2. Caterpillar Method

So as I told you these are two commonly adopted methods. One is a Caterpillar method other one is a Peurifoy method. So we are going to discuss this procedure as discussed by Gransberg et. al.

The Caterpillar Method is a widely recognized approach for estimating equipment costs in construction. It is often used alongside the Peurifoy Method, another established technique. The step-by-step procedures for both methods follow guidelines that are documented in industry literature, ensuring that users can apply them effectively in practical situations.

Imagine you're planning a road trip and need to estimate how much gas you will need. Just as you might consult a map and a gas calculator to determine your fuel cost, construction professionals will refer to the Caterpillar and Peurifoy methods to calculate equipment costs based on historical data and guidelines.

So let us start with the estimation of the ownership cost. So under the ownership cost we are going to estimate the depreciation first. In this caterpillar method we are going to adopt these straight line methods for estimation and depreciation.

Ownership cost includes all expenses related to the owning of equipment, with depreciation being a primary component. The Caterpillar Method uses the straight line approach to calculate depreciation, which means that the equipment's cost is spread evenly over its useful life. The formula for depreciation is: (Initial Price - Salvage Value) / Depreciation Period in hours. This method ensures that the equipment's value diminishes consistently over time, which aids in financial planning.

Think of a new car you purchased. If you bought it for $20,000 and expect to sell it for$5,000 after 10 years, each year the car's value decreases by $1,500. This is similar to how depreciation is calculated in the Caterpillar Method, where the cost of equipment is evenly spread across its useful life.

Hope you remember so how to estimate the average value of the machine using straight line depreciation method we have derived this formula in the earlier lecture.

The average annual investment is determined using the formula: (P(n+1) + S(n-1)) / (2n), where P is the purchase price of the machine, S is its salvage value, and n is the useful life of the machine. This formula calculates the average cost of investment in equipment over its life, helping to assess its financial feasibility more accurately.

Consider this: If you buy a bicycle for $300 and expect to sell it for$100 after 5 years, the average annual investment helps you understand how much you are effectively spending on that bike each year. It allows you to plan your budget and decide if it makes sense to own the bike versus using public transport.

Now the ownership cost is done it is more to the operating cost. So under operating cost we are going to discuss cost of consumable. Firstly, we will discuss about the fuel cost.

Operating costs include expenses that occur when using the equipment, such as fuel consumption, repairs, and consumables like filters and lubricants. Understanding these costs is crucial for accurately estimating the total cost of equipment operations. Fuel costs can be derived from manufacturer handbooks that state fuel consumption rates for specific equipment models under various load conditions.

Think of running a lawnmower. The purchase price is just one part of the cost, but you also need to consider the fuel you use to keep it running, any oil or filters you need to replace, and how often you might need repairs. Just like maintaining a lawnmower, equipment in construction has ongoing costs that significantly impact its overall expenditure.

Fuel costs there are different handbook which provides you the information on the fuel consumption factor.

To determine fuel costs, one can reference manufacturer handbooks that provide information on fuel consumption factors based on machine performance under various operating conditions. Depending on the load on the machine—whether in tough terrain or light work—the fuel consumption will vary, affecting overall operational costs.

Using data from the manufacturer about your car's gas mileage is similar to how construction professionals look up fuel consumption for their equipment. If you drive your car in heavy traffic, it consumes more fuel than on a highway; likewise, if a bulldozer is working in rocky conditions, it will burn more fuel compared to when it's on soft ground.

Another important thing is FOG is nothing but filter, oil, grease. So these are also the consumables which are consumed during the equipment operation.

Consumables such as Filter, Oil, and Grease (FOG) are additional operating costs that need to be considered. Their costs can be derived from manufacturer guidelines that specify the expected usage rates per hour of operation. Adjustments may be made based on local labor costs and operational conditions to provide a realistic estimate.

Think of a bike again; it requires oil for the chain and other lubricants to keep running smoothly. When calculating the total cost of owning and operating that bike, you need to account for those consumable items, just as construction equipment needs to account for FOG costs over time.

So maintenance and repair of your machine excluding the tire cost. ...So you can get these values accordingly depending upon your handbook your referring so finally divided by the annual usage of the equipment in hours.

Repair costs can be estimated as a percentage of the initial cost of the machine, excluding the tire cost. The repair factor varies based on the machine's age and usage history, and these factors are often documented in handbooks. To find the hourly repair cost, you divide the total repair costs by the annual usage hours.

If you own an oven, it may need repairs over time. If you know that repairs might cost about 10% of the oven's initial price each year, you can plan for those expenses. Similar calculations are made for construction equipment to ensure budgets include potential repair expenses.

So now the total ownership and the operating cost will be the sum of all the ownership cost components, operating cost components and in addition you have to add the operating wages.

Ultimately, the total equipment cost comprises all ownership costs (like depreciation and taxes) and all operating costs (such as fuel, maintenance, and labor). To effectively manage a budget for construction projects, operators must sum all of these costs to understand the true financial impact of using equipment.

When planning a vacation, you wouldn't just consider the flight costs; you'd need to factor in hotel accommodations, food, and any entertainment you plan to do. In construction, it's similar: to know how much a piece of machinery will truly cost your project, all expenses need to be added together.

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