2.1. Equipment Must Pay for Itself

The first point to be kept in mind is equipment must pay for itself. So what I mean by that is generally we have invested a huge amount of money in the equipment, there are a lot of costs invested in the equipment. So everyone knows about the purchase cost associated with the machine other than that there are components of ownership cost also like your depreciation cost, cost of investment, say for example, if you are going to procure the equipment through a loan, you may be paying interest for the loan that is the cost of investment.

This chunk emphasizes that heavy investments in equipment need to be justified by ensuring the equipment generates enough profit to cover its costs. Not just the initial purchase price but also ongoing costs such as depreciation (the loss of value over time), loan interest, insurance, and taxes must be considered. If the equipment cannot pay for itself through its usage, it can negatively impact the overall project budget.

Consider a pizza restaurant that purchases a new pizza oven for $20,000. Aside from the oven's price, they have to consider additional costs like maintenance, the utility bills for running the oven, and insurance. If the oven allows them to make more pizzas and generate more profit, it will pay for itself over time. However, if they can’t sell enough pizzas due to its high running cost, the investment wouldn't be justified.

Similarly, your equipment is an asset so you have to pay the property taxes for the equipment so that is a part of ownership costs. Similarly, you have to pay the insurance premium to protect the owner of the equipment from the loss of theft or fire or due to accident. So the insurance premium whatever we pay, it forms a part of your ownership cost, then the storage cost of equipment, then the other operating costs, like your fuel costs, lubricating oil costs, filter cost and the wages to pay for the operator, maintenance and the repair cost and the cost of mobilization of the equipment to the project site.

This part highlights the variety of ownership costs associated with equipment that owners should consider. In addition to purchase costs, there are ongoing costs like taxes, insurance, fuel, maintenance, and wages for operators. Each of these costs accumulates over time and must be factored into the decision-making process regarding whether or not to purchase or retain equipment.

Imagine buying a car. You not only paid for it, but you'll also need to pay for insurance, registration, maintenance, and gas. Similarly, for construction equipment, every cost must be accounted for to truly understand the financial burden of ownership. Just like a car that costs a monthly amount to keep it functioning, every piece of construction equipment has its ongoing expenses.

So, you should understand that there are a lot of costs involved in the machine. So, how to estimate all these costs we are going to discuss in the upcoming lectures. So, there are many lecture hours dedicated, how to estimate the costs associated with the machine there I will give you in depth information on the estimation part. So, as of now, what we need to know is since a lot of cost is invested in the machine. The equipment must be engaged productively in the construction project site and you should be able to generate profit out of that.

Here, the emphasis is on the importance of not just owning equipment, but using it effectively to generate profit. If equipment sits idle too often, it won't pay off the costs associated with it. The upcoming lectures promise a deeper dive into estimating these costs to ensure effective utilization and profitability of equipment in projects.

Think of investing in a gym membership. If you pay a monthly fee but only go once a month, you're not getting your money's worth. Conversely, if you go regularly and take full advantage of the facilities, the membership pays off in terms of your health and fitness. The same principle applies to construction equipment; using it frequently and efficiently transforms it into a valuable asset.

Another point to be kept in mind is in some cases the value of the equipment may be greater than the contract value that means, there are some high end equipments like say tunnel boring machine it may cost so many hundreds or crores. Similarly, cranes of heavy lifting capacity like 2000 tons lifting capacity crane. So, they are all high end machines in this particular case, there are chances that the value of equipment may be greater than the contract value.

This chunk discusses the scenario where the value of specific types of equipment exceeds the total contract value of projects they are used for, which leads to considerations about how to recover that investment through multiple projects. This involves strategic planning on whether adequate work in the future can justify the purchase of such costly machinery.

Imagine purchasing a luxury yacht that costs a million dollars but only getting one small contract that’s perhaps worth $500,000. To make your investment worthwhile, you would need to find multiple contracts or frequent use cases for the yacht, otherwise you're at a loss. This is similar to considering high-end construction equipment, which needs to be appropriately justified in terms of future project opportunities.

And another general point to be kept in mind is, it is not everyone then it is not possible for a contractor to own all the types and all the sizes of equipment. Say for example, if we take an excavator, there are different bucket capacities of excavators, so, it is not possible for the contractor to have all the bucket capacities models in the project site.

This section emphasizes that it isn’t practical for contractors to own every type and size of equipment they might need. They often focus on purchasing equipment that is most likely to be utilized frequently based on their past experiences, and rent other specialized equipment only when necessary.

Just like a chef may own essential tools for their daily cooking, like a knife and frying pan, but would rent a pizza oven for special occasions rather than purchase it outright, construction contractors apply the same logic when deciding between buying and renting equipment.

So, these are the general questions to be asked before planning for a purchase of any machine. Whether your project size justifies purchasing of the machine? It is a very important question because whatever equipment you buy; the size of the equipment should fit into the size of your project that is the equipment cost should be fitting into the project cost.

Prior to purchasing equipment, contractors need to ask crucial questions about justification based on project size and cost. Purchasing a large, expensive work excavator for a small project wouldn't make sense financially nor operationally. Matching the size and capacity of the equipment with the project’s needs is vital for cost efficiency.

Similar to outfitting a small kitchen for a home cook with a commercial-grade oven, you’d waste resources and space on something that exceeds your immediate needs. A contractor must consider if the equipment will realistically meet the project scale without overspending.

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