2.2.5. Total Cost Calculation

Hello everyone. I welcome you all to the lecture 5 of this course construction methods and equipment management. So in this lecture 5 we will be discussing about how to estimate the total equipment cost. So far we have discussed about how to estimate the ownership cost and the operating cost components. So in this lecture we will be working out some illustrations on how to estimate the total equipment cost using Caterpillar method and Peurifoy method which are commonly adopted methods.

This introduction sets the stage for understanding how to calculate the total equipment cost in construction management. The speaker highlights that previous lectures covered both ownership costs (the costs associated with owning a piece of equipment) and operating costs (the costs incurred while using the equipment). In this lecture, the focus will shift towards practical applications using two well-known methods—the Caterpillar method and the Peurifoy method.

Imagine you’re budgeting for a construction project. Before deciding how much to spend on equipment, you need to understand the different costs involved: how much it will cost to buy the equipment and how much it will cost to use it during the project. This lecture will help you make those calculations wisely.

So as we know the owner ship cost and operating cost is the two main components. 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.

The total equipment cost consists of two main components: ownership cost and operating cost. The ownership cost is primarily made up of depreciation, which reflects the loss of value of the equipment over time. The Caterpillar method uses the straight-line approach for calculating depreciation, which means that the value of the equipment is reduced evenly over its useful life. This is crucial for understanding how much money the equipment will lose in value while it's used.

Think of a car you bought for $20,000. If you plan to use it for 10 years and expect to sell it for$5,000 at that time, your depreciation each year would be based on losing $15,000 in value over 10 years, which amounts to$1,500 per year. This makes budgeting easier by knowing how much money you'll lose each year due to wear and tear.

So depreciation is nothing but initial price minus salvage value divided by the depreciation period in hours.

Depreciation = (Initial price - Tire cost - Salvage value) / Depreciation period in hours.

To calculate the hourly depreciation of the equipment, you will first determine the initial price (purchase price), subtract any tire costs (which are treated separately as operating costs), and also subtract the salvage value (the estimated value when you eventually sell it). This amount is then divided by the total hours the equipment is expected to be useful (the depreciation period). This results in an hourly depreciation rate which can be useful for project budgeting.

If you buy a piece of machinery for $50,000, expect to sell it for$10,000 later, and plan to use it for 5,000 hours, you would calculate the depreciation like this: ($50,000 -$0 - $10,000) / 5,000 hours =$8 per hour. This means every hour you use the machine, it loses $8 in value.

Now let us calculate the other components of the ownership cost. It is nothing but the cost of investment, taxes, insurance. So everything will be calculated as a percentage of the average value of equipment.

Besides depreciation, ownership costs also include the costs associated with the investment in the equipment, taxes based on ownership, and insurance costs. These expenses are not fixed but vary as a percentage of the average value of the equipment calculated over its useful life. It is important to consider all these factors into the total cost to ensure proper budgeting.

Think of renting an apartment. You not only have to pay for the rent (comparable to depreciation) but also need to consider utilities, insurance, and taxes which are based on the apartment’s value. Similarly, calculating ownership costs of equipment includes all these aspects to get an accurate depiction of what you will end up spending over time.

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

Once the ownership costs are computed, the next step is to determine the operating costs, which mainly include consumables. The first item discussed is fuel cost, which can vary depending on the model of the equipment and how it is used. Various handbooks provide fuel consumption factors, which can help predict how much fuel will be used based on hours of operation and load conditions. Accurate calculations of fuel costs are crucial for managing the overall project budget.

Imagine you drive your car differently based on traffic and load. If you’re stuck in traffic (high load), your car uses more fuel compared to a smooth highway drive (low load). Similarly, heavy machinery consumes fuel differently based on how it’s used, which means accurate estimations of operating costs can significantly affect the total expenditure on a project.

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.

Finally, to determine the total cost of using the equipment, all components of ownership costs (like depreciation, taxes, insurance) and operating costs (like fuel, repairs) are summed up. Additionally, wages paid to operators also need to be included to get a complete picture of what it costs to operate the equipment in any construction project.

Consider a bakery that includes all its ingredient costs (flour, sugar, eggs), electricity costs (the oven), and staff wages in their total operational costs. Similarly, in construction, it's essential to include every cost associated with owning and operating equipment to ensure accurate financial planning for the project.

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