The Construction Equipment Costs in Contractor’s Overhead

When contractors estimate new construction, remodel, or renovation projects, determining construction equipment costs is included. It’s one of the more nuanced parts of building an accurate overhead expense. It can be just as challenging as calculating labor — and if it’s done poorly, everyone pays.

Identifying what equipment is needed for each phase of work is just the beginning. The contractor also has to nail down how long each piece will be on site. And whether it makes more sense to use owned equipment or rent it.

How Construction Equipment Costs Are Calculated

Contractors typically base equipment costs on a working hour rate. This is since ownership expenses are also figured on a per-hour basis. That hourly rate for owned equipment covers the direct costs of operating it. Think fuel, oil, grease, electricity, miscellaneous supplies, and routine repairs. It does not include the equipment operator’s wages. These are a separate labor cost, or mobilization to the site, which is figured independently.

Depreciation is also factored into the billable rate. The moment a piece of equipment is purchased — just like a vehicle — it begins losing value. The more it’s used across projects, the faster it wears out. A contractor who doesn’t build depreciation into his rates or estimates has no reserve for replacing equipment. Replacement happens when it reaches the end of its useful life. Those costs ultimately flow through to the owner as part of the contractor’s overhead.

How Equipment Depreciation Is Calculated

The standard method for calculating construction equipment depreciation is straightforward. Take 100% of the capital investment an subtract salvage value. Then divide by the number of service years the equipment has left.

For example, a piece of equipment with an initial cost of $50,000, no salvage value, and a five-year lifespan. That equipment would depreciate at $10,000 per year. This annual figure is then broken down further by estimated working hours across multiple projects. The result produces an hourly rate that gets built into what an owner is charged.

In addition to depreciation, a contractor’s equipment overhead typically includes:

• Interest on any financed equipment
• Major repairs beyond routine maintenance
• Routine maintenance costs
• Insurance and taxes on owned equipment
• Storage costs when equipment is not in use

Rented Construction Equipment and Overhead

When a contractor rents major equipment, rental companies typically quote rates by the day, week, or month. Rental costs generally include mobilization, maintenance, fuel, insurance, taxes, and repairs. This makes them more predictable than owning. Though it’s not necessarily cheaper on long-duration projects.

On larger projects, construction equipment costs can rival labor as a major driver of overhead expense. That makes accurate time estimation for equipment use critical — for both parties. Nobody benefits from expensive equipment sitting idle on site. And repeated mobilization charges caused by poor scheduling add cost without adding value.

Small Tools: A Separate Line Item

Small tools and consumables — shovels, brooms, extension cords, drills, nail guns, and similar items — have a general life cycle of a year or less. These are typically carried in a contractor’s general conditions as a lump sum allowance rather than itemized by the hour.

Did You Know?

Any small tools purchased and charged to a specific project by the contractor become the property of that project’s owner. They rarely get turned over at job completion unless the owner specifically requests them. So it may be worth asking.