5. Estimating Operating Costs

So what are these operating costs? So basically these operating costs occurs only when the equipment is used. So unlike ownership cost when we discuss about the ownership cost I told you that the ownership is incurred irrespective of whether the equipment is operated or not.

Operating costs are expenses that arise only when the equipment is actively in use. This is in contrast to ownership costs, which are incurred regardless of whether the equipment is being used. For instance, if a machine is leased or owned, there are fixed costs associated with it, such as depreciation, insurance, and taxes. In contrast, operating costs like fuel, maintenance, and repairs only apply when the machine is operated, making them variable costs that fluctuate based on usage.

Imagine you own a car. You have to pay for insurance, taxes, and the car itself regardless of whether you drive it or not; this is similar to ownership costs. However, fuel, maintenance, and repair costs occur only when you're actually driving the car, representing operating costs.

First let us see what are all the components of the ownership cost? So basically you have these consumables, they come under the operating cost. Your fuel, lubrication oil, filter, grease and all the other small components which are getting consumed during the equipment operation all these are called as consumables.

Operating costs have several components, key among them are consumables. Consumables include materials such as fuel, lubricating oil, filters, grease, and small parts that get used up during the operation of equipment. Additionally, labor costs for operators, and expenses related to minor repairs and maintenance also contribute to operating costs. Understanding these components is crucial for accurate cost estimation and budgeting in projects that utilize heavy machinery.

If you think of operating costs like running a restaurant, consumables would be the ingredients used to prepare meals. Just as chefs need fresh produce and fuels to cook, machines need fuel and oils to operate. Labor costs for chefs equate to operator wages for machinery, emphasizing the importance of managing these expenses.

One thing what you need to know is your operating cost will vary with the usage of the machine, it vary with the number of operating hours of the machine.

Operating costs are not fixed; they change based on how much the equipment is used. The more hours a machine is operated, the more it will consume fuel, require maintenance, and incur wear and tear. Therefore, budgeting and predicting operating costs should include an understanding of the expected usage hours for each piece of equipment.

Consider a bicycle rental service. The more frequently each bicycle is rented and used, the higher the costs associated with maintaining it—more tires might need replacing, and brakes adjusted. Similarly, as machinery works more hours, it experiences greater operational costs.

The operating cost will also be more it depends upon the usage similarly it also depends upon the job operating condition. A same equipment if it is put under 2 different types of operating condition one is put in a very severe or tough operating condition one is put in a average operating condition.

The operating conditions significantly affect operating costs. Equipment used in harsh conditions—like rough terrain or heavy material handling—will generally incur higher operating costs compared to equipment used in milder conditions. This is due to increased fuel consumption, wear and tear, and the need for more frequent repairs in tougher environments.

Think of climbing a mountain versus walking on a flat path. Climbing requires more energy and stamina, similar to how machinery working in difficult conditions requires more fuel and can suffer from more wear. A truck moving materials on an unpaved road consumes more fuel and faces more repair costs than one on a smooth highway.

So now let us discuss about the operating cost one by one in detail the first one which we are going to discuss is about the maintenance and the repair cost.

Maintenance and repair costs are a significant component of operating costs. As equipment ages, these costs typically increase due to wear and tear, necessitating more frequent repairs and parts replacements. Regular maintenance helps prevent major breakdowns and ultimately lowers operation costs over time, highlighting the importance of proactive maintenance practices.

Imagine you have an old car. If you regularly change the oil and check tire pressures, it will likely serve you well and require fewer repairs. Conversely, if neglected, you may face costly repairs and reduced reliability, just like machinery needing regular maintenance to keep operating efficiently.

So now let us see how to estimate the hourly repair cost for a particular year say this formula if you remember this is somewhat similar to what we used for estimation of depreciation using Sum of the year’s digit methods something similar to that.

Estimating hourly repair costs involves mathematical formulas that consider the expected lifecycle of equipment and associated repairs. Specifically, the 'sum of the years' digit method can estimate the cost based on the age of the equipment and overall expected repair expenses. This method helps spread the costs over the equipment's service life, aiding in budget planning.

This process is comparable to budgeting for school supplies over a school year. If you have a set budget and know your supplies will last for nine months, you can determine how much to spend monthly versus trying to guess each specific need without an overview.

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