Equipment expenses constitute a significant part of construction costs. It is important to accurately quantify and price them when preparing an estimate for a job to ensure that the bid is both competitive and profitable.
In this post, we will discuss how the equipment expenses can be calculated and presented in an estimate. We will also take a look at the process from two different points of view – as a general contractor, and from a trade contractor’s perspective.
A general contractor is an individual or company who manages a construction project and is responsible to the client for the overall success of the enterprise.
General contractors, at least for the purpose of this article, do not perform construction activities themselves. Instead, they hire specialised subcontractors (trade contractors), such as concreters, plumbers and carpenters overseeing their progress and accepting their work.
In most cases, the answer to the question of how the general contractor estimates equipment expenses is quite simple – he doesn’t. General contractors do not own or hire construction equipment; this becomes the purview of trade contractors who are providing the labour.
When a general contractor prepares an estimate, they use their subcontractors’ rates. These rates include equipment costs. As long as the total rate is acceptable, the general contractor doesn’t need to be involved in the development of the component costs.
Yet in some cases, to make the bid more appealing for a prospective client, a general contractor may choose to delineate the otherwise composite rate provided by a subcontractor into labour, materials and/or equipment with a separate line item for each component. Furthermore, they can have a bit of a play with the numbers to add extra gloss. This approach has little estimating value and is more of a sales exercise.
Earlier, to keep things simple, we said that general contractors do not perform any labour themselves. In practice, they still do it sometimes. In this situation, whatever we say about trade contractors in the following sections of the post will apply to the items representing the work performed by the general contractor him or herself using their own trades.
Although the practice of buying and maintaining tools specific to unrelated trades is still common and widespread, the trend is to be free of this logistical and financial burden.
Trade Contractors perform specialised tasks, such as landscaping or masonry. They are the people who do the actual work. In this section we will discuss how trade contractors usually calculate their equipment costs. As mentioned previously, this information will also apply to a general contractor involved in providing direct labour and associated equipment.
There are two ways of designating the equipment costs in an estimate – it can either be simply included in the company’s general overhead or its cost can be represented when pricing individual line items.
Equipment as Part of General Overhead
The cost of small tools and inexpensive consumables, such as saw blades, can be included in the contractor’s general overhead. General overhead is a percentage that is added to the overall job total to cover all additional expenses, such as administrative and office costs.
There is no universally practised method of deciding whether a particular tool should be included in general overhead. Many companies will define a threshold, e.g. $1,000.00, below which the tool is a general expense.
Including equipment in General Overhead bears a higher risk of under- or over-estimating expenses compared to the more formal method described in the next section. That’s why the smaller the contractor, the less margin for error they can afford, and the lower the threshold of equipment expenses in general overhead is going to be. On the other hand, bigger companies are expected to have higher General Overhead and can safely include more expensive tools in it.
Accepted local building practices define an expected General Overhead percentage for companies of different sizes. For instance, General Overhead for small builders in the US is around 7.5%.
Making the general overhead lower makes the bid somewhat more attractive, but if it is too small for a company of a given size, this may raise doubts as to whether the company is actually capable of reliably delivering on the contract. Subcontractors with underestimated overhead are likely to have problems with staying on schedule and within budget.
Calculating Equipment Costs
If the equipment was not included in the general overhead, its cost needs to be estimated in a more formal way. Here we will discuss how to find the rate for a tool and how to apply it in a job estimate.
It is much easier to price equipment when it is rented because the rate is already known.
Things are getting more interesting if the tool or machine is owned by the builder. In that case, the rate will include depreciation, maintenance, fuel and lubrication expenses, taxes, as well as insurance, storage and financing costs.
First, we will need to work out the depreciation rate for the item. There are different models of depreciation, but for the purpose of pricing, the only practical method is the Straight-Line Method because it gives us a depreciation rate that does not change over the lifetime of the asset. To calculate it, we need to divide the difference between the purchase and sale price of the tool by the amount of time that we are going to keep it. For instance, if we are buying a plate compactor for $1,500.00 with the intention to sell it for $750.00 after 5 years, the annual depreciation will be ($1,500.00 – $750.00)/2 = $150.00.
Maintenance and repairs can be a fixed annual figure or a percentage of the depreciation.
Let’s assume that the maintenance for the above-mentioned plate compactor is 80%. Then the annual maintenance cost of the unit is $120.00.
Fuel and Lubrication
Depending on the equipment, fuel consumption can be expressed in litres (gallons) per hour or litres per 100 km (miles per gallon). If oil is also constantly consumed, e.g. as in a 2-stroke engine, the associated costs need to accounted for as well.
The consumption figures can be found in the factory manual or by field observations. The former are easier to obtains, whereas the latter will be more accurate.
If the fuel consumption for the plate compactor is 1.5l/h, and the hourly cost is 1.5l * $1.2/l = $1.8/h.
If the fuel consumption is relatively small, it can be included in General Overhead instead of the equipment rate.
Taxes, such as car registration fee, add up to the cost.
Financing, Storage and Insurance
In most cases, to calculate financing, storage and insurance costs, first we will need to find the Average Annual Investment, which is the average value of the asset during its life cycle:
Average Annual Investment = (Purchase Price + Sale Price) / 2.
The Average Annual Investment for the compactor will be ($1,500.00+$750.00)/2 = $1,125.00
The annual financing expenses are calculated as Average Annual Investment x Interest Rate. This applies even if the builder purchased the equipment using their own funds. In this case, the additional cost comes from the fact that the money invested in the plant could otherwise have been lent to generate interest income.
The Interest Rate in the above formula is the annual interest charged or paid by the financial institution, depending on whether the money was borrowed or could have otherwise been invested.
Storage expenses and insurance premiums can be either well defined (e.g. parking fees) or calculated as percentage of the Average Annual Investment.
Let’s assume that the Interest Rate is 10%, we are insuring our compactor at 1.5% of its current price, and the storage expenses will be 4% of the Average Annual Investment. Then the cost of financing, storage and insurance is $1,125.00 x (10% + 1.5% + 4%) = $174.38.
Converting annual figures to hourly rates
As we can see above, some expenses, such as maintenance, make sense only as an annual figure. Simply dividing it by 365 and then by the number of working hours won’t take us anywhere because the tools are not used all the time.
To arrive on an hourly rate, we need to make some observations, or, at least, assumptions, as to how many hours per day, week or month the tool is used, and then reflect this in the calculations.
We know that on average the compactor will be used 8 hours per week. That is 53 weeks/year * 8 h/week = ~420 h/year.
Calculating Hourly Rate
Now, to calculate the total rate, we will add up all rate components converting the annual ones to hourly where required:
Rate = ($150.00/year + $120.00/year + $174.38/year) / 420 hours/year + $1.8/h = $2.86/hour.
Although we went into all the trouble of calculating the annual cost of the equipment, more often than not, this figure can be obtained from the accountant who, being a specialist in the field, can capture more details and predict it with higher accuracy.
Equipment COSTS in an Estimate
Now, when we have calculated the rate for equipment, we can use it in an estimate.
When equipment, such as temporary fencing, scaffolding, portable toilets or heaters, is kept on-site for an extended period of time and is not used for a particular trade, it will appear in the estimate as an individual line item. To calculate the total cost for the item, we will need to multiply the daily, weekly or monthly rate by the time that the equipment is going to be used. We may also need to multiply the result by length for scaffolding and temporary fencing, which are, in addition to time, priced by metres or feet.
However, wherever possible, instead of adding a separate line for equipment along with labour and materials, we should try to calculate a composite rate for the provided service and use it in all similar estimates and quotes. This rate will be applied per unit of length, area or volume.
For instance, if a paint sprayer costs $4/h, we should not price the sprayer, labour and undercoat separately. Instead, knowing how long it takes to spray one square metre and how much undercoat will be used, we can calculate a composite rate for applying undercoat per square metre. If the labour is $50/h, the undercoat coverage and price are is 0.1 l/m2 and $20/l respectively, and the painter’s performance is 100 square meters per hour, the composite rate will be 1/100 h/m2 x $50/h + 1/100 h/m2 x $4/h + 0.1 l/m2 x $20/l = $2.54/m2.
To apply the composite rate in an estimate, we simply need to multiply it by the physical dimensions of the job: 100 m2 x $2.54/m2 = $254.00.
and then apply the composite rate to a take-off quantity:
Similar to the General Contractor’s bids, elegant and efficient estimating may not be the only consideration when a Subcontractor prepares an estimate. To make it more attractive, he or she can separate labour, materials and equipment, although this is, by all means, not the best practice estimating-wise.