Chapter 10 Pricing Equipment

1. Chapter 10Pricing Equipment

2. 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.

3. 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

4. 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.

5. 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.

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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