When a contractor estimates a new, remodel or renovation project he must determine the construction equipment costs that will become part of the contractor’s overhead expense.
Estimating the cost of equipment for a project can be as challenging as calculating his labor costs. It will depend greatly on whether the equipment needed is owned by the contractor and can return a profit or if it needs to be a rental.
Besides deciding what construction equipment is needed for each phase of the work, the contractor will also need to determine the length of time it’s to be used.
How Construction Equipment Costs are Calculated
When a contractor calculates the cost of equipment included in his project estimate he generally bases it on a working hour since ownership is also figured as a cost per hour.
The hourly rate charged for owned equipment operation would not include the wages of the operator or the mobilization to the site since the operator is a labor cost and mobilization charges are figured separately.
Equipment hourly rates would include expenses like fuel, oil, grease, electricity, any miscellaneous supplies and repairs.
Depreciation is also a factor included in calculating the billable rate of construction equipment. As soon as a piece of equipment is purchased, just like your car, it begins to depreciate in value.
The more a given piece of equipment is used on a project or across a series of construction projects, the equipment will begin to wear out.
It is in the contractor’s best interest to include an allowance in his construction estimate or billable rate for depreciation otherwise there will be no money set aside for new equipment when it wears out. These costs are passed on to an owner as part of the contractor’s overhead expense.
How Equipment Depreciation is Charged
Depreciation for a piece of equipment is generally calculated by taking 100 percent of the capital investment minus any salvage value divided by the number of years the equipment is likely to be used.
As an example, if a piece of equipment had an initial cost of $50,000 less salvage value and an estimated life span of 5 years, then the depreciation would be $10,000 per year.
That $10,000 per year would be further broken down into estimated working hours of use, across multiple projects, to provide an hourly rate included in the billable amount charged an owner.
In addition to depreciation costs, as part of the equipment rates included by a contractor in his overhead, would be any interest, major repairs, maintenance, insurance, taxes and storage.
Major equipment rented to a contractor and included in his overhead costs are generally quoted to the contractor for days, weeks or months, depending on that contractor’s needs. Rental costs will typically include mobilization, maintenance, fuel, insurance, taxes and any repairs.
Based on the size and type of a project, construction equipment costs can be as much a major contributor to a contractor’s overhead expense as labor. It benefits both the owner and the contractor to accurately estimate the time needed for major equipment use.
Neither the contractor nor the owner wants to incur unnecessary costs for idol major equipment sitting unused on site or for unnecessary equipment mobilization charges back and forth due to poor planning.
Small Tools for the Taking
Small tools and consumable items like shovels, brooms, extension cords, drills, nail guns, etc. have a general life cycle of a year or less and are often added to a contractor’s general conditions expense as a lump sum amount.
Any small tools purchased and paid for on a project become the property of that project’s owner and are rarely, unless requested by the owner, turned over at the end of the job.
Tagged with: construction expenses • contractor markup • contractors overhead and profit • estimating construction equipment
Filed under: Cost Estimating
