Equipment pricing: owning, operating and rental costs

Excavators, loaders, cranes, compactors, lifts, pumps and heaters do much of the heavy work on a construction site. Their cost can be a large share of an item's price, especially in earthwork, where equipment often costs more than labour and materials combined. Estimators price equipment by the hour, day, week or month, and they decide whether to use the firm's own fleet, rent from a dealer or leave the equipment to a subcontractor. This lesson explains how hourly equipment rates are built, how rental and ownership compare, and how equipment production rates turn into unit prices.

Owning and operating costs

An owned machine costs money whether it works or sits in the yard, and it costs more money every hour it runs. Estimators therefore divide equipment cost into two groups.

• Ownership costs: depreciation, interest on the money invested, insurance, licences and property taxes, and storage. They accrue with time, whether or not the machine works.
• Operating costs: fuel, lubricants and filters, repairs and maintenance, tires or undercarriage wear, and wear parts such as bucket teeth and cutting edges. They accrue with each hour of use.

The operator is usually priced separately as labour, using the loaded rate of an operating engineer, because the same operator may run several machines and because collective agreements and prevailing wage rules set operator wages. Some rental rates include an operator; the estimator must check.

The result is very sensitive to utilization. If the backhoe worked only 600 hours a year instead of 1,000, the interest, insurance and tax cost per hour would rise from $13.80 to $23.00, and if its life in hours fell, depreciation per hour would rise too. Idle equipment is expensive, which is why contractors watch fleet utilization closely and rent rather than buy machines they need only occasionally.

Published rates and company rates

Contractors price their own fleet with internal rates calculated as above and updated each year from the equipment accounting records. For work on public projects and for pricing changes, owners and contractors often refer to published rate guides. In Canada, provincial road builders' and heavy construction associations publish equipment rental rate guides, some ministries of transportation publish rates for changes and force account work, and the Blue Book used in the United States is also referenced by some Canadian owners.

Published rates are useful as a check and as a contractual basis for changes, but a bid should be priced with the rates the firm actually experiences, because the purpose of a bid is to forecast the firm's own costs. A firm whose fleet is older, newer or better maintained than average has real costs that differ from published averages.

Renting versus owning

Contractors rent equipment for many reasons: to avoid tying up capital, to get specialized machines for a short period, to avoid maintenance and storage, and to match the fleet to fluctuating workload. Rental rates are quoted by the day, week or month, with the weekly rate typically about three to four times the daily rate and the monthly rate about three times the weekly rate. Rental usually covers ownership and major repairs; the renter pays fuel, daily maintenance, damage beyond normal wear, delivery and pickup, and often a damage waiver or proof of insurance.

Whether to rent or own depends on how many hours per year the firm will use the machine. Ownership has high fixed costs but lower hourly costs; rental has no fixed cost but a higher rate per hour used. The break-even point is where the two annual costs are equal.

Equipment production rates

To price an item, the estimator needs the equipment cost per unit of work, which requires the machine's production rate. For cyclic machines such as excavators and loaders, production per hour is the output of one cycle multiplied by the number of cycles per hour, reduced for the fact that machines do not work every minute of every hour.

• Bucket capacity: the rated heaped capacity of the bucket.
• Fill factor: the share of rated capacity actually carried, which depends on the soil; loose sand fills well, while blasted rock and sticky clay fill poorly.
• Cycle time: the time to dig, swing, dump and return, which depends on depth, swing angle and where the material is dumped.
• Job efficiency: working minutes per hour, often 45 to 50, to allow for operator breaks, waiting for trucks, moving the machine and small delays.

Production is only as fast as the slowest part of the system. An excavator loading trucks can only work as fast as trucks arrive; if there are too few trucks, the excavator waits, and if there are too many, trucks queue. Estimators balance the fleet by calculating truck cycle time, including loading, travel, dumping and return, and providing enough trucks to keep the loader busy. Lesson 7 returns to earthwork quantities and truck counts.

Small tools, mobilization and standby

Not every piece of equipment is priced by the hour. Small tools such as saws, drills, vibrators and levels are usually priced as a percentage of labour cost, often 2 to 5 %, because tracking them individually is not worth the effort. Mobilization and demobilization, the cost of moving equipment to and from the site with low-bed trailers, permits and set-up, is priced as a lump sum for each machine or for the job. Cranes have their own mobilization costs, including counterweight trucks and assembly crews, which can exceed a day's operating cost.

Standby or idle time is a further consideration. If a machine must be kept on site while waiting for other work, its ownership cost continues even though operating costs stop. Contracts often specify standby rates for changes, commonly a percentage of the ownership rate, and estimators should consider whether the planned sequence will leave expensive equipment idle.

• Price the operator as labour at the loaded rate, separately from the machine, unless the rate includes an operator.
• Include fuel unless the rental or subcontract provides it.
• Add delivery, pickup and set-up for each rented machine.
• Check whether heaters, pumps and generators run around the clock, which multiplies hours and fuel.
• Allow for winter equipment such as ground thaw units, hoarding heaters and snow removal where the schedule requires them.