What is meant by pricing construction equipment?

Pricing construction equipment means estimating the cost of operation of all the construction equipment used in a construction project. The pricing is done based on two factors – ownership cost and operating cost of the equipment. Thorough knowledge of the ownership and operating costs is necessary for proper project management and executing profitable construction.

Various equipment used in construction

The construction equipment produced by the construction company includes equipment for earthmoving, construction, material handling, and other construction equipment. The commonly used construction equipment includes hoe, spade, pickaxe, and iron pan.

The earthmoving equipment includes an excavator, backhoe, loaders, bulldozers, trencher, motor grader, motor scraper, crawler loader, and wheeled loading shovel. The excavator is used for digging trenches, excavating mines, and lifting away the waste. Most of the excavators are powered by hydraulic fluid with hydraulic cylinders and hydraulic motors. The crawler excavator is an advanced type of excavator used currently. A backhoe is a digging machine, mounted on the back of a tractor or a front loader. Loader is heavy equipment used to move the construction materials and waste. Bulldozers are heavy machinery, used for pushing and loosening the soil. Wheel loader drives on wheels unlike bulldozers that runs on tracks. Trenchers are the equipment used for digging trenches, priory used for laying pipes. Motor graders are used for creating flat surfaces during the grading process. Motor scraper, crawler loader, and wheeled loading shovels are also used for moving soil.

The construction equipment includes dumpers, tippers, and trailers. Dumpers are used for transporting heavy materials on construction sites. Tippers are used for transporting construction materials such as aggregates, sand, and so on. Trailers are used for transporting goods and materials.

The material handling equipment includes cranes, conveyors, hoists, and forklifts. Cranes are heavy machinery used for lifting and moving materials on site. Conveyors are used for transporting heavy materials. Hoists are also used for lifting and lowering materials. Forklifts are used for moving heavy materials over short distances.

Other construction machines include concrete mixers, road rollers, road-making machines, stone crushers, slurry pumps, hot mix plants, shovels, draglines, and so on.

Construction equipment price

The total cost of construction equipment is based on two factors - ownership cost and cost of operating construction equipment.

Ownership cost

Ownership costs are fixed costs and are calculated on annual basis. The estimator must perform proper financing of the ownership cost. Ownership cost includes:

• Initial capital cost
• Depreciation
• Investment cost
• Insurance cost
• Taxes
• Storage cost

Initial Cost

The initial cost is about 25% of the total annual cost of the machinery. The initial cost is the cost at the time of equipment sales that a contractor pays for purchasing the machines. The initial cost consists of the factory price of the machine (inclusive of the extra equipment and taxes), shipping cost, cost of assembly, and other overhead costs paid by the contractor before equipping the asset.

Depreciation

Depreciation is defined as the reduction in the market value of the equipment. Due to age, wear, and deterioration, the value of equipment can depreciate. Hence, depreciation occurs due to the physical deterioration, due to the continuous wear and tear of the equipment, and obsolescence occurring with time. The term depreciation is used to state the change of assets (equipment) value from year to year. The depreciation is also affected by the rental rate of the equipment. Rental rate is the rate that the owner of equipment incurred while leasing the equipment to another contractor for use. Hence, it is necessary to consider the rental rate as well, while calculating depreciation. While calculating the depreciation, the initial cost and equipment life should be known. The initial cost should include the base price of the equipment, sales tax, transportation cost, and initial assembly cost.

The various methods used for calculating depreciation are:

• Straight-line depreciation
• Sum of years' digit depreciation
• Double declining balance depreciation

Straight-line depreciation

In straight-line depreciation, it is assumed that the equipment will lose the same amount every year until it reaches its salvage value. Salvage value is the expected amount of the equipment during its resale after completion of its useful life. The straight-line depreciation is calculated using the formula given below,

$D_n = \frac{IC - S - TC}{N}$

where,

IC is the initial cost, S is the salvage value, TC is the tire and track costs, and N is the useful life in years.

Sum of years digit depreciation

In the sum of years' digit depreciation, it is assumed that the amount of depreciation after 1 year is not straight. This type of depreciation is calculated using the formula given below-

$D_n = \left(\frac{Year for which depreciation needs to be calculated}{1+2+3+...+N}\right) . (IC - S - TC)$

Double declining balance depreciation

In this method, the depreciation is calculated by considering accelerated depreciation. The depreciation in this method is calculated using the formula given below-

$D_n = \frac{2}{N}.(B{V}_{(n-1)} - TC)$

where,

$B{V}_{(n-1)}$ is the book value at the end of the previous year.

Investment cost

The investment cost is the annual cost of the money invested for the equipment. If the equipment is purchased on loan, then the investment cost includes the interest amount as well. The investment cost is calculated using the formula given below,

$P =\frac{IC (n+1) + S (n-1)}{2n}$

where

n is the useful life in years.

Insurance cost, taxes, and storage cost

Insurance cost is the cost invested for the insurance of the equipment from fire, theft, accident, or any type of damage. Taxes are the cost paid for the property tax and licenses. Storage cost includes the rental cost of the yards which the contractor pays for leasing the yard, where the equipment is to be stored.

Cost of operating construction equipment

The cost of operating construction equipment includes the following factors:

• Maintenance cost
• Tire cost
• Consumable cost
• Mobilization cost
• Operator cost
• Special items cost

Maintenance cost

The construction equipment faces a lot of wear and tear. Hence, frequent repair and maintenance are required to be done by the contractor. The wear and tear of machinery vary from site to site depending upon the site conditions. The maintenance cost is more for the older equipment. Good maintenance, timely wear measurement, proper attention, and regular cleaning are some of the methods to reduce the operating cost. The hourly repair cost is calculated using the formula given below,

$Hourly repiar \cos t = \left(\frac{Year digit}{Sum of years\text{'} digit}\right) . \left(\frac{Lifetime repair \cos t}{Hours operated}\right)$

Tire cost

Tire cost represents the cost of tire repair and replacement. The life expectancy of rubber tires is generally less. The tire repair cost of equipment generally adds about 15% to the tire replacement cost. The tire repair and replacement cost can be calculated using the following formula,

$Tire repair and replacement \cos t = 1.15 x \frac{\cos t of set of tires}{expected tire life}$

Consumable costs

Consumable costs include fuel costs and lubricating oil costs. The contractor must use the machinery properly to achieve fuel and oil economy. The fuel costs vary for different types of machines. The quantity of oil required can be calculated using the following formula,

C$Quantity of oil = \frac{(0.006 . hp . f)}{7.4} . \frac{c}{t}$ where hp is the rated horsepower of the machine, f is the operating factor, t is the number of hours, and c is the capacity of the crankcase of the machine.

Mobilization cost, operator cost, and special item cost

Mobilization cost is the cost of moving the equipment from one place to another. Operator cost is the wages of the operator who operates the machinery. Special items cost includes the cost of replacement of high wear items such as blades, shanks, end bits, the rental cost of small items, and so on.

Context and Applications

The pricing of construction equipment is useful for students undergoing the following courses:

• Bachelors in Technology (Civil engineering)
• Masters in Technology (Construction Management)

Practice Problems

1. Which of the following is not an earth-moving equipment?

1. Bulldozer
2. Crane
3. Excavator
4. Backhoe

Answer– b

Explanation– Crane is not an earth-moving equipment.

2. Which of the following is not a material handling equipment?

1. Crane
2. Hoist
3. Forklift
4. Backhoe

Answer– d

Explanation– Backhoe is not a material handling equipment.

3. Which of the following is not a method to calculate depreciation?

1. Straight-line depreciation
2. Curved depreciation
3. Sum of years' digit depreciation
4. Double declining balance depreciation

Answer– b

Explanation– Curved depreciation is not a method to calculate depreciation.

4. Which of the following is not included in the initial cost of the equipment?

1. Factory price
2. Demolition cost
3. Cost of assembly
4. Shipping cost

Answer– b

Explanation– Demolition cost is not included in the initial cost of the equipment.

5. How much percentage to the tire replacement cost is added to the tire repair cost?

1. 50%
2. 15%
3. 30%
4. 60%

Answer– b

Explanation– Tire repair cost generally adds 15% to the tire replacement cost.