Construction Management PDF

Management of Project Resources……………………………………………………PRMG-020
Construction Equipment
Management
1
THE PROFESSIONAL PROGRAM IN PROJECT MANAGEMENT
Project Group
NAME STUDENT ID
SABRI MOHAMED GOMA 700161261
WAEL AHMED AHMED 700163260
WALID MOHAMED IBRAHIM 700163261
AHMED EZZ ELDIN 700160535
MOHAMED IBRAHIM 700160922
MOHAMED ADEL 700160534
MOHAMED SALAH ELDIN 700160536
PRESENTED TO PROF. IBRAHIM ABDEL RASHID
2
Abstract
Construction equipment planning and selection plays crucial role for the
success of construction firms. Inadequate manual processes of equipment planning
and selection and the subjective decisions of equipment managers usually result in
major losses in construction firms. An indispensable item of resources, it produces
output at accelerated speed, enables completion of task in limited time. Equipment
saves manpower, which is becoming costly and more demanding day by day.
Equipment improves quality, productivity and safety. Construction equipment
planning aims at identifying construction equipment for executing project tasks,
assessing equipment performance capability, forecasting date wise requirement of
number and type of equipment and finally participating in the selection of
equipment to be acquired. To derive full benefits from the equipment, there should
be proper selection and good planning of its operations. This paper deals with the
planning and selection procedure for equipment adopted by a company to achieve
its objective of timely project completion.
3
Table of Contents
Chapter I
Introduction
___________________________________________________________________
Chapter II
Factors Affecting the Selection of Construction Equipment
2.1 Introduction
2.2 Types of Equipment
2.2.1 Standard Types of Equipment
2.2.2 Special Types of Equipment
2.3 Factors that affect the cost of owning and operating construction equipment
2.4 The Cost of Owning and Operating Construction Equipment
2.4.1 Ownership Costs
2.4.1.1 Depreciation cost
2.4.1.2 Investment Cost
2.4.1.3 Taxes
2.4.1.4 Insurance cost
2.4.1.5 Storage cost
2.4.2 Operating costs
2.4.2.1 Maintenance and Repair parts cost
2.4.2.2 Lubrication and fuel
2.5 Economical Life of Construction Equipment
2.5.1. Downtime Costs:
2.5.2. Obsolescence Costs:
___________________________________________________________________
4
Chapter III
Sources of Construction Equipment
3.1 Introduction
3.2 Equipment characteristics
3.3 Purchase the equipment.
3.4 Rent the equipment.
3.5 Replacement Analysis
3.6 Time-value of money
3.6.1 Single payment
3.6.2 Uniform Series of Payments
3.6.3 Cash Flow Diagrams
_____________________________________________________________________________________
Chapter IV
Conclusions
_____________________________________________________________________________________
Chapter V
References
5
CHAPTER (I)
1.1Introduction
Modern construction is characterized by the increasing utilization of

equipment to accomplish numerous construction activities. Equipment refers to all
the equipment, tools, and apparatus necessary for the proper construction and
acceptable completion of a project. In a construction project, equipment costs are
typically divided into portions. The first and bigger portion covers the cost of
equipment and is often referred to as equipment cost. It represents the cost of
acquiring the equipment and the cost of operating that equipment during the
construction processes. The second and smaller portion covers the cost of hand
tools. This represents a smaller portion of the project cost and is often calculated as
a percentage of payroll costs. It is added to the indirect cost under the jobsite
overhead.
The major problem frequently faced by contractor in the selection of most

suitable equipment. Under given conditions, one of the largest elements of
investigation of contractor would be own and operating cost of plant and
equipment. The capital investment on purchase and/or rental/lease, and operation
of the plant and equipment being very high, it has to be managed so as to ensure
maximum return on investment, productivity and minimum operating, maintenance
and repair cost. Thus appropriate selection and planning is essential for successful
completion of project and to secure maximum profit out of it .The type of
equipment selected usually depends upon the characteristics of material to be
handled. Whether to use wheeled equipment or track equipment; whether to use
dragline excavator or power shovel, are some of the typical questions that are to be
answered by the planner of construction equipment.
6
CHAPTER (II)
Factors Affecting the Selection of Construction
Equipment
2.1 Introduction
A problem which frequently confronts a contractor as he plans to construct a
project is the selection of the most suitable equipment. He should consider the
money spent for equipment as an investment which he can expect to recover with
profit during the useful life of the equipment. A contractor does not pay for the
construction equipment; the equipment must pay for itself by earning for the
contractor more money than it cost. A contractor can never afford to own all types
or sizes of equipment that might be used for the kind of work he does. It may be
possible to determine what kind and size of equipment seem most suitable for a
given project, but this information will not necessarily justify the purchase of the
equipment, he may own a type of equipment that is less desirable than the
proposed one, but, it may be of benefit and less expensive than the proposed one.
"Anytime a unit of equipment will pay for itself on work certain to be done, it
is a good business to purchase it. For example, if a unit of equipment costing
$25000 will save $50000 on a project, a contractor is justified in purchasing it
regardless of the prospects of using it on additional projects, or the prospects of
selling it at a favorable price when the project is finished."
2.2 Types of Equipment:

2.2.1 Standard Types of Equipment:
There is no clear definition of standard equipment. Equipment that is
standard for one contractor may be special for another. But it may be defined as the
equipment that can be used economically on more than one project, its repair parts
may be obtained more quickly, and it can be easily disposed of at more favorable
price.
7
2.2.2 Special Equipment:
It is the equipment that is manufactured for use on single project or for a

special type of operation. Such equipment may not be suitable or economical for
use on other project.
2.3 Factors that affect the cost of owning and

operating construction equipment:
Kept records for equipment previously used should give information which
may be used as a guide for the particular equipment it was used under the same
conditions. Factors that affect the cost of owning and operating construction
equipment include:
1. The cost of the equipment delivered to the owner.
2. The severity of the conditions under which the equipment is used.
3. The number of hours the equipment is used per year.
4. The number of years the equipment is used.
5. The care with which the owner maintains and repairs the equipment.
6. The demand for used equipment when it is sold, which will affect the
salvage value.
When it is necessary to estimate the cost of owning and operating

construction equipment prior to purchasing it, cost records, based on past
performance generally will not be available.
8
2.4 The Cost of Owning and Operating Construction

Equipment:
For construction firms, it is important to accurately estimate the equipment
cost as part of the total cost of the construction project. Inaccurate estimation of
construction equipment cost may adversely affect the profit margin of the firms
especially engaged in projects with more involvement of different types of
construction equipment‟s. The total cost of a piece of construction equipment
consists of two components namely ownership cost and operating cost. This is also
referred as O&O cost of the construction equipment. The selection of a piece of
equipment in a construction project depends on the total cost associated with that
equipment. The details about equipment ownership cost and operating cost are
presented below.
2.4.1 Ownership Costs:

Ownership cost is the total cost associated with the construction equipment
for owning it irrespective of the equipment is employed or not in the project. The
ownership cost consists of the following;
2.4.1.1 Depreciation Cost:

Depreciation: Is the loss in value of a piece of equipment over time,
generally caused by wear and tear from use, the profitable owner of
equipment must recover this loss during its useful life.
Depreciation Accounting Value:

The depreciation accounting value (usually termed book value), is the
systematic allocation of the costs of a capital investment over some specific
number of years. This value can be calculated by subtracting the depreciation at m
year times the no. of the year (m) from the actual cost of equipment.
9
There are number of methods to calculate the depreciation, but before

calculating it using any method, close estimation of the following items must be
known:
1. The purchase price (termed P).
2. The economic life of the equipment (termed N).
3. The estimated resale value at the close of the economic life, known as
salvage value (termed S).
With these three items of information known or estimated, the depreciation

can be calculated; the most commonly used methods are the following:
1. Straight-line (SL) method.
2. Sum-of-the-years (SOY) method.
3. Declining-balance method.
1-Straight-line method (SL):

This method is the easiest one to calculate and probably the most widely
used method in construction. The annual amount of depreciation (Dm), for any
year (m), is a constant value, and thus the book value decreases at a uniform rate
over the useful life of the equipment. The equations used are:
10
Example:
A piece of equipment is available for purchase for ($12000), has an
estimated useful life of (5 years), and an estimated salvage value of ($2000).
Determine the depreciation and the book value for each of the 5 years using the SL
method.
11
2-Sum-of-the-years method (SOY):

This is an accelerated method, which is a term applied to accounting
methods which permit rates of depreciation faster than straight line. The rate of
depreciation is a factor times the depreciable value (P-S). This factor is calculated
as follows:
Example:
Determine the depreciation and the book value for each of the 5 years using the
SOY method.
12

 Notice that the allowable depreciation in this method is different for each
year of the equipment life.
13
3-Declining-balance method:
This method is also an accelerated depreciation method that provides for

larger portions of cost to be written off in the early years; this method nearly
approximates the actual loss in market value with time. Declining methods range
from 1.25 times the current book value divided by the life to 2.00 times the current
book value divided by the life (the latter is termed double declining balance). The
estimated salvage value (S) is not included in the calculation, but the book value
cannot go below the salvage value.
Following are the equations necessary for the use of the declining balance
methods:
1.
14
Example:

Determine the depreciation and the book value for each of the 5 years using the
DDB method.
15
Example:
A piece of equipment costing ($10000) new, with a (5 years) useful life, and
an expected salvage value of ($1000) is being considered for purchase. Calculate
the yearly ownership costs using the three methods of depreciation.
16
17
2.4.1.2 Investment Costs:
Owning equipment costs money, one part of ownership costs is Investment

costs which include the following:
− The interest on the money invested.
− Taxes of all types which are assessed against the equipment.
− Insurance.
− Storage.
The rates for these costs vary among different owners, with location and
whether or not the equipment is actually used. The average annual cost of interest
(I), is based on the average value of the equipment (P) during its useful life, which
can be calculated based on straight-line depreciation as follows:
18
2.4.1.3 Taxes
It represents the property taxes to be paid to the state or central government.
It depends on the value of the equipment owned and the applicable tax rate for a
given location. The property tax can be calculated as a percentage of the average
annual investment or a percentage of the book value in a given year. Generally it
ranges from 2 to 5% of the average annual investment or book value of equipment.
2.4.1.4 Insurance cost

It represents the annual premium to be paid to insurance companies to cover
the cost incurred due to accident, fire, theft etc. for the construction equipment. In
other words, it represents the cost that protects the owner of the equipment against
these damages. Similar to taxes, the insurance cost can be calculated as a
percentage of the average annual investment or the book value in a given year. It is
generally about 1 to 3% of the average annual investment or book value of
equipment.
2.4.1.5 Storage cost

It is the cost of keeping the equipment in storage yards when it is not
operating at the work site. Storage cost includes the rental and maintenance charge
for storage yards, wages of security guards and wages of workers employed for
bringing in and out of the storage yards. It is around 0.5 to 1.5% of the average
annual investment or book value of equipment. The annual storage cost can be
calculated for the entire fleet of equipment and is then prorated to individual
equipment requiring the storage facility. Similar to storage cost, the tax and
insurance cost can be calculated for the equipment fleet and then prorated to
individual equipment. It may be noted here that the annual rates (%) mentioned
above for taxes, insurance and storage costs are typical values. However the actual
rates will vary depending on the type and size of equipment, place of purchase,
location of project site etc.
19
2.4.2 Operating costs:
Operating costs are those costs associated with the operation of a piece of
equipment. Operating costs usually occur only when the equipment is being used;
it includes:
2.4.2.1 Maintenance and Repair Parts cost:
The annual cost of maintenance and repairs may be expressed as a percent of

the annual cost of depreciation.
Maintenance and Repair cost is incurred as the construction equipment is

subjected to wear and tear due to the operations it performs. The repair and
maintenance cost includes the cost of replacement parts, labor charges and the cost
of setting up and operating facilities to carry out major repair and maintenance
operations. The repair and maintenance cost varies from one year to another over
the service life of the equipment, however it increases with age of the equipment.
This cost contributes a substantial portion of the operating cost. The increase in
service life and decrease in repair and maintenance cost of construction equipment
can be achieved by carrying out timely recommended maintenance and repair
operations. The minor repairs can be carried out at the job site where the
equipment is operating, however the major repairs can be carried out in the
facilities set up by the equipment owner or in the workshop of authorized dealers
for the equipment. The annual repair and maintenance cost can be calculated as a
percentage of the annual depreciation cost of the equipment. Past information
available from company records or from other relevant sources for similar
equipment under similar working conditions can be used for estimating the repair
and maintenance cost. If this data is not available, equipment manufacturer‟s
guidelines can be used for calculating this cost. The hourly repair and maintenance
cost can be calculated by dividing the annual cost by the number of operating
hours per year.
20
2.4.2.2 Lubrication and fuel.
Fuel Consumption:
When operating under standard conditions, a gasoline engine will
consume approximately (0.06 gal, 0.23 liter) per each flywheel horsepower hour,
while a diesel engine will consume approximately (0.04 gal, 0.15 liter) per each
flywheel horsepower hour. Engines used in construction industry seldom operate at
a constant output or at a rated output, except for short periods of time, also,
construction equipment is seldom operated the entire 60 min in an hour.
Fuel consumed per hour= operating factor×hp×engine consumption …… (1-17)
Lubricating Oil Consumption:

The quantity of lubricating oil used by an engine will vary with the size, the
capacity of the crankcase, the condition of the piston rings and the number of hours
between oil changes. A formula may be used to calculate the quantity of oil
required as follows:
21
Examples illustrating the cost of owning and operating construction

equipment:
Example:
Determine the probable cost per hour for owning and operating a (1.5 m3)
diesel engine crawler power shovel, the following information will apply:
22
23
2.5 Economical Life of Construction Equipment:
The owner of construction equipment should be interested in obtaining the

lowest possible cost per unit of production. In order to accomplish this objective he
must follow an informed program of equipment replacement. When should
equipment be replaced? If the owner replaces it too soon, he will experience an
unnecessary capital loss, whereas, if he waits too long, the equipment will have
passed its period of economic operation. In order to determine the most economical
time to replace equipment, accurate records of maintenance and repair costs and
downtime must be kept for each machine. The owner must consider all costs
related to the ownership and operation of the equipment, and the effect which
continued use will have on these costs. The costs to be considered are:
1. Depreciation and replacement.
2. Investment.
3. Maintenance and repairs.
4. Downtime.
5. Obsolescence.
An analysis of the effect which hours of usage will have on each of these
costs will establish the time at which a machine should be replaced.
2.5.1. Downtime Costs:

Downtime is the time that a machine is not working because it is undergoing
repairs or adjustments. Downtime tends to increase with usage. Availability is a
term that indicates the portion of time that a machine is available for production,
expressed as a percent. For example, if a machine is down 5% of the time, then its
availability is 95%.
24
Example:
A machine's operation cost is (6 $/hr), has an average downtime of (5%),
calculate the machine availability if it was used (2000 hr/year).
Solution:
The cost per hour for downtime=0.05×6=0.3 ($/hr)

The annual downtime cost for machine=0.3×2000=600 ($/year)
Productivity of a machine:
Productivity is a measure of the ability of equipment to produce at its
original rate. If the productivity of a machine decreases with usage, the effect of
this decrease is to increase the cost of production, which is equivalent to an
increase in the cost per hour for continuing to use the equipment.
2.5.2 Obsolescence Costs:
Improvements in the productive capacities result in lower production costs.

These improvements, whose advantages can be gained only by the replacement of
older equipment with newer one, decrease the desirability of continuing to use the
older equipment. For example, if a new machine will reduce production costs by
10%, when compared with production costs for an existing machine, the latter will
suffer a loss in value equal to 10%. This is defined as an obsolescence loss.
25
CHAPTER (III)
Sources of Construction Equipment
3.1 Introduction
Contractors and other users of construction equipment are concerned with a
decision as to whether to purchase or rent equipment. Under certain conditions it is
financially advantageous to purchase, whereas under other conditions it is more
economical and satisfactory to rent it. There are at least three methods under which
a contractor may secure the use of construction equipment:
1. Purchase the equipment.
2. Rent the equipment.
3. Rent the equipment with an option to purchase it at a later date.
The method selected should be the one that will provide the use of the
equipment at the lowest total cost.
Each of the three methods has both advantages and disadvantages which
should be considered prior to making a decision. If the cost was the only factor to
be considered, then an analysis of the cost under each method should give the
answer. If other factors should be considered, they should be evaluated and applied
to the cost as a basis on which to reach a decision. The correct decision for one
contractor will not necessarily apply for another contractor.
26
3.2 Equipment characteristics
Equipment characteristics are related to equipment capabilities (capacities

and versatility) and costs. Capacity can be in the form of maximum allowable
payload and maximum volume that can be handled. It can also relate to the power,
mobility, or maneuverability of a piece of equipment. Versatility refers to the
degree of applicability of a unit to perform many different operations. For
example, a dozer can be adapted to perform many tasks by simply changing a
blade or adding additional attachments. Versatility can make a piece of equipment
more useful on a site, thus replacing the need for more specialized units. Cost is
certainly an important consideration in equipment selection.
All the above factors can be related and they all must be considered together
in equipment selection. Equipment planning can yield many solutions. Many
decisions involve trade-offs that must be properly analyzed to identify the best
solution. For example, choosing two smaller pieces of equipment instead of one
larger unit may mean higher unit production costs, but there is a redundancy in the
system that can be good insurance if one unit should break down and work can be
kept moving. Considering the above factors that can influence equipment selection,
the outcome of equipment planning should yield a solution that satisfies the
following three underlying objectives in equipment selection: feasibility,
efficiency, and economy.
The feasibility refers to the selection of equipment that can carry out the
tasks in a satisfactory manner. This is determined by the nature of the work that the
equipment will perform and the condition in which the equipment will do the
work. Efficiency refers to the selection methods that maximize efficiency of the
construction operation such as those decisions that can reduce the number of
equipment pieces through selecting higher capacity units. Efficiency in operation
may not have a direct effect on the direct cost of the project but may have an
indirect effect on other aspects of the construction project, such as minimizing site
congestion leading to higher productivity, while decreasing the likelihood of
accidents and promoting communication and coordination.
27
Finally, the selected pieces of equipment and methods that produce the
lowest cost are ideal for the project as they directly contribute to lower
construction costs, which is one of the goals of every construction project.
3.3 Purchase the equipment

Buying results in direct ownership of the equipment. Acquisition of
equipment by buying is done either through cash purchase by using company funds
or through financing purchase. The outright cash purchasing is done when
sufficient funds are available. However cash purchase can have an adverse effect
on company‟s cash flow as it reduces the liquid asset thus affecting company‟s
working capital. When sufficient funds are not available for outright cash purchase,
the equipment can be acquired by finance purchasing wherein the purchasing is
done through loan arrangements from lenders i.e. banks or other financial
institutions that includes the payment of loan through installments along with an
initial down payment. One of the main advantages of owning the equipment by
outright cash purchase is that it may result in lowest cost per operating hour as
compared to renting or leasing. Other advantages associated with buying include,
complete control of the owner over use of the equipment and its maintenance and
replacement of equipment when it is no more economical. In addition, there is also
income tax benefit associated with depreciation of the equipment. Acquiring the
equipment through buying is an economically attractive option when there is more
work load leading to higher utilization rate of the equipment over its useful life.
Otherwise it will lead to the risk of not getting the required return on the capital
investment if there is not enough utilization of the equipment. This is one of the
disadvantages associated with buying. If the equipment is purchased through
finance purchasing, the equipment owner has to pay the required loan installment
to the lender even when the equipment is not operational. Acquisition through
buying may sometimes force the owner to use the obsolete equipment due to
financial constraints.
28
3.4 Rent the equipment

Renting is a method of acquiring the equipment for a shorter duration. It is
an alternative to direct ownership (i.e. through buying) of the equipment for a
shorter period. Acquisition of equipment through renting is suitable when the
contractor or the construction company requires the equipment for a project task of
shorter duration. In addition through renting, the company can select the equipment
that is exactly suited for the project task and it is possible to acquire the equipment
based on latest technology which is more productive than older models. In these
circumstances, renting of the equipment is more beneficial than direct ownership
even though the rental charges are higher than the direct ownership charges. Since
the equipment is not owned by the user, there is no tax benefit associated with
depreciation of the equipment. However tax benefit is gained as the rental cost is
considered as an expense that reduces the income of the company using the
equipment. The capital that is tied up when the equipment is acquired through
buying can be used in other investment if the equipment is rented. Among the three
methods of acquiring the equipment, typically the hourly rental cost is higher as
compared to that of lease or direct ownership. Rental period may a day, a week or
a month and may go up to one year. The rental rates are generally established on
daily basis, weekly basis or monthly basis. The daily rate on hourly basis is higher
than the weekly rate on hourly basis and the weekly rate (on hourly basis) is higher
than the monthly rate (on hourly basis). The repair and maintenance cost of the
equipment to be paid either by the user or owner of the equipment (i.e. renting
company) is stated in the rental contract. In case of major repair work, generally
the cost is paid by the renting company whereas the cost of minor repair and
maintenance that is incurred at the project site is usually paid by the user of the
equipment. The cost fuel and lubricants is mostly paid by the user of the
equipment. By renting, it is possible to reduce the downtime experienced due to
breakdown of the equipment followed by repair as the equipment is replaced by the
rental service. Further in order to check the suitability of specific equipment in
actual job site conditions, the equipment can be rented and its performance can be
tested before taking a decision to purchase the equipment that involves a major
Capital investment.
29
In addition, the user of the equipment can get rid of the cost of transporting
the equipment from one project site to another by renting it. However the user
mostly pays the transportation charges for bringing the equipment from renting
company‟s yard to the work site and also pays the cost of assembly, loading etc.
Advantages of purchasing equipment compared to renting it are:

1. It is more economical if the equipment is used sufficiently.
2. It is more likely to be available for use when needed.
3. Because ownership should assure better maintenance and care, purchased
equipment should be kept in better mechanical condition.
Disadvantages of owning equipment compared to renting it are:

1. It may be more expensive than renting.
2. Purchasing may require a substantial investment of money or credit that
may be needed for other purposes.
3. The ownership of equipment may influence a contractor to continue using
obsolete equipment after superior equipment has been introduced.
4. The ownership of equipment designed primarily for a given type of work,
may induce a contractor to continue doing that type of work, whereas other
work requiring different types of equipment might be available at a higher
profit.
5. The ownership of equipment might influence a contractor using the
equipment beyond its economic life, thereby increasing the cost of
production unnecessarily.
Once the decision is made whether to purchase or rent, the next decision to
be made is whether to simply rent or rent with an option to purchase. The latter
alternative will result in a higher rental cost as some of the periodic rental charges
will be applicable towards the purchase price of the equipment. This is an
attractive alternative if the renter of the equipment believes he may have enough
use for the equipment to purchase it, but is not too sure that the utilization will be
as high as predicted. This kind of rental agreement results in higher hourly charges
than straight rental agreement.
30
If the contractor intends to buy the equipment after renting it for a period of
time, then 90% of the rent charges will be discounted from the total actual cost of
the equipment.
Example:
A crawler bulldozer having the information shown below; the contractor

intends to rent this equipment for 8 months with an option to buy it later.
Determine the probable cost per hour for owning and operating this equipment.
31
32
3.5 Replacement Analysis

Replacement analysis is carried out when there is a need to replace or
augment the currently owned equipment (or any asset). There are various reasons
that result in replacement of a given equipment. One of the reasons is the reduction
in the productivity of currently owned equipment. This occurs due to physical
deterioration of its different parts and there is decrease in operating efficiency with
age. In addition to reduced productivity, there is also increase in operating and
maintenance cost for the construction equipment due to physical deterioration. This
necessitates the replacement of the existing one with the new alternative. Similarly
if the production demands a change in the desired output from the equipment, then
there is requirement of augmenting the existing equipment for meeting the required
demand or replacing the equipment with the new one. Another reason for
replacement of the existing equipment is obsolescence. Due to rapid change in the
technology, the new model with latest technology is more productive than the
currently owned equipment, although the currently owned equipment is still
operational and functions acceptably. Thus continuing with the existing equipment
may increase the production cost. The impact of rapid change in technology on
productivity is more for the equipment with more automated facility than the
equipment with lesser automation.
In replacement analysis, the existing (i.e. currently owned) asset is referred

as defender whereas the new alternatives are referred as challengers. In this
analysis the „outsider perspective‟ is taken to establish the first cost of the
defender. This initial cost of the defender in replacement analysis is nothing but the
estimated market value from perspective of a neutral party. In other words this cost
is the investment amount which is assigned to the currently owned asset (i.e.
defender) in the replacement analysis. The current market value represents the
opportunity cost of keeping the defender i.e. if the defender is selected to continue
in the service. In other words, if the defender is selected, the opportunity to obtain
its current market value is forgone.
33
Sometimes the additional cost required to upgrade the defender to make it

competitive for comparison with the new alternatives is added to its market value
to establish the total investment for the defender. Along with the market value,
there will be revised estimates for annual operating and maintenance cost, salvage
value and remaining service life of the defender, which are expected to be different
from the original values those were estimated at the time of acquiring the asset.
The past estimates of initial cost, annual operating and maintenance cost, salvage
value and useful life of defender are not relevant in the replacement analysis and
are thus neglected. The past estimates also incorporate a sunk cost which is
considered irrelevant in replacement analysis. Sunk cost occurs when the book
value (as determined using depreciation method) of an asset is greater than its
current market value, when the asset (i.e. defender) is considered for replacement.
In other words it represents the amount of past capital investment which cannot be
recovered for the existing asset under consideration for replacement. Sunk cost
may occur due to incorrect estimates of different cost components and factors
related productivity of the defender, those were made at the time of original
estimates in the past with uncertain future conditions. Since sunk cost represents a
loss in capital investment of the asset, the income tax calculations can be done
accordingly by considering this capital loss. In replacement analysis the incorrect
past estimates and decisions should not be considered and only the cash flows
(both present and future) applicable to replacement analysis should be included in
the economic analysis. For replacement analysis, it is important know about
different lives of an asset, as this will assist in making the appropriate replacement
decision. The different lives are physical life, economic life and useful life.
Physical life of an asset is defined as the time period that is elapsed between initial
purchase (i.e. original acquisition) and final disposal or abandonment of the asset.
Economic life is defined as the time period that minimizes the total cost (i.e.
ownership cost plus operating cost) of an asset. It is the time period that results in
minimum equivalent uniform annual worth of the total cost of the asset. Useful life
is defined as the time period during which the asset is productively used to
generate profit. In replacement analysis the defender and challenger is compared
over a study period. Generally the remaining life of the defender is less than or
equal to the estimated life of the challenger.
34
When the estimated lives of the defender and challenger are not equal, the
duration of the study period has to be appropriately selected for the replacement
analysis. When the estimated lives of defender and challenger are equal, annual
worth method or present worth method may be used for comparison between
defender and the challengers (new alternatives). In the following example,
replacement analysis involving equal lives of defender and challenger is discussed.
3.6 Time-value of money

The value of money is dependent on the time at which it is received. A sum
of money on hand today is worth more than the same sum of money to be received
in the future because the money on hand today can be invested to earn interest to
gain more than the same money in the future. Thus, studying the present value of
money (or the discounted value) that will be received in the future is very
important. This concept will be demonstrated in the following subsections.
3.6.1 Single payment

Single payments may occur either today or at some time in the future. P is used to
indicate a sum paid or received today, and F is used to indicate a future sum.
Let's determine the future value of $10 invested at 6% for one year.
$10 (1 + 0.06) = $10.60
This can be written symbolically as
F = P (1 + i)
Where i is the interest rate. For n periods, the formula becomes
F = P (1+ i)n
35
The term (1+ i)n is called the single payment compound amount factor, which is
used to determine the future worth of a present sum of money.
The reciprocal, or 1/ (1+ i)n is called the single payment present worth factor
which is used to determine the present worth of a future sum of money. In solving
economic analysis problems, students may use either their calculators or the
formulas for each factor or a shorthand notation and the interest tables.
In following, we will set up the example problems both ways, but we will
use the shorthand notation for problem solution.
The shorthand notation for the single payment compound amount factor is
written as (F/P, i, n) which means find a future sum given a present value at i
interest for n time periods.
A similar shorthand notation for the single payment present worth factor
would be (P/F i, n).
This means: Find the present worth of a given future sum received or paid at
the end of n periods at an effective interest rate of i.
Example:
A contractor plans to purchase a pickup truck in 5 years. How much should

the contractor invest at 6% interest today to have the $30,000 needed to purchase
the truck at the end of the 5 years?
Solution
In this problem, the purchase price is a known future value, and the
unknown is the present worth amount. Mathematically, this can be written as
P = F/ (1+ i)n = $30,000 / (1 + 0.006)5
36
Using our shorthand notation, it is written as
P = F (P/F, i, n) = ($30,000) (P/F, 6%, 5)
Note that the unknown is always the numerator in the shorthand notation
(P/F), and the known is the denominator. Looking at tables, we find the factor
value to be 0.747. Solving the equation yields the following answer:
P = ($30,000) (0.747) = $22,410
----------------------------------------------------------------------------
Example
A contractor is considering the purchase of a new pump that will be used to
remove storm runoff from open excavations. The pump will cost $15,000 and have
au expected life of 10 years. After 10 years of use, the contractor estimates the
pump salvage value will be $4,000. What is the contractor's total cost (on a present
worth basis) of owning the pump, if the effective interest rate is 8%?
Solution
In this problem, the purchase price is a known present worth cost and the
salvage value is a future receipt. To determine the present worth of the total cost,
we subtract the present worth of the salvage value from the initial cost.
Mathematically, this is written as
P = $15000 - $4,000 / (1+0.08)10
P = $15,000 - [($4,000) (P/F, 8%,10)]
Inserting the factor value from table yields the following:
P = $15,000 - [($4,000) (0.463)] = $15,000 - $1,852 = $13,148
37
3.6.2 Uniform Series of Payments

In some situations, it is desirable to determine the present worth or future
worth of a uniform series of payments or receipts.
In other situations, it is necessary to determine a series of equal payments or

receipts. To accomplish these analyses, we will introduce A, which is defined as a
series of equal payments or receipts that occur at the end of each period for n
periods. It is important that you learn this definition and understand that A is not
used for payments or receipts mode or received at the beginning of each time
period.
The uniform series compound amount factor is used to determine the future
worth of a series of equal payments or receipts. Mathematically, it is written as
[(1 + i)n-1]/ i, and the shorthand notation is (F/A,i,n).
The uniform series present worth factor is used to determine the present
worth of a series of equal payments or receipts. Mathematically, it is written as
[(1 + i)n-1]/ [i(1 + i)n] and the shorthand notation is (P/A,i,n).
The uniform series sinking fund factor is used to determine a series of equal
payments or receipts that is equivalent to a stated or required future sum.
Mathematically, it is written as i / [(1 + i)n-1], and the shorthand notation is
(A/F,i,n).
The uniform series capital recovery factor is used to determine a series of

equal payments or receipts that is equivalent to a given present worth sum.
Mathematically, it is written as [i (1 + i)n] / [(1 + i)n - 1], and the shorthand
notation is (A/P, i, n).
38
Example
A contractor is investing $5,000 per year in savings certificates at an interest
rate of 6% and plans to continue the investment program for 6 years. He is doing
this so he will have a down payment for some new construction equipment. What
will the value of the contractor's investment be at the end of 6 years?
Solution
In this problem, the annual investment is an annual uniform series and the
unknown is the future worth. mathematically, this can be written as follows:
[A(1 + i)n-1]/ i = [$5,000)(1 + i)6-1]/ 0.06

F = ($5,000) (F/A, 6%, 6)
Inserting the factor value from table yields the following:

F = ($5,000) (6.975) = $34,875
3.6.3 Cash Flow Diagrams
Cash flow diagrams are used to analyze economic alternatives. Although

they are not always necessary in simple problems, such diagrams allow the student
to better visualize each of the individual sums and uniform series involved in the
alternative. The following conventions are used to standardize cash flow diagrams:
– The horizontal (time) axis is marked off in equal increments, one per
interest period, up to the end of the time period under consideration (period of
ownership). The interest period may be years, months, days, or any other equal
time period.
– Receipts are represented by arrows directed up and payments are

represented by arrows pointing down.
– Two or more receipts or payments in the same period are placed end to
end, and these may be combined.
39
– All cash that flows during an interest period is considered to flow at the
end of the period. This is known as the year-end, convention.
These conventions are illustrated in the following example..
Example
A contractor purchased a small used tractor for $20,000 that she intends to
use for landscaping around newly constructed houses. Maintenance costs for the
tractor are esti-mated to be $1,000 per year. The contractor plans to dispose of the
tractor after 5 years and realize a salvage value of $7,000. Annual income
generated by the tractor is esti-mated to be $5,000 per year. Draw the cash flow
diagram.
Solution
Arrows representing the initial purchase price and the annual maintenance
costs will be drawn down in accordance with our convention, since they are
payments. The salvage value and the income will be represented by arrows
pointing up, because they are receipts. The resulting cash flow diagram is shown
below.
40
Example
A contractor is considering purchasing a used tractor for $180,000 that she
could use for 10 years and then sell for an estimated salvage value of $10,000.
Annual maintenance and repair costs for the used tractor are estimated to be
$15,000 per year. As an alternative, the contractor could lease a similar tractor for
$4,000 per month. Should the contractor purchase the used tractor or lease the
tractor from an equipment dealer?
Annual operating cost is approximately the same for both alternatives. Use a
minimum attractive rate of return of 12%.
Solution
Since the rental alternative is known on an annual cost basis, we will
compare the alter-natives on an annual cost basis. The annual cost for the rental
alternative is
A = (12 months) ($4,000/month) = $48,000
Following is a cash flow diagram for the purchase alternative:
41
The annual cost can be determined using the following equation:
A= [($180,000) (A/P, 12%, 10)] + $15,000-[($10,000) (A/F,12%,10)]
Substituting factor values from tables yields the following:
A= [($180,000) (0.177)] + $15,000 - [($10,000) (0.057)]
=$31,860 + $15,000-$570 = $46,290
The contractor should purchase the used tractor, because it has a lower annual cost.
42
Chapter (IV)
Conclusions
The following are the main conclusions of this paper:
 Types of Equipment:
 Standard Types of Equipment
 Special Equipment
 Factors that affect the cost of owning and operating

construction equipment:
 The cost of the equipment delivered to the owner.
 The severity of the conditions under which the equipment is used.
 The number of hours the equipment is used per year.
 The number of years the equipment is used.
 The care with which the owner maintains and repairs the equipment.
 The demand for used equipment when it is sold, which will affect the
salvage value.
 The following expenses should be considered when

determining the full ownership cost of equipment:
 Depreciation
 Maintenance and repair
 Financing
 Taxes
 Insurance
 Storage
 Fuel and lubrication
43
 When straight-line depreciation is used, the amount of

depreciation from initial cost to salvage value is distributed
equally each year over the life of the asset.
 Depreciation can also be calculated using the declining-

balance method or the production or use method. Using these
methods results in depreciation amounts that are high to begin
with but decline as the asset gets older.
 Taxes, insurance charges, and storage costs vary over a wide

range of values depending on particular circumstances. An
allowance for these costs is also calculated as a percentage of
the average annual investment amount.
 Fuel costs depend on the type of engine and are proportional

to the engine’s horsepower rating. An operating factor that is
always less than 100% is also introduced to account for the
fact the engine does not operate continuously at full throttle.
 Advantages of purchasing equipment compared to renting it

are:
 It is more economical if the equipment is used sufficiently.
 It is more likely to be available for use when needed.
 Because ownership should assure better maintenance and care, purchased
equipment should be kept in better mechanical condition.
44
 Disadvantages of owning equipment compared to renting it

are:
 It may be more expensive than renting.
 Purchasing may require a substantial investment of money or credit that
may be needed for other purposes.
 The ownership of equipment may influence a contractor to continue using
obsolete equipment after superior equipment has been introduced.
 The ownership of equipment designed primarily for a given type of work,
may induce a contractor to continue doing that type of work, whereas other
work requiring different types of equipment might be available at a higher
profit.
 The ownership of equipment might influence a contractor using the
equipment beyond its economic life, thereby increasing the cost of
production unnecessarily.
45
Chapter (V)
References
References
 Adams, O. (1997), “Contractor development in Nigeria: perceptions of
contractors and professionals”, Construction Management and Economics,
Vol. 15 No. 1, pp. 95-108.
 Edwards, D.J. and Holt, G.D. (2000a), “ESTIVATE: a methodology for

calculating hydraulic excavator productivity and output costs”, Engineering,
Construction and Architectural Management, Vol. 7 No. 1, pp. 52-62.
 Edwards, D.J., Holt, G.D. and Harris, F.C. (2000b), “A model for predicting
plant maintenance costs”, Construction Management and Economics, Vol.
18 No. 1, pp. 65-75.
 Proctor, J.R. (1995), “Selecting tower cranes”, Civil Engineering, Vol. 65

No. 2, pp. 52-6.(The) Provision and Use of Work Equipment Regulations
(1992), Statutory Instrument 1992 No. 2932 (as amended), available at:
www.opsi.gov.uk/si/si1992/Uksi_19922932_en_1.htm (accessed 23February
2009).
46

Construction Management PDF

Uploaded by

Copyright:

Available Formats

You might also like

Construction Management PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Construction Management PDF

Uploaded by

Copyright:

Available Formats

Management of Project Resources……………………………………………………PRMG-020

THE PROFESSIONAL PROGRAM IN PROJECT MANAGEMENT

WAEL AHMED AHMED 700163260

WALID MOHAMED IBRAHIM 700163261

AHMED EZZ ELDIN 700160535

MOHAMED IBRAHIM 700160922

MOHAMED ADEL 700160534

MOHAMED SALAH ELDIN 700160536

PRESENTED TO PROF. IBRAHIM ABDEL RASHID

Modern construction is characterized by the increasing utilization of

The major problem frequently faced by contractor in the selection of most

2.2 Types of Equipment:

2.2.2 Special Equipment:

It is the equipment that is manufactured for use on single project or for a

2.3 Factors that affect the cost of owning and

1. The cost of the equipment delivered to the owner.

2. The severity of the conditions under which the equipment is used.

3. The number of hours the equipment is used per year.

4. The number of years the equipment is used.

When it is necessary to estimate the cost of owning and operating

2.4 The Cost of Owning and Operating Construction

2.4.1 Ownership Costs:

2.4.1.1 Depreciation Cost:

Depreciation Accounting Value:

There are number of methods to calculate the depreciation, but before

With these three items of information known or estimated, the depreciation

1-Straight-line method (SL):

2-Sum-of-the-years method (SOY):

This method is also an accelerated depreciation method that provides for

A piece of equipment is available for purchase for ($12000), has an

2.4.1.2 Investment Costs:

Owning equipment costs money, one part of ownership costs is Investment

− The interest on the money invested.

− Taxes of all types which are assessed against the equipment.

2.4.1.4 Insurance cost

2.4.1.5 Storage cost

2.4.2 Operating costs:

2.4.2.1 Maintenance and Repair Parts cost:

The annual cost of maintenance and repairs may be expressed as a percent of

Maintenance and Repair cost is incurred as the construction equipment is

2.4.2.2 Lubrication and fuel.

Fuel consumed per hour= operating factor×hp×engine consumption …… (1-17)

Lubricating Oil Consumption:

Examples illustrating the cost of owning and operating construction

2.5 Economical Life of Construction Equipment:

The owner of construction equipment should be interested in obtaining the

1. Depreciation and replacement.

3. Maintenance and repairs.

2.5.1. Downtime Costs:

The cost per hour for downtime=0.05×6=0.3 ($/hr)

2.5.2 Obsolescence Costs:

Improvements in the productive capacities result in lower production costs.

1. Purchase the equipment.

2. Rent the equipment.

3. Rent the equipment with an option to purchase it at a later date.

3.2 Equipment characteristics

Equipment characteristics are related to equipment capabilities (capacities