are also considered where equipments manufactured in our own
country are not available.
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.3 EXTENT OF MECHANIZATION
6.Social objects of the project:
project Sometimes projects are sanctioned with the
object of providing employment opportunities, to improve the economic
condition of the masses in addition to the development in the area.
7.Labour Relations:
Relations In certain areas, past experience indicates labour
unrests, strikes, absenteeism, uncertainty, unavailability of labour or
seasonal fluctuations. In such circumstances machines are preferred being
more reliable to complete the project in time.
8.Overseas Projects:
Projects It is difficult and expensive to send large number of
man-power required in adopting the manual means in these projects,
therefore only alternative left is to execute the project using construction
equipments only.

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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.3 EXTENT OF MECHANIZATION
9.Quality and Performance:
Performance The work carried out by means of
construction equipments is of high standard of quality and performance.
The quality is consistent, execution is fast and work is more durable.
10.Development of Industries:
Industries In countries like Ethiopia where
industries are in developing stage, it is the need of time to use
construction equipments for the development of manufacturing industry
and faster industrialization of the country.

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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION PROJECTS
1.4 USE OF MACHINES V/S USE OF MANUAL LABOUR
 The advantages and disadvantages of using machines and manual labour in

construction projects are briefly described hereunder:

Points in favor of Machines Points in favor of Manual labour

1. It can handle tough works which cannot be 1. Initial heavy investments are not required to be
performed by manual labour. made.

2. It is cheaper when quantum of work is more and 2. Valuable foreign exchange is saved by employing
material is required to be transported for long exchange is saved by employing manual labour instead
distances. of using machines which are to be imported.

3. Machines when used in the project, it delivers 3. Small and short duration projects are sometimes
better quality of work. found to be economical with manual labour.

4. It is possible to adhere to schedules. 4. Direct advantage to considerably large number of

people by way of employment which help in social and
economic betterment.

5. It is easy to predict the behavior of a machine as 5. No problem due to delay in procurement of spares
compared to that of man, hence planning is for the repair of machines. The delay (lead time) is
easy. substantially high in case of imported equipments.

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 1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.4 USEPoints OFinMACHINES
favor of Machines V/S USE OF MANUAL Points in favor LABOUR
of Manual labour
6. Being lesser number of persons, (operators only), it is easy 6. Project can be started immediately, which is not possible in case
to supervise and control. machines are used. Since importation, shipment, transportation
installation and commissioning of equipments require a
substantial time.

7. It helps in development of technical knowhow, skill and 7. Disposal of equipment and its balance spare parts poses a
industrial development of the country. problem after the project is completed.

8. Availability of Manpower and seasonal fluctuations will not

affect the project’s progress.

9. Effect of climate and topographic conditions is less when

machines are used as compared to that when manual labour
is used.

10. No problem for housing and transportation of persons

and also for the arrangement for supply of food, water, light
and medicines etc.

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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.5 FORECASTING EQUIPMENT REQUIREMENT
Following are the main points planner has to decide in equipment

planning.
1.Working Shifts:
Shifts By increasing the number of shifts we can reduce the
number of equipment required, as the same equipment can be used in
second and third shift.
2.Number and Size of Equipments:
Equipments For deciding the number and size of
the equipments following factors should be considered.
 Quantum of work,
 Working days available for completion of project.
 Number of shifts planned.
3.Matching Units:
Units The number and size of the matching equipments
should be planned for each activity, keeping in view that complete
matching set must be utilized at the maximum and combination must be
optimum. 12
1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.5 FORECASTING EQUIPMENT REQUIREMENT
4.Procurement Scheduling:
Scheduling Procurement scheduling is done
considering procurement time required and time when equipment is
required.
5.Workshop and Stores Planning:
Planning While planning for the purchase of
equipments, it is necessary to plan for the workshop and stores for
carrying out the repair and maintenance.
6.Man power planning:
planning Planning for manpower in order to operate the
equipment and to carry out the repair and maintenance is also
necessarily be done sufficiently in advance.
7.Site Conditions:
Conditions The type of equipment selected mainly depends upon
soil available, and valley conditions, surface and strata where work is to
be carried out.

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PROJECTS
1.6 SCIENTIFIC PLANNING
Modern construction projects are complex in nature and success of a

project depends greatly on proper and scientific planning.

This means that the data or basis taken should be based on past

experiences gained in various projects and on work studies carried out in

various conditions at various places.
While planning a project we must very carefully decide about the extent

of use of construction equipments.

1.6.1 Quantum of work
The first stage of planning is to calculate the total quantity of work

involved in each operation.

For correct planning it is very much essential to ascertain quantity of

work as accurate as possible.

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PROJECTS
1.6.1 Quantum of work
While calculating the quantity of work involved it is necessary to take

a note of various constraints, for example,

A. limitation of working space, which may affect the efficiency of
the machine, so as to assess the output rate of equipment to be
used,
B. location of quarries and amount of material available in each of
them.
1.6.2 Output and Capacity of Equipment
Next phase of planning is to decide the equipment on the basis of its

output and capability.

The equipment must be capable to handle the work efficiently on

which it is to be engaged.
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PROJECTS
1.6.2 Output and Capacity of Equipment
Output of the equipment varies with various conditions. Following are

some of them:
 Different type of soil needs different amount of effort.
 Reduction of horse power of engine due to altitude.
 Time spent on servicing and inspection varies with the working
conditions.
 Output of the equipment also depends upon the operator’s efficiency.
 Output of dumper etc. depends on the condition of haul road.
 Time spent on the unproductive works.
 Changing weather conditions are responsible for variation in output.
 Capacities of the matching machineries working in the same group.

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PROJECTS
1.6.3 Utilization and Time-period
It is always a good practice to utilize equipment to the limit of its useful

life on one particular project.

 For a project of nearly 4 years or more duration, it is possible to use the

equipment to its full economic life.

Experience has shown that a yearly utilization for as equipment under

average working condition in most case is as follows:

 Single shift operation – 1500 hrs.
 Double shift operation – 2500 hrs.
 Triple shift operation – 3200 hrs.
Two shift operation of equipment is economical and should be

employed whenever possible.

Three shift working results in frequent breakdowns and low

availability, which means more standbys and increase in cost.

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PROJECTS
1.6.4 Equipment Operation Planning
Following are the main points which should be considered while

planning for equipment operation:

 Equipments must work in coordination, especially when they are
required to work in a team.
 Proper working and the maintenance of auxiliary equipments
should also be ensured.
 Poor maintenance of service roads may result in more cycle time of
trucks, dumpers etc. besides causing more downtime.
 In order to ensure proper operating of equipment and to eliminate
delays it is necessary to ensure scheduled maintenance in addition
to watch the working by the operator.
 Safety on the work is a must.
 Good workmen should be given proper incentives.
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PROJECTS
1.6.5 Manpower Planning
To achieve maximum production at lower cost and at desired quality,
right man at right place at right job and at right time must be put.
This is what is called scientific assessment of manpower planning.
Following are the essential requirements for a sound manpower planning:

 It should be done sufficiently in advance.

 It should be reviewed periodically, so that modifications or
alternations if any can be incorporated.
 The planning should have top management support.
 It should be need based.
 It should be economic in nature.
 It should incorporate the elements of flexibility and elasticity.
 It should provide a suitable policy
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.6.5 Manpower Planning
To achieve maximum production at lower cost and at desired quality,
right man at right place at right job and at right time must be put.
For an effective and efficient manpower planning following main factors

should be considered:
 Working Hours:
Hours Manpower requirement is directly related to the total
hours worked per day by the employee in a project.
 Number of shifts:
shifts It has been experienced that production falls in the
night shifts as compared with day shifts.
 Nature of work:
work Nature of work decides the output and capabilities
hence plays and important role in deciding manpower requirement.
 Operators Efficiency:
Efficiency Normally following standard is considered as
guidelines for measuring workers efficiency:
 Operators having one year of job experience = 85%
 Newly appointed operators after training = 60%
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.7 SELECTION OF EQUIPMENT
Proper selection of equipment for a construction project is of vital

importance for its speedy and economical completion.

For proper selection of equipment, a considerable experience in the

operation and maintenance in the field is essential.

Following are the main points which should be considered in the process

of equipment selection.
A.Suitability for Job Conditions:
Conditions The equipment must meet the
requirement of the work, climate and working conditions.
B.Size of the Equipment:
Equipment Size of equipment should be such that it must be
able to be used with other matching units.
C.Standardization:
Standardization It is better to have same type and size of equipments in
the project.
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PROJECTS
1.7 SELECTION OF EQUIPMENT
D.Availability of Equipment in the market:
market The equipment which is easily
available in the market should be purchased.
E.Availability of Spare Parts:
Parts While selecting a particular type or make of
equipment, it should be ensured that the spare parts will be available at
reasonable price throughout the working life of the equipment.
F.Multipurpose Equipments (Versatility):
(Versatility) There are certain types of
equipments which are not utilized fully.
G.Availability of Know-how:
Know-how The equipment selected should be
satisfactorily handled by available operators and mechanics.
H.Use in Future projects:
projects When equipment completes only a part of their
useful life in a project, it should be kept in view that the equipment can be
used in future projects and may not become obsolete.

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PROJECTS
1.7 SELECTION OF EQUIPMENT
I.The Economical Aspects:
Aspects While selecting the equipment, it should be
considered that the cost of unit production should be minimum.
J.Reliability of the Equipment:
Equipment Equipment selected for the project must
be reliable one.
K.Service Support:
Support Service support should be available in the area of
project where the equipment shall be used. Service after sales is a major
criteria for selection of equipment.
L.Operating Requirements:
Requirements The equipment selected should be easy to
operate and maintain, acceptable to the operator and should have lesser
fuel consumption.
M.Past performance:
performance If the equipment being purchased is of new make
and model, it is desirable to enquire about its performance from other
users, who are using this make and model.
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.7 SELECTION OF EQUIPMENT
I.Reputation of the manufacturer.

J.Warranty or guarantee offered by the manufacturer .

K.Use of standard components in the equipment .

L.Adequacy of drive mechanism or power of the prime-mover.

M.Versatility of the equipment should be given due priority:

priority This
means a machine which can be used for many jobs.

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PROJECTS
1.8 FORWARD PLANNING
The planning of a project should be made at least 6 to 9 months in

advance of commencement of work.

This time lead is essential for the following main tasks to be performed

before the commencement of project:

A. Purchase of Equipment:
Equipment This includes the formalities for calling
enquiries from manufacturers, selecting an equipment; time taken by
the supplier for supply of the equipment and transporting it to the
project site, installation and commissioning it.
B. Workshop Installation:
Installation A well equipped workshop should be
installed in the project, so as to fulfill the requirement of repair of
equipment.
C. Spare Parts Stock:
Stock Initial lot of spares should be purchased along
with the equipment.
D. Posting of Personnel:
Personnel Selection of the right operator. 25
1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.9 PURCHASE OF EQUIPMENT
Once the selection of the equipment is done the purchase order for the

selected model and type is issued considering lead time for the supply of
equipment, time required for its installation and commissioning, and the
time when equipment should be available for use.
The process of selection of equipment is generally a part of

procurement, followed by equipment planning and helps in purchase of

equipment.
The complete procurement action is divided in various activities like

calling enquiries, its technical and financial evaluation, ordering,

contract-making, transporting, assembling and installation and
commissioning.

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PROJECTS
1.9 PURCHASE OF EQUIPMENT
1.9.1 Purchasing v/s Hiring
Contractors and other users of construction equipment are required to take

a decision as to whether to purchase an equipment or to acquire it on hire.

Following are the points which are in favor of purchasing an equipment:

 When the equipment used for the most of the construction period and
likely to complete almost its full life, while working in the project.
 It remains available for use whenever it is needed.
 Purchased equipment means an own equipment, is generally kept in
better mechanical condition and is more reliable. This means matching
equipments will not be affected adversely due to frequent breakdowns.

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PROJECTS
1.9 PURCHASE OF EQUIPMENT
1.9.1 Purchasing v/s Hiring
Following are the points which are against owning the equipment:

 When the equipment cannot be used for its full life, then the owning
may be more expensive than hiring.
 The purchaser is required to do huge investment initially, which
otherwise he may need for other purposes.
 Contractor may have to face the danger of obsolescence of the
equipment.
1.9.2 Hiring with an option to purchase
In this system user hire the equipment at the prevailing rate with a

provision that he may purchase it at a later date if he wishes to do so.

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PROJECTS
1.10 WORKSHOP INSTALLATION
A workshop should be installed in the project so as to enable to carry

out necessary repair and maintenance of the equipment. Workshop

should cater for the following facilities:
 Servicing, which includes cleaning, cooling, lubrication, and check-
ups.
 Field repairs.
 To carry out inspection at regular specified intervals to detect faults
which can be rectified in time to avoid breakdowns. It detects the
defects in operation, change in adjustments, wear and tear, cracks or
any other indication for likely breakdown in near future.
 Tire repair.

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PROJECTS
1.11 SPARE PARTS MANAGEMENT
Machines worth millions of Birr are idle for want of spares, on other

hand huge stock of spares are lying which perhaps may not be used.
This emphasizes the need of paying more attention on the management

of spares.
 Improvement in the capacity utilization and cost reduction can be

achieved by better spare parts management.

The objective of spare parts management is to provide right parts in

right quantity, in right place, at right time and at right cost.

The parts must be properly codified and classified.

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PROJECTS
1.12 MAINTENANCE MANAGEMENT
Every machine is thoroughly tested and inspected by the manufacturers

before selling.
When used it is subjected to wear and tear, hence proper attention

should be given to protect the machine and its components from undue
wear and thus protect them from failures.
A proper attention means lubrication,
lubrication cleaning,
cleaning timely inspection and
systematic maintenance.
maintenance
Maintenance means efforts directed towards the up keep and the repair

of that machine.

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PROJECTS
1.12 MAINTENANCE MANAGEMENT
Following are the types of maintenances:

A. Repair Maintenance can be followed for non-critical equipments,

and where failures are unpredicted.
B. Corrective Maintenance should be adopted for frequently falling
components.
C. Preventive Maintenance (planned or scheduled or systematic
maintenance). Periodic inspection or checking at the pre-decided
frequency helps to find out the reasons leading to breakdown and to
rectify them when they are in minor (or initial) stages.

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PROJECTS
1.12 MAINTENANCE MANAGEMENT
1.12.1 Functions of Preventive Maintenance
Following are some of the important functions of the preventive

maintenance programme:
A. Inspection or checkups at carefully decided frequencies.
B. Lubrication. Mechanical components like gears, bearings, bushes
and other friction surfaces give good performance for long periods
C. Every preventive maintenance work should be preplanned.
D. Good record keeping is essential for good preventive maintenance.
E. Training of maintenance personnel.
F. Storage of maintenance spares.

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1.12 MAINTENANCE MANAGEMENT
1.12.1 Functions of Preventive Maintenance
Advantages of Preventive Maintenance

A. Less overtime work required as it is pre-planned.

B. Less repair costs
C. Less Production downtime.
D. Less stand-by equipments needed.
E. Increased life expectancy.
F. Better spare parts control leading to reduced inventory.
G. More reliability.

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1.12 MAINTENANCE MANAGEMENT
1.12.2 Tyre Maintenance
Correct tyre selection and proper tyre maintenance are therefore very

essential for ensuring economic operation.

For proper maintenance of tyres following factors should be considered:

 Proper inflation.
 Proper Loading.
 Proper Speed.
 Keeping the tyre up to desired temperature.
 Proper driving habit.
 Avoiding vehicles’ mechanical irregularities.
 Storing of tyres properly.
 Tyre rotation and Retreading at right time.
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1.13 DOWN-TIME AND AVAILABILITY
The downtime is the duration from the time when equipment goes under

breakdown to the time when it is restored to service.

Down time can be reduced by following ways:

 Speedy Fault Detection.

Detection Fault should be detected before it becomes
serious enough to affect performance.
 Speedy Fault Diagnosis.
Diagnosis The time spent in fault diagnosis can be
reduced by following a logical method of fault diagnosis.
 Speedy repairs.
repairs Time for repairs include time required for fault
detection and diagnosis, removal of assembly, stripping, adjustments,
assembly and then final trial test.
 Reduction in Waiting Time.
Time Waiting time for repair is considerably
higher than actual time taken for repairs due to the irregular (random)
arrival of repair jobs.
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1.14 OPERATION AND UTILISATION
Since this is the task directly responsible for production, maximum

managerial care should be given to the ‘operation’.

Following are the main factors which effect the operation:
operation
i. Availability of Trained Personnel.
ii. Adequate repair and maintenance facilities in the projects.
iii. Availability of spares required for repair and maintenance.
iv. Working Conditions.
v. Haul roads should be well maintained
vi. Information Monitoring System
vii. Feedback should be extended to the manufacturers
viii.The output of each equipment should be compared with that of pre-
determined norms.
ix. Encourage operators and maintenance personnel for giving long life
of the equipment.
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1.15 MANAGEMENT TECHNIQUES
A.Network Techniques.
Techniques Network techniques can be used to prepare
equipment schedules, organizing and executing the work of assembling,
installation and commissioning of plants, to organize and execute major
repair job of equipment.
B.Work Study.
Study Work study is performed to determine:
i. A best way of doing a work so as to get maximum output without
affecting the equipment adversely.
ii. How much time a unit of work should take to perform or how much
work per hour should be performed by the equipment?
C.Operation Research Techniques.
Techniques Operation research is a method of
analysis by which management receives aid for their decision. It offers
alternative plans for a problem for decision by adopting analytical
methods.
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PROJECTS
1.15 MANAGEMENT TECHNIQUES
C.Operation Research Techniques.
Techniques
The methods of operation research which can be applied to equipment

management are:
i. Waiting line models,
ii. equipment replacement models,
iii. simulation and
iv. transportation model.
D.Communication.
Communication Communication means transmission of ideas,
information, directions etc. The communication is a continuous process
and must move freely in both directions and can be either oral or written,
and flows either in upward or downward or horizontal directions.

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1.15 MANAGEMENT TECHNIQUES
E.Computerization in Equipment management.
management Computers are sued
effectively for various aspects related to the equipment management
like, availability of equipment, resource leveling, maintenance of
history cards and then using them for planning the over hauling of
assemblies/equipment as a whole.
F.Value Engineering.
Engineering Value engineering is a tool of management to
determine the approaches for saving the cost from the point of ‘value.’
 The job of value engineers is to make a study of the design,
specifications, materials and methods of construction of the
project at a lesser cost without reducing the quality and
usefulness of project.

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1.16 REDUCTION OF CONSTRUCTION COST
A cost reduction in construction can be achieved by adopting following

ways:
i. Proper planning
ii. Timely supply of funds, equipment, materials, and personnel.
iii. Proper equipment planning and selection.
iv. Proper equipment operation,
operation maintenance and utilization.
v. Adopting proper inventory control.
vi. Engaging experienced operators
vii. Monitoring progress and adopting scientific methods.
viii. Ensuring continuous supervision.
supervision
ix. Adopting innovations and latest techniques suitable for the job
x. Eliminate unnecessary construction requirements.
xi. Use local materials when they are satisfactory.
xii. By applying value Engineering.
Engineering 41
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1.17 DECISION-MAKING
Decision-making is the most important task in equipment management

and we can say that good decision making ability is the key to success.
Efficiency, loss or profit, and working atmosphere of a construction

firm are affected by these decisions.

Management without decisions is like a man without backbone.

In general, decisions are the output of the following inputs:

i. Knowledge and information,

information
ii. Ability and skill:
skill Communications, analytical, or conceptual.
iii. Value system:
system Opinions, attitudes, habits, or belief

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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.17 DECISION-MAKING
The job of equipment management involves a large number of

decisions e.g.
a) Which equipment should be used?
b) What work is to be done by equipment?
c) Whether to use equipment or to do it manually?
d) What make and model of the equipment is to be purchased?
e) Which of the matching equipment and of what size and in what
number to be deployed?
f) Which of the accessories to be purchased with the equipment?
g) Whether to purchase the equipment or take on hire.
h) When to purchase from own capital or take loan.
i) Whether to purchase a particular spare for store or purchase when
needed.
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1. EQUIPMENT MANAGEMENT IN CONSTRUCTION
PROJECTS
1.17 DECISION-MAKING
Characteristics of a Good Decision:
a) It is the choice of the best course among various alternatives.
b) It is the end process preceded by the deliberations and reasoning
c) It is associated with commitment.
d) It is rational.
e) Evaluation process exists in every course of decision making.
Procedure for Decision-Making:
a) Recognizing and analyzing the problems.
b) Finding relevant facts.
c) Determining possible alternatives.
d) Evaluating the impact of alternatives.
e) Selecting the best solution.
f) Implementation of the decision.
44
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
GENERAL
Principles and techniques of engineering economics are utilized while

making equipment selection and planning of finances for the purchase

of construction equipments.
Economics of construction equipment deals with the study of

working of the equipment and to compute the unit costs of production.

Unit cost of production is calculated after estimating the best of

production by calculating hourly ownership and operating cost of the

equipment and knowing hourly production of that equipment.

45
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.1 Investment Costs
This is a kind of fixed cost and continues to be incurred whether the

equipment is used or not. Investment costs comprises of the following:

 Interest on the money invested in the procurement of the
equipment.
 Various taxes on the equipment.
 Insurance expenses.
 Storage costs.
If the money spent on the purchase of the equipment, was invested in

the bank or similar other agencies, it would have earned an interest.

Now this amount, equivalent to the interest, should be recovered from
this equipment.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.1 Investment Costs
Generally these investment costs are taken as about 10 to 15% of the

total cost of the equipment. This total cost comprises of the following:
a) Price of the equipment with all attachments and accessories.
b) Insurance and freight charges.
c) Expenses on un-loading, clearance and custom duty.
d) Cost of transportation to the job site including loading and
unloading.
e) Erection and commissioning charges.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Due to use and obsolescence every equipment loses its value. This

loss is accounted for by depreciating the equipment every year.

Depreciation.
Depreciation Whenever any machine or equipment performs useful
work its wear and tear is bound to occur. This can be minimized up to
some extent by proper care and maintenance but can’t be totally
prevented.
Obsolescence.
Obsolescence is the depreciation of existing machinery or asset due
to new and better invention, design of equipment of processes etc.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
depreciation can be classified as under:

49
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Methods of Calculation: The following are the methods for
calculating depreciation.
i. Straight line Methods
ii. Diminishing Balance Method
iii. Sinking fund Method
iv. Annuity Charging method
v. The Insurance policy method
vi. The Revaluation or Regular Valuation method
vii. Machine Hour Basis method
viii.The sum of the year’s Digits method

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
This method assumes that the loss of value of machine is directly

proportional to its age. It means one should deduct the scrap value
from the original value and divide the remaining value by the number
of years of useful life.
Let C be the Initial cost of a machine.
S be the scrap value.
N be the Number of years of life of machine. and
D be the depreciation amount per year.

Then, CS Birr

D
N

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Example-1
(a) A machine was purchased for Birr 450,000 on 1 st January, 1991,
the erection and installation work costs Birr 70,000. This was replaced
by a new one on 31st Dec, 2010. If the Scrap Value was estimated as
Birr 150,000 what should be the rate of depreciation and depreciation
fund on 15th June, 2000?
(b) If after 12 years of running, some assemblies are replaced and the
replacement cost is Birr 150,000 what will be the new rate of
depreciation?

52
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Solution

53
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Solution

54
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Solution

55
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Example-2
Consider an excavator purchased for 3.1 million birr having a useful
life of 5 yrs. Determine the depreciation and book value for each of
the 5 years using Straight Line method. Assume a salvage value of S
= 860,000 birr.
Solution

56
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Straight Line Method
Solution

57
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Diminishing Balance Method
This is also called “Reducing Balance” Method. The diminishing

value of machine is greater in the early years. It depreciates rapidly in

the early and later-on slowly.
So under this method, the book value of the machine goes on

decreasing as its existence continues.

In this, let x be the fixed percentage taken to calculate the yearly

depreciation on the book value.

Where, C = initial cost, S = Scrap Value, N=No. of the years of life.

It will be more clear by the following solved example .

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Diminishing Balance Method
Example - 3
A lathe is purchased for Birr 800,000 and the assumed life is 10 years
and scrap value Birr 200,000. If the depreciation is charged by
diminishing Balance method, calculate the percentage by which value
of the lathe is reduced every year and depreciation fund after 2 years.
Solution

59
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Diminishing Balance Method
Solution

60
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Diminishing Balance Method
Solution

61
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.2 Depreciation
Diminishing Balance Method
Solution

62
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.1 OWNING COSTS
2.1.3 Major Repair Cost
While minor or field repairs are carried out during the day to day

working of the equipment the major repairs are carried out after the
substantial use of the equipment.
Major repairs and over hauls are the replacement of major parts of the

equipment because of the excessive wear through a long period of use.

Since these repairs require a heavy amount of 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 to 200% of

the cost of depreciation depending on the type of equipments.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.1 Cost of Fuel
The actual consumption of fuel or electricity in these construction

equipments depends upon:

i. Engine B.H.P
ii. The load factor, which means the extent to which the engine
will operate at full power. Load factor generally vary from
30% to 70%.
iii. The conditions of the engine
Optimum fuel consumption in liters per hour may be calculated using

following formula:
Fuel consumption = 0.27 x load factor.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.1 Cost of Fuel
Recommended value of load factor

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.2 Cost of Lubricants
Lubricants include the following:

 Engine oil
 Air filter oil
 Transmission oil
 Hydraulic oil
 Greases etc.
The quantity of lubricating oil depends upon various factors. Some of

these factors are:

 Capacity of the crank case
 Condition of piston rings
 Number of hours between oil changes.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.2 Cost of Lubricants
Lubricating Oil Consumed
Requirement of lubricants including engine oil, air cleaner oil,

transmission oil, greases, and hydraulic oil, can be assessed on the

basis of information supplied by the equipment manufacturer.
Following formula is used for estimating the quantity of oil required

per hour:

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.3 Servicing and Maintenance Cost
Regular servicing and maintenance of each equipment is very

essential in order to have the equipment in reliable and perfect

condition of working. This cost includes:
 Change of lubricants
 Checking and servicing of fuel and lubricating systems, including
change of filter elements.
 Care of tyres and tubes
 Care of Battery and electrical system
 Cleaning of the equipment and other similar works.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.4 Labour Cost
Labour cost is an important element of operating cost and

contributing a major part of it.

Labour cost element includes the salaries of operators, and helpers

engage on the equipment.

Provision for leave reserve (may vary from 10 to 12%) is also made

under the bead of labour cost.

A percentage of the wages of supervisory staff, depending upon the

attention required on that particular equipment, is also to be added.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.2 OPERATING COSTS
2.2.5 Cost of Field Repairs
This is the cost incurred on minor repairs which are carried out on the

site or in field workshops.

These repairs include replacement of minor parts, such as fan belts,

filters, bearings, wire ropes etc. and other adjustments required to be

carried out during normal working of the equipment.
2.2.6 Overheads
These are the charges which are incurred on complete fleet of the

equipment.
These charges includes the pay on watchman, light and water charges

in the storage yards, uniform to the operating and maintenance staff

etc.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
Determination of Owning and Operation Costs
To determine the cost of owning and operating following procedure is

adopted.

71
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
Determination of Owning and Operation Costs

72
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
Determination of Owning and Operation Costs

73
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.3 EQUIPMENT RENTAL RATES ACCORDING TO
ETHIOPIAN ROADS AUTHORITY (ERA)

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.4 COST CONTROL AND COST REDUCTION
Cost control is a method of comparing actual costs with

predetermined standards or targets.

Whereas the cost-reduction is meant to take drastic actions,

sometimes by changing rigid boundaries laid down by the standards or

targets.
Steps for Cost Control and Cost Reduction
Following essential steps are required to be taken for effective cost

control and cost-reduction.

i. Inculcating an all-round cost consciousness in the organization.
ii. While setting standards and norms, scope of cost reduction is to be explored.
iii. Decide priorities for attack to achieve quick results.
iv. Control on consumption as well as on block-up of capital is to be exercised.
v. Provide right climate to encourage creativity.
vi. Reporting and monitoring system should be strengthened.
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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.4 COST CONTROL AND COST REDUCTION
Cost saving Areas
A.Reduction in Material Cost
 Ensure purchase of right quantities of right quality at right time
from right source and at right price.
 Avoid overstocking or inventory build-up
 Planning material procurement in advance, scientifically and from
practical consideration.
 Decision regarding whether to purchase aggregate etc. or to
manufacture.
 Minimum handling of material be ensured.
 Utilize scrap and waste material.
 Avoid wastage of material.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.4 COST CONTROL AND COST REDUCTION
Cost saving Areas
B.Reduction in Labour Cost
 Judicious and rational distribution of workmen
 Labour rate should be decided considering actual norms of output.
 Suitable inspection and supervision methods be introduced.
 Decision for single shift, double shift, triple shift, or extended
shift (one shift of 10 to 12 hrs) be taken, considering overall
economy.
 Operators should be trained from time to time to make them well
conversant with the latest technology to enable to achieve
maximum productivity.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.4 COST CONTROL AND COST REDUCTION
Cost saving Areas
C.Reduction in Overheads
 Overhead expenditure should be maintained in a proper record
and compared with estimates or standards from time to time.
 To keep control on indirect labour.
 To have versatile machines with different accessories to have
optimum utilization.
 Reduction in avoidable unproductive expenditure to the
maximum.
 Construction of colonies, office etc. be made by utilizing the
local material for economy and location be decided after careful
considerations.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.5 Cost- Accounting
In the current days of competition, it is necessary that the concern

should have utmost efficiency and minimum possible wastage and

losses.
Financial or Accounting Ratio Analysis
Financial or accounting ratio may be defined as relating one

accounting figure to another to provide better comparison. Different

financial ratio are:

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.5 Cost- Accounting
Financial or Accounting Ratio Analysis

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.5 Cost- Accounting
Financial or Accounting Ratio Analysis

81
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.5 Cost- Accounting
Uses of Financial Ratio Analysis
Financial rations provide useful indications to appraise financial

health of a concern and overall efficiency of the project.

Computation of rations often leads to a further enquiry into various

aspects of project, and which enables to bring out some important

facts, which ultimately helps in:
a) Planning: short, medium, and long range.
b) Diagnosis of financial ills or industrial sickness.
c) Decision marking of all types
d) Keeping a continuous watch on the financial trends and taking
corrective actions well in advance

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.5 Cost- Accounting
Bidding by the Construction Agencies
The value of the profit is decided after considering several factors,

some of them are:

 Competition in the market
 Size of the project.
 Facilities available like, mobilization advances, interval at which
payments will be made to the contractor.
 price escalation
 Risk involved
 Chances for utilizing the equipment after completion of the project.
 Availability of raw material from open market or on control and its
lead time.
 Maintenance period after completion of the project.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.6 REPLACEMENT OF EQUIPMENTS
The main reasons for the replacement of the equipment are:

A.Deterioration.
Deterioration It becomes necessary to replace the machine when it
wears out and does not function properly.
B.Obsolescence.
Obsolescence Whenever new equipment comes in the market, which
is capable of producing more products of good quality with less labour
and has more efficiency, the existing machine is to be replaced with
this machine although it was functioning well.
C.Inadequacy.
Inadequacy With the change of product design to meet the
customers demand or quantity to be manufactured, old machinery
becomes inadequate and, therefore, calls for different manufacturing
equipment.

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85
2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.7 REPLACEMENT OF EQUIPMENTS
Equipment Replacement Policy
Large numbers of factors are responsible to replace the equipment

before the expiry of the estimated life, namely:

 To reduce production cost.
 To reduce fatigue.
 To raise quality
 To increase output
 To secure greater convenience, safety and reliability.

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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.7 REPLACEMENT OF EQUIPMENTS
Guidelines in Replacement Analysis
There are certain rules which may be used as guidelines for replacement

analysis.
A.For equipment in use
Do consider:
 Operating cost
 Repairs and maintenance cost.
 Down time cost.
 Salvage value
 Rebuilding cost
Do not consider:
 Original cost.
 Money already spent on repairs and maintenance
 Unrealistic book value
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2. ECONOMICS OF CONSTRUCTION EQUIPMENT
2.7 REPLACEMENT OF EQUIPMENTS
Guidelines in Replacement Analysis
B.For new equipment

Do consider:
 Initial cost
 Interest on capital investment.
 Salvage value at the end of useful life
 Cost advantage of improved product
 Labour savings.
Do not consider:
 Any savings not clearly assessable.
 Overhead charges

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THANK YOU!

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