(Kindly feel free to write to me on gmail to help improve above notes as these notes are not proof read by any expert. They are just my class notes prepared after referring to popular books on this subject and my 20 year experience in the field. Notes number 16 gives a list of such books. )
For construction firms, it is important to accurately estimate the equipment cost as part of the total cost of the construction project. Inaccurate estimation of construction equipment cost may adversely affect the profit margin of the firms especially engaged in projects with more involvement of different types of construction equipment.
The total cost of a piece of construction equipment consists of two components namely ownership cost and operating cost. This is also referred as O&O cost of the construction equipment. The selection of a piece of equipment in a construction project depends on the total cost associated with that equipment.
The details about equipment ownership cost and operating cost are presented below.
Ownership cost :- Ownership cost is the total cost associated with the construction equipment for owning it irrespective of the equipment is employed or not in the project.
The ownership cost consists of the following;
a) Initial cost,
b) Salvage value,
c) Interest cost or cost of capital investment,
d) Taxes,
e) Insurance cost,
and
f) Storage cost
a) Initial cost : Initial cost is the capital investment required to own the equipment. It includes purchase cost, sales tax, transportation cost (or freight charges) to bring the equipment to company’s storage yard or construction site and cost of assembly and installation of the equipment. If the equipment is mounted on rubber tires (pneumatic tires), then the tire cost is deducted from the initial cost for calculating ownership cost. This is because the expected service life of pneumatic tires is less than that of the remaining of the equipment. Accordingly the rate of deprecation of tires is different from that of the equipment. Cost of tires is considered as a part of operating cost of the equipment. As the equipment is used in the project, there is depreciation in value of the equipment with time, the total amount of depreciation for the construction equipment over the useful life is equal to the initial cost less the estimated salvage value.
b) Salvage value : Salvage value represents expected cash inflow that will be received by disposing of equipment at the end of its useful life. The estimation of expected salvage value of the equipment can be carried out by referring to the data obtained from past projects wherein same (or similar) equipment was used or information obtained from other relevant sources.
c) Interest cost or cost of capital investment: It is the annual cost of interest charged on the borrowed money or that of capital investment to acquire the ownership of the equipment. If the equipment is purchased by borrowing money from a lender, then interest cost is the interest charged (at interest rate charged by lender) on the borrowed amount. On the other hand if the equipment is purchased using construction firm’s own funds, then cost of capital investment is the interest charged on capital investment at interest rate equal to construction firm’s rate of return. Even though the construction firm uses its own funds to purchase the equipment, cost of capital investment is charged as part of the ownership cost because the construction firm could have invested the funds elsewhere to earn the return instead of purchasing the equipment. The interest cost on borrowed money or cost of capital investment can be exactly calculated by considering time value of money and using appropriate compound interest factors. However the interest cost or cost of capital investment can also be calculated approximately as percentage of constant average annual investment (cost) over the useful life of the equipment. The annual interest rate or the rate of return is multiplied to the average annual investment to find out the annual interest cost or cost of capital investment. The average annual investment can be calculated by finding out the average value of the equipment over the useful life of the equipment. It may be noted here that the value of the equipment depreciates with time. By considering straight-line depreciation, the average annual investment can be found out by calculating average of the book value at the beginning of 1st year and that at beginning of last year of useful life i.e. at the beginning of ‘n’ year.
d) Taxes : It represents the property taxes to be paid to the state or central government. It depends on the value of the equipment owned and the applicable tax rate for a given location. The property tax can be calculated as a percentage of the average annual investment or a percentage of the book value in a given year. Generally it ranges from 2 to 5% of the average annual investment or book value of equipment.
e) Insurance cost : It represents the annual premium to be paid to insurance companies to cover the cost incurred due to accident, fire, theft etc. for the construction equipment. In other words, it represents the cost that protects the owner of the equipment against these damages. Similar to taxes, the insurance cost can be calculated as a percentage of the average annual investment or the book value in a given year. It is generally about 1 to 3% of the average annual investment or book value of equipment.
f) Storage cost : It is the cost of keeping the equipment in storage yards when it is not operating at the work site. Storage cost includes the rental and maintenance charge for storage yards, wages of security guards and wages of workers employed for bringing in and out of the storage yards. It is around 0.5 to 1.5% of the average annual investment or book value of equipment. The annual storage cost can be calculated for the entire fleet of equipment and is then prorated to individual equipment requiring the storage facility. Similar to storage cost, the tax and insurance cost can be calculated for the equipment fleet and then prorated to individual equipment.
Operating Costs: Operating costs, unlike fixed ownership costs, change in proportion to hours of operation or use. They depend upon a variety of factors, many of which are, to some extent, under the control of the operator or equipment owner.
The operating cost consists of the following;
a) Maintenance and repair.
b) Fuel
c) Lubricant
d)Tyre
e) Operator
a) Maintenance and Repair : This category includes everything from simple maintenance to the periodic overhaul of engine, transmission, clutch, brakes and other major equipment components, for which wear primarily occurs on a basis proportional to use. Operator use or abuse of equipment, the severity of the working conditions, maintenance and repair policies, and the basic equipment design and quality all affect maintenance and repair costs.
The cost of periodically overhauling major components may be estimated from the owner's manual and the local cost of parts and labor, or by getting advice from the manufacturer. Another owner's experience with similar equipment and cost records under typical working conditions is a valuable source. If experienced owners or cost records are not available, the hourly maintenance and repair cost can be estimated as a percentage of hourly depreciation.
b) Fuel : The fuel consumption rate for a piece of equipment depends on the engine size, load factor, the condition of the equipment, operator's habit, environmental conditions, and the basic design of equipment.
To determine the hourly fuel cost, the total fuel cost is divided by the productive time of the equipment. If fuel consumption records are not available, the following formula can be used to estimate liters of fuel used per machine hour.
c) Lubricants : These include engine oil, transmission oil, final drive oil, grease and filters. The consumption rate varies with the type of equipment, environmental working condition (temperature), the design of the equipment and the level of maintenance. In the absence of local data, the lubricant consumption in liters per hour for skidders, tractors, and front-end loaders could be estimated as
Q = .0006 × GHP (crankcase oil)
Q = .0003 × GHP (transmission oil)
Q = .0002 × GHP (final drives)
Q = .0001 × GHP (hydraulic controls)
These formulas include normal oil changes and no leaks. They should be increased 25 percent when operating in heavy dust, deep mud, or water. In machines with complex and high pressure hydraulic systems such as forwarders, processors, and harvesters, the consumption of hydraulic fluids can be much greater. Another rule of thumb is that lubricants and grease cost 5 to 10 percent of the cost of fuel.
d) Tires : Due to their shorter life, tires are considered an operating cost. Tire cost is affected by the operator's habits, vehicle speed, surface conditions, wheel position, loadings, relative amount of time spent on curves, and grades.
In Zone A, almost all tires wear through to tread from abrasion before failure. In Zone B, most tires wear out - but some fail prematurely from rock cuts, rips, and non-repairable punctures. In Zone C, few if any tires wear through the tread before failure due to cuts.
e) Operator Costs : Operator costs include direct and indirect payments such as taxes, insurance payments, food, housing subsidy, etc. Operator costs need to be carefully considered when calculating machine rates since the hours the operator works often differs from the hours the associated equipment works. What is important is that the user define his convention and then to use it consistently. For example, in felling, the power saw rarely works more than 4 hours per day, even though the cutter may work 6 or more hours and may be paid for 8 hours, including travel. If felling production rates are based upon a six-hour working day, with two hours of travel, the machine rate for an operator with power saw should consider 4 hours power saw use and eight hours operator for six hours production.
No comments:
Post a Comment