Construction Equipment Management

1. University
University
Madawalabu
Madawalabu
Construction Equipment and Plant Management
COTM 4202
Lecture by
Lecture by:
: Andualem
Andualem Endris
Endris (
(M.Sc
M.Sc)
)
andu0117@yahoo.com
andu0117@yahoo.com
School of Engineering,
School of Engineering,
Construction Technology & Management
Construction Technology & Management D
Department
epartment

2. A construction company can acquire a construction
plant and equipment through
 Cash or outright purchase
Renting
Leasing
A construction company can acquire a construction
plant and equipment through
 Cash or outright purchase
Renting
Leasing
February 2, 2019 2
COTM 4202

3. Buying or financing equipment is most sensible if
the equipment is essential to your core fleet and
expected to provide reliable service for a long time.
If you decide it's worth the large outlay of funds
to buy or finance equipment, you'll find owning
equipment can provide long-term benefits.
Buying or financing equipment is most sensible if
the equipment is essential to your core fleet and
expected to provide reliable service for a long time.
If you decide it's worth the large outlay of funds
to buy or finance equipment, you'll find owning
equipment can provide long-term benefits.
February 2, 2019 3
COTM 4202

4. Renting entails a short-term agreement or contract to use
capital equipment weekly or monthly, with the rental rate
decreasing as the term lengthens.
Following are some other popular reasons for renting
equipment:
• To fill in for peak periods, special projects, or broken
machinery
• To try out equipment before buying or leasing it
• To lessen the risk of purchasing costly equipment that won’t
be needed later
Renting entails a short-term agreement or contract to use
capital equipment weekly or monthly, with the rental rate
decreasing as the term lengthens.
Following are some other popular reasons for renting
equipment:
• To fill in for peak periods, special projects, or broken
machinery
• To try out equipment before buying or leasing it
• To lessen the risk of purchasing costly equipment that won’t
be needed later
February 2, 2019 4
COTM 4202

5. Leasing can be an attractive option if you use the
equipment frequently but don’t have the resources to
purchase equipment outright or make an adequate
down payment.
However, leasing carries higher interest rates and
contractors usually are responsible for the insurance
and personal property taxes on the equipment being
leased.
Leasing can be an attractive option if you use the
equipment frequently but don’t have the resources to
purchase equipment outright or make an adequate
down payment.
However, leasing carries higher interest rates and
contractors usually are responsible for the insurance
and personal property taxes on the equipment being
leased.
February 2, 2019 5
COTM 4202

6. • The Plant, equipment and tools used in construction
operations are priced in the following three categories
1. Small tools and consumables
2. Equipment usually shared by a number of work
activities
3. Equipment used for specific tasks
• Total equipment cost comprises two separate
components
 Ownership cost
 Operating cost
• The Plant, equipment and tools used in construction
operations are priced in the following three categories
1. Small tools and consumables
2. Equipment usually shared by a number of work
activities
3. Equipment used for specific tasks
• Total equipment cost comprises two separate
components
 Ownership cost
 Operating cost
February 2, 2019 6
COTM 4202

7. Ownership costs are fixed costs. Almost all of these costs are
annual in nature and include:
 Initial Cost
 Depreciation
 Investment (Interest) Cost
 Insurance, Tax and Storage Cost
Ownership costs are fixed costs. Almost all of these costs are
annual in nature and include:
 Initial Cost
 Depreciation
 Investment (Interest) Cost
 Insurance, Tax and Storage Cost
February 2, 2019 7
COTM 4202

8. On an average, initial cost makes up about 25%
of the total cost invested during the equipment’s useful
life. This cost is incurred for getting equipment into
contractor’s yard, or construction site, and having the
equipment ready for operation. Many kinds of
ownership and operating costs are calculated using
initial cost as a basis, and normally this cost can be
calculated accurately. Initial cost consists of the
following items:
• Price at Factory + extra equipment + sales tax
• Cost of shipping
• Cost of assembly and erection
On an average, initial cost makes up about 25%
of the total cost invested during the equipment’s useful
life. This cost is incurred for getting equipment into
contractor’s yard, or construction site, and having the
equipment ready for operation. Many kinds of
ownership and operating costs are calculated using
initial cost as a basis, and normally this cost can be
calculated accurately. Initial cost consists of the
following items:
• Price at Factory + extra equipment + sales tax
• Cost of shipping
• Cost of assembly and erection
February 2, 2019 8
COTM 4202

9. • The decline in market value of a piece of equipment due
to age, wear, deterioration and obsolescence.
• In the appraisal of depreciation, some factors are
explicit while other factors have to be estimated.
• Generally the asset costs are known which include:
• Initial cost: The amount needed to acquire the equipment
• Useful life: The number of years it is expected to be of utility
value
• Salvage value: The expected amount the asset will be sold at
the end of its useful life
• The decline in market value of a piece of equipment due
to age, wear, deterioration and obsolescence.
• In the appraisal of depreciation, some factors are
explicit while other factors have to be estimated.
• Generally the asset costs are known which include:
• Initial cost: The amount needed to acquire the equipment
• Useful life: The number of years it is expected to be of utility
value
• Salvage value: The expected amount the asset will be sold at
the end of its useful life
February 2, 2019 9
COTM 4202

10. • How ever, there is always some uncertainty about the
exact length of the useful life of the asset and about the
precise amount of salvage value, which will be realized
when the asset is disposed.
• The depreciation methods are:
• Straight line method
• Sum of years digit method
• Declining balance method
• How ever, there is always some uncertainty about the
exact length of the useful life of the asset and about the
precise amount of salvage value, which will be realized
when the asset is disposed.
• The depreciation methods are:
• Straight line method
• Sum of years digit method
• Declining balance method
February 2, 2019 10
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11. It is the simplest to understand as it makes the basis
assumption that the equipment will lose the same amount
of value in every year of its useful life until it reaches its
salvage value. The depreciation in a given year can be
expressed by the following equation
Dn = (C – S) / N
Where Dn = Depreciation in year n
C = The initial cost
S = The salvage value
N = The useful life (years)
It is the simplest to understand as it makes the basis
assumption that the equipment will lose the same amount
of value in every year of its useful life until it reaches its
salvage value. The depreciation in a given year can be
expressed by the following equation
Dn = (C – S) / N
Where Dn = Depreciation in year n
C = The initial cost
S = The salvage value
N = The useful life (years)
February 2, 2019 11
COTM 4202

12. It tries to model depreciation that actual market
value of a piece of equipment after 1year is less than
the amount predicted by SL method. Thus more annual
depreciation in the early years of a machine’s life and
less in its later years. The depreciation in a given year
can be expressed by the following equation
Dn = (year n digit) * (C – S ) / ∑N
Where Dn = Depreciation in year n
year n digit = The reverse order
C = The initial cost
S = The salvage value
N = The useful life (years)
It tries to model depreciation that actual market
value of a piece of equipment after 1year is less than
the amount predicted by SL method. Thus more annual
depreciation in the early years of a machine’s life and
less in its later years. The depreciation in a given year
can be expressed by the following equation
Dn = (year n digit) * (C – S ) / ∑N
Where Dn = Depreciation in year n
year n digit = The reverse order
C = The initial cost
S = The salvage value
N = The useful life (years)
February 2, 2019 12
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13. The depreciation for a given year is calculated on
the basis of the undepreciated balance (instantaneous
book value), rather than the original cost. Further the
method does not take into account any salvage value of
the asset. The factor can be determined using simple
interest formula and also special tables developed for
the purpose.
Dn = (M/N) * BVn-1 BVn = BVn-1 - Dn
Where Dn = Depreciation in year n
M = constant (Generally 2 for double declining)
N = The useful life (years)
BVn-1 = Opening book value at year n
The depreciation for a given year is calculated on
the basis of the undepreciated balance (instantaneous
book value), rather than the original cost. Further the
method does not take into account any salvage value of
the asset. The factor can be determined using simple
interest formula and also special tables developed for
the purpose.
Dn = (M/N) * BVn-1 BVn = BVn-1 - Dn
Where Dn = Depreciation in year n
M = constant (Generally 2 for double declining)
N = The useful life (years)
BVn-1 = Opening book value at year n
February 2, 2019 13
COTM 4202

14. Compare the depreciation in each year of the
equipment’s useful life for each of the above
depreciation methods for the following wheeled front-
end bucket loader:
• Initial cost:1,480,000 Birr includes delivery and other costs
• Useful life: 7 years
• Salvage value: 180,000 Birr.
Compare the depreciation in each year of the
equipment’s useful life for each of the above
depreciation methods for the following wheeled front-
end bucket loader:
• Initial cost:1,480,000 Birr includes delivery and other costs
• Useful life: 7 years
• Salvage value: 180,000 Birr.
February 2, 2019 COTM 4202 14

15. Investment (or interest) cost represents the annual cost
(converted into an hourly cost) of capital invested in a
machine. If borrowed funds are utilized for purchasing a
piece of equipment, the investment cost is simply the
interest charged on these funds. If it is purchased with
company assets, an interest rate that is equal to the rate of
return on company investment should be charged.
P= C(n+1)/2
P= Average value of the equipment
C= initial cost
n=the useful life (years)
Investment (or interest) cost represents the annual cost
(converted into an hourly cost) of capital invested in a
machine. If borrowed funds are utilized for purchasing a
piece of equipment, the investment cost is simply the
interest charged on these funds. If it is purchased with
company assets, an interest rate that is equal to the rate of
return on company investment should be charged.
P= C(n+1)/2
P= Average value of the equipment
C= initial cost
n=the useful life (years)
February 2, 2019 15
COTM 4202

16. • Investment cost is computed as the product of interest rate
multiplied by the value of the equipment, which is then
converted into cost per hour of operation.
• Assuming no salvage value, the average value of equipment
may be determined from the following equation:
P= C(n+1)/2
• If it has salvage value:
P= [C(n+1) + S(n-1)]/2n
P = Average value of the equipment
C = Initial cost
S = Salvage value
n = The useful life (years)
• Investment cost is computed as the product of interest rate
multiplied by the value of the equipment, which is then
converted into cost per hour of operation.
• Assuming no salvage value, the average value of equipment
may be determined from the following equation:
P= C(n+1)/2
• If it has salvage value:
P= [C(n+1) + S(n-1)]/2n
P = Average value of the equipment
C = Initial cost
S = Salvage value
n = The useful life (years)
February 2, 2019 COTM 4202 16

17. Insurance cost represents the cost incurred due to
fire, theft, accident and liability insurance for the
equipment.
Tax cost represents the cost of property tax and
licenses for the equipment.
Storage cost includes the cost of rent and
maintenance for equipment storage yards, the wages
of guards and employees involved in moving
equipment in and out of storage, and associated direct
overhead.
Insurance cost represents the cost incurred due to
fire, theft, accident and liability insurance for the
equipment.
Tax cost represents the cost of property tax and
licenses for the equipment.
Storage cost includes the cost of rent and
maintenance for equipment storage yards, the wages
of guards and employees involved in moving
equipment in and out of storage, and associated direct
overhead.
February 2, 2019 17
COTM 4202

18. The total equipment ownership cost is calculated
as the sum of depreciation, investment cost, insurance
cost, tax and storage cost.
This should be expressed as an hourly cost and
used for estimating and for charging equipment cost to
projects, it does not include job overhead or profit.
Therefore if the equipment is to be rented to others,
profit should include to obtain an hourly rental rate.
The total equipment ownership cost is calculated
as the sum of depreciation, investment cost, insurance
cost, tax and storage cost.
This should be expressed as an hourly cost and
used for estimating and for charging equipment cost to
projects, it does not include job overhead or profit.
Therefore if the equipment is to be rented to others,
profit should include to obtain an hourly rental rate.
February 2, 2019 18
COTM 4202

19. • Calculate the hourly ownership cost for the second year of operation
of a 465 hp twin-engine scraper. This equipment will be operated 8
h/day and 250 days/year in average conditions. Use the sum-of-
years’-digit method of depreciation as the following information:
• Initial cost: 1,860,000 Birr
• Tire cost: 140,000
• Estimated life: 5 years
• Salvage value: 120,000
• Interest on the investment: 8%
• Insurance: 1.5%
• Taxes: 3%
• Storage: 0.5%
• Fuel price: 72.00Birr/gal
• Operator’s wages: 32 Birr /h
• Calculate the hourly ownership cost for the second year of operation
of a 465 hp twin-engine scraper. This equipment will be operated 8
h/day and 250 days/year in average conditions. Use the sum-of-
years’-digit method of depreciation as the following information:
• Initial cost: 1,860,000 Birr
• Tire cost: 140,000
• Estimated life: 5 years
• Salvage value: 120,000
• Interest on the investment: 8%
• Insurance: 1.5%
• Taxes: 3%
• Storage: 0.5%
• Fuel price: 72.00Birr/gal
• Operator’s wages: 32 Birr /h
February 2, 2019 COTM 4202 19

20. Ownership costs are also called “variable” cost. Because
they depend on several factors such as the number of operating
hours, the types of equipment used, and the location and
working condition of the operation.
 Maintenance & Repair cost
 Tire cost
 Consumable cost
 Mobilization & Demobilization cost
 Equipment Operator cost
 Special Items cost
Ownership costs are also called “variable” cost. Because
they depend on several factors such as the number of operating
hours, the types of equipment used, and the location and
working condition of the operation.
 Maintenance & Repair cost
 Tire cost
 Consumable cost
 Mobilization & Demobilization cost
 Equipment Operator cost
 Special Items cost
February 2, 2019 20
COTM 4202

21. Once a piece of equipment is purchased and
used, it eventually begins to wear out and suffers
mechanical problems. At some point, it reaches the end
of its useful life and must be replaced. The Equipment
replacement decision involves determining when it is no
longer economically feasible to repair.
 Equipment Life
 Replacement alternatives
Once a piece of equipment is purchased and
used, it eventually begins to wear out and suffers
mechanical problems. At some point, it reaches the end
of its useful life and must be replaced. The Equipment
replacement decision involves determining when it is no
longer economically feasible to repair.
 Equipment Life
 Replacement alternatives
February 2, 2019 21
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22. Construction equipment life can be defined in three ways.
Physical life:
Age at which the machine worn out and can no longer reliably produce.
 Profit life:
The life over which the equipment can earn a profit.
 Economic life:
Time period that maximizes the profit over the equipment life.
Construction equipment life can be defined in three ways.
Physical life:
Age at which the machine worn out and can no longer reliably produce.
 Profit life:
The life over which the equipment can earn a profit.
 Economic life:
Time period that maximizes the profit over the equipment life.
February 2, 2019 22
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23. February 2, 2019 23
COTM 4202

24. The owners have to take replacement decision in
correct time to avoid losses. As there are many factors
involved, adopting the most appropriate method is
also important. In determining the optimum
replacement timing some analysis minimum cost,
maximum profit and payback period are to be
considered.
The owners have to take replacement decision in
correct time to avoid losses. As there are many factors
involved, adopting the most appropriate method is
also important. In determining the optimum
replacement timing some analysis minimum cost,
maximum profit and payback period are to be
considered.
February 2, 2019 24
COTM 4202

25. • What is the yearly depreciation for a truck with an
initial cost of 1,500,000 Birr, an assumed life of five
years, and an expected resale value of 480,000 Birr?
Solve using:
• Straight line method
• Declining balance method
• SoYD method.
• What is the yearly depreciation for a truck with an
initial cost of 1,500,000 Birr, an assumed life of five
years, and an expected resale value of 480,000 Birr?
Solve using:
• Straight line method
• Declining balance method
• SoYD method.
February 2, 2019 COTM 4202 25

26. February 2, 2019 26
COTM 4202
Thank You
Thank You