Question
Explain the step wise procedure for calculating the costs for hourly owning, operating and mobilsation of heavy construction equipment. Compare investment factoring method and depreciation factoring method. As a project manager, when will you opt for owning an equipment vs renting an equipment?
Answer :
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Skip in 10
The calculation of hourly owning, operating and mobilisation costs of heavy construction equipment is an important part of construction equipment management. A project manager must determine the actual hourly cost of equipment before deciding whether a machine should be purchased, hired or subcontracted. The total cost generally consists of owning cost, operating cost and mobilisation or transportation cost. The first step is to identify the equipment and collect its basic technical and financial information. The required information includes the purchase price, estimated useful life, salvage value, annual or total expected working hours, fuel consumption, lubrication requirements, operator requirements, tyre or undercarriage life, repair and maintenance costs, insurance, taxes and transportation requirements. Manufacturer specifications and previous project records can be used for estimating these values. The second step is to determine the initial investment in the equipment. The initial investment normally includes the purchase price of the machine, freight, taxes, duties, accessories, attachments and other costs necessary to place the equipment in working condition. If the equipment is purchased for ₹50 lakh and additional costs for transportation, installation and accessories are ₹5 lakh, the initial investment becomes ₹55 lakh. The third step is to calculate the annual or hourly depreciation cost. Depreciation represents the reduction in the value of the equipment due to age, use and obsolescence. Under the straight-line method, annual depreciation is calculated as: Annual Depreciation = (Initial Cost − Salvage Value) / Useful Life The hourly depreciation cost is then obtained by dividing annual depreciation by the expected annual working hours: Hourly Depreciation = Annual Depreciation / Annual Working Hours For example, if equipment costs ₹55 lakh, has a salvage value of ₹10 lakh, a useful life of 10 years and is expected to work 2,000 hours per year, annual depreciation is ₹4.5 lakh and hourly depreciation is ₹225. The fourth step is to
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