CIVL 394 CIVIL ENGINEERING

CONSTRUCTION AND ECONOMY

SECTION 2
CONSTRUCTION PLANTS
DR. TOLGA ELK

CHAPTER 1
CONSTRUCTION
ECONOMICS

Equipment Cost
Elements of Equipment Cost

To tender it is necessary to know the cost of a

unit production (money/m3 excavation,
Money/m2 of top soil stripping, etc.)

Thursday, November 17,

2016

EQUIPMENT COST
To find the cost of operating of an
equipment, it is essential to estimate many
factors, such as, fuel consumption, tire life,
and so on.
The best basis for estimating such factors
is to use the historical data (=records).
If this data is not available, the equipment
manufacturer can be consulted.

Thursday, November 17,

2016

EQUIPMENT COST
Elements of Equipment Cost
Owning Costs
Depreciation
Straight-Line Method
Sum-of-the-Years-Digits Method
Double-Declining-Balance Method

Investment Cost
Insurance, Tax, and Storage

EQUIPMENT COST
Operating Costs
Fuel Cost
Service Cost
Repair Cost
Tire Cost
Special Items
Operator

Total Owning and Operating Costs

Depreciation Costs
Depreciation represents the decline in market value of an item of
equipment due to age, wear, deterioration, and obsolescence.
Depreciation is used for two purposes.
- Evaluating tax liability.
- Obtaining depreciation component of hourly equipment costs.

For tax liability many contractors prefer to depreciate the

equipment as rapidly as possible to obtain the maximum
reduction in tax liability during the first few years of equipment
life.
For rubber-tired equipment, the value of tires should be
subtracted from the amount to be depreciated because tire cost
will be computed separately as an element of operating cost.
Thursday, November 17,
2016

Depreciation Costs Cont.

Equipment salvage value should be estimated as realistically
as possible based on historical data.

Equipment economical life should also be determined. For

many construction equipment, the economical life time is
accepted to be 5 years.
The common depreciation methods are:
- Straight line method
- Sum of the years digits method
- Double declining balance method
Thursday, November 17,
2016

Straight Line Method

Straight line method produces a uniform
depreciation for each year of equipment life.
The amount to be depreciated annually is
equipment's initial cost less salvage value (less tire
cost for rubber-tired equipment).

Cost - Salvage - (tires)

Dn =
N
Where: N= equipment life (years)
n = year of life (1, 2, 3 etc.)
D= Depreciation value
Thursday, November 17,
2016

Example 1
Using the straight-line method of depreciation, find
the annual depreciation and book value at the end
of each year for a track loader having an initial cost
of $50000, a salvage value of $5000, and expected
life of 5 years.

Thursday, November 17,

2016

10

Solution 1
50000 - 5000
D1,2,3,4,5 =
= $9000
5
Year
Depreciation Book Value ($)
($)
(End of Period)
0
0
50000
1
9000
41000
2
9000
32000
3
9000
23000
4
9000
14000
5
9000
5000
Thursday, November 17,
2016

11

Sum-of-the-Years-Digits Method
The sum of the years digits method of depreciation
produces a non-uniform depreciation which is the
highest in the first year of life and gradually
decreases thereafter.
The amount to be depreciated is the same as that
used in the straight-line method.
The depreciation for a particular year is calculated
by multiplying the amount to be depreciated by a
depreciation factor.

Year digit
Dn
Amount to be depreciated
Sum of years' digits
Thursday, November 17,
2016

12

Example 2
For the loader of Example 1, find the annual
depreciation and book value at the end of each year
using the sum-of-the-years'-digits method.

Thursday, November 17,

2016

13

Solution 2
Using above equation
5
D1
(50000 - 5000) = 15000
(1 2 3 4 5)

4
D2 (50000 - 5000) = 12000
15

3
D3 (50000 - 5000) = 9000
15
2
D4 (50000 - 5000) = 6000
15
1
D5
(50000 - 5000) = 3000
15
Thursday, November 17,
2016

14

Solution 2
Year

Depreciation
($)

Book Value ($)

(End of Period)

50000

15000

35000

12000

23000

9000

14000

6000

8000

3000

5000

Thursday, November 17,

2016

15

Double-Declining-Balance Method
This method produces its maximum depreciation in the
first year of life.
The depreciation for a particular year is found by
multiplying a depreciation factor by the equipment's
book value at the beginning of the year.
The annual depreciation factor is found by dividing 2 by
the equipment life in years.
Care must be taken not to reduce the book value below
the salvage value of the equipment.

2
Dn Book value at the beginning of year
N
Thursday, November 17,
2016

16

Example 3
For the loader of example 1, find the annual
depreciation and book value at the end of
each year using the double-declining-balance
method.

Thursday, November 17,

2016

17

Solution 3
2
Annual depreciation factor = = 0.4
5
D1 0.4 50000 = 20000

D2 0.4 30000 = 12000

D3 0.4 18000 = 7200

D4 0.4 10000 = 4320

D5 0.4 6480 = 2592 use $1480*

Thursday, November 17,

2016

18

Solution 3
Year
0
1
2
3
4
5

Depreciation
($)
0
20000
12000
7200
4320
1480

Book Value ($)

(End of Period)
50000
30000
18000
10800
6480
5000

* Because a depreciation of $2592 in the fifth year would reduce the book
value to less than $5000, only $1480 ($6480-5000) may be taken as
depreciation.
Thursday, November 17,
2016

19

Investment Cost
Investment cost represents the annual cost of the
capital invested in a machine.
It is simply the interest charge on these funds.
Investment cost is computed by multiplying the
interest rate by the value of the equipment.
For a specific year investment cost is calculated
by using the book value of the equipment in that
year.
However, the simple way to find it is:

Initial cost + Salvage value

Average investment =
2
Thursday, November 17,
2016

20

Insurance, Tax and Storage

Insurance cost represents the cost of fire, theft, accident, and
liability insurance for the equipment.
Tax cost represents the cost of property tax and licenses for
the equipment
Storage cost represents the cost of storage yard, wages of
guards and employees involved in handling equipment in and
out of storage yard and associated direct overhead
Owning Cost
Owning cost is computed as the sum of depreciation,
investment, insurance, tax and storage costs.

Thursday, November 17,

2016

21

Operating Costs
Operating costs are incurred only when
equipment is operated.

Operating cost includes:

- Fuel cost

- Service cost
- Repair cost
- Tire cost
- Cost of special items
- Operators' wages
Thursday, November 17,
2016

22

Fuel Cost
The hourly cost of fuel is the multiplication of
hourly consumption and the cost of fuel per unit
of fuel.
If fuel consumption historical data is not available,
the manufacturer's data or
Table 17.1 can be used.

Thursday, November 17,

2016

23

Thursday, November 17,

2016

24

Service Cost
Service cost represents the cost of oil, hydraulic fluids,
grease, and filters as well as the labour required to
perform routine maintenance service.
The manufacturers data or Table 17.2 can be used.

Thursday, November 17,

2016

25

Repair Cost
Repair cost represents all repair and maintenance cost
except for tire repair or replacement, routine services, and
replacement of high-wear items such as ripper teeth.
It is the largest item of operating expenses.
Lifetime repair is estimated as a percentage of initial cost.
See Table 17.3.
However repair cost is lower in the first year than the last
years.
Therefore, for an accurate estimate during a year the
following equation is used.
Year digit
Lifetime repair cost
Hourly repair cost =

Sum - of - years - digits Yearly Hours operated

Thursday, November 17,
2016

26

Example 4
Estimate the hourly repair cost for the first year of
operation of a crawler tractor costing $136000 and
having a 5-year life.
Assume average operating conditions and 2000 hours
of operation during the year.

Solution 4 :
Lifetime repair cost factor = 0.90 (Table 3.2)
Lifetime repair cost = 0.90 $136000 = $122400
1 122400
Hourly repair cost =

$4.1
15
2000
Thursday, November 17,
2016

28

Tire Cost
Tire cost represents the cost of tire and
replacement.
Table 17.4 may be used to approximate tire life if
the data is not available.
For replacement of tire, a 15% of repair cost is to
be added.

Cost of a set of tire ($)

Tire cost = 1.15
Expected tire life
Thursday, November 17,
2016

29

Thursday, November 17,

2016

30

OPERATING COST
Special Items

It includes the cost of replacing high-wear items such as

dozer, grader, and scraper blade cutting edges and end
bits, ripper tips, shanks etc.
The unit cost is calculated by dividing expected cost in
lifetime by working hours in a life time.

Operator Cost

It include the operator's wages.

Wages should include all insurances, social security, taxes,
overtime etc.

Total Owning and Operating Costs

Total owning and operating cost is used for tendering

purposes.
However, it does not include overhead and profit.
Thursday, November 17,
2016

31

Example 17.6
Calculate the expected hourly owning and operating
cost for the second year of the operation of the twinengine scraper described below.
Cost delivered
=$152,000
Tire cost
=$12,000
Estimated life
=5 years
Salvage value
=$16,000
Depreciation method =sum-of-the-years-digits
Investment (interest) rate=10%
Tax, insurance, and storage rate=8%
Operating conditions =average
Rated power
=465 hp
Fuel price
=$0.40/gal
Operator's wages
=$8.00/h
Operating Hours per year = 2000 hours
Thursday, November 17,
2016

32

Solution 17.6
Owning Cost
Depreciation cost:
4
D2 = (152000 16000 12000) = $33067
15
33067
Depreciation =
= $16.53 / hr
2000

Thursday, November 17,

2016

33

Investment, tax, insurance, and

storage cost
Cost rate = Investment + tax, insurance, and
storage= 10+8= 18%

152000 + 16000
Average investment =
= $84000
2
84000 0.18
Investment, tax, insurance, and storage =
= $7.56 / hr
2000

Total owning cost =16.53 + 7.56 = $24.09 / hr

Thursday, November 17,

2016

34

Operating cost
Fuel cost:
Estimated consumption = 0.035 465 = 16.3 gal/hr

Fuel cost =16.3 0.40 = $6.52 / hr

Service cost

Service cost = 0.33 6.52 = $2.15/ hr

Thursday, November 17,
2016

35

 Repair cost
Lifetime repair cost = 0.90 (152000 - 12000) = $126000
Repair cost =

2
126000

= $8.4/hr
15
2000

Tyre cost

Estimated tire life = 3000 hr

$12000
Tire cost = 1.15
= $4.60 / hr
3000

Operator wages = $8.00 / hr

Thursday, November 17,
2016

36

Total opearting cost = 6.52 + 2.15 + 8.4 + 4.60 + 8.00 = $29.67/hr

Total O & O Cost

Owning and operating cost = 24.09 + 29.67 = $ 53.76/hr

Thursday, November 17,

2016

37