Equipment Costs and Economics

Dr. Mohammad S. El-Mashaleh

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 1

Equipment costs and economics

• The economic analysis of construction
equipment is concerned with
determining the total equipment rate

• Total equipment rate consists of:

• Owning costs
• Operating costs
• Overhead costs
Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 2

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 • For a particular piece of equipment, our goal
is to determine cost/unit of production (i.e.,
$50/m3)

• If we know:
• Cost/hr (i.e. $160/hr)
• Production (i.e., 20m3/hr)

• Then, the cost per unit of production can be

determined by dividing the total equipment
rate by its hourly production rate

• Cost per unit of production = 160/20 = $8/m3

Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 3

Owning and operating costs (O&O

costs)
• As the name implies, these are divided
into:

• Owning costs

• Operating costs

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 4

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 Owning costs

• Fixed costs that are incurred each year

whether the equipment is operated or
not

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 5

Operating costs

• Incurred only when the equipment is

actually used

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 6

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 Breakdown of Equipment Costs
Ownership costs Miscellaneous costs Operating costs

Cost of maintenance (CMAI)

Cost of depreciation (CDEP)
Cost of operation (COPE)
Cost of investment (CINV)
Cost of escalation (CESC)

Total ownership costs = Total operating costs =

CDEP+ CINV + CESC CMAI+ COPE

Total O&O Costs = Ownership costs + Operating costs + Miscellaneous costs

Overhead costs = 10% X [ CDEP + CINV + CESC + CMAI + COPE]

Total Equipment Rate = Total O&O costs + Overhead costs

Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 7

Cost of depreciation (CDEP)

• Depreciation represents the decrease in
market value of equipment due to age
and deterioration

• The equipment’s life to be used for

depreciation purposes should represent
the equipment’s expected economic or
useful life

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 8

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 P−S
C DEP =
N ×n
Where:
P = Purchasing cost
S = Salvage value (value of equipment at the end
of useful life)
N = Useful life. Usually 5-8 yrs
n = Number of hours yearly = 2000 hrs
8 hrs/day * 5 days per wk * 52 wks ≈ 2000

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 9

Example 1

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 10

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 Cost of investment (CINV)

P×i
C INV =
n

P = Average investment per yr

i = annual interest rate
n = number of hrs per yr
Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 11

Determining average investment

(1) Averaging P and S

(2) Averaging over useful life
(3) Based on formula 1
(4) Based on formula 2

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 12

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 Averaging over P and S

P+S
P=
2

Averaging over useful life

V . @ end of first yr + ..... + V . @ end of last yr

P=
N

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 13

Formula 1

P ( N + 1)
P=
2N

Formula 2

P( N + 1) + S ( N − 1)
P=
2N

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 14

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 Example 2

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 15

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 16

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 Cost of escalation (CESC)

P New − P Old
C ESC =
N ×n

P New = P Old × (1 + i ) N
Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 17

Example 3

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 18

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 Cost of maintenance (CMAI)
• The regular practice is to use % of purchase
price

%P
C MAI =
N ×n
Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 19

Typical lifetime repair cost (% of

initial cost)
Type of Operating conditions
equip Favorable Average Severe
Clamshell & 40 60 80
dragline
Crane 40 50 60
Excavator, 50 70 90
hoe, shovel
Scraper 85 90 105
Wheel 85 90 105
loader
Track loader 50 60 75
Construction Project Management
Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 20

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 Cost of operation (COPE)

COPE = C Fuel + COil + C Driver

COil = 10% × C Fuel

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 21

Cost of miscellaneous (CMISC)

• For any additional cost that is not

accounted for

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 22

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 Cost of overhead (Coverhead)
• Taken as

5
(4 − 10)% of ∑C
C =1
DEP + C INV + C ESC + C MAI + COPE

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 23

Example 4

Construction Project Management

Dept. of Civil Eng.
Dr. Mohammad El-Mashaleh
Hashemite University 24

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