This document provides explanations and examples for how to account for the acquisition of tools and equipment, and how calculate the use cost of tools and equipment in specific construction projects.
Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. (IRS Publication 535).
Annual Tool/Wage Ratio is a number used to define how much is spent on tools compared to how much is spent on labor. Because the number is expressed as a percentage, it can then be used as a guideline to estimate the tool cost for an individual project. It is calculated as the Annual Tool Cost divided by the Annual Payroll.
Project Cost of Tools is calculated as Total Project Labor Cost times Annual Tool/Wage Ratio.
Total Annual Payroll (wages) | $175,000 |
Annual Tool Purchases (Value) | $5,000 |
Total Labor Cost for Project | $35,000 |
Annual Tool/Wage Ratio | 5,000 / 175,000 = .0285 = 2.85% |
Project Cost of Tools | $35,000 x .0285 = $997.00 |
Supplies are items not listed in quantity takeoff, but used in the completion of a project. They may include:
Annual Supply/Wage Ratio is a number used to define how much is spent on supplies compared to how much is spent on labor. Because the number is expressed as a percentage, it can then be used as a guideline to estimate the supply cost for an individual project. It is calculated as the Annual Supply Cost divided by the Annual Payroll.
Project Cost of Supplies is calculated as Total Project Labor Cost times Annual Supply/Wage Ratio.
Total Annual Payroll (wages) | $175,000 |
Annual Supply Purchases (Value) | $3,200 |
Total Labor Cost for Project | $35,000 |
Annual Supply/Wage Ratio | 3,200 / 175,000 = .0183 = 1.83% |
Project Cost of Supplies | $35,000 x .0183 = $640.50 |
Equipment includes light and heavy construction vehicles, special equipment, etc.
There are three options for accessing equipment for construction work.
In this scenario, the equipment is owned by a rental company, and the construction company pays them for the temporary use of the equipment.
Rented Time Periods are the units by which the use of the equipment is measured. The rental company will provide rates that the construction company must pay per rented time period.
Examples of Rented Time Periods include:
In this scenario, the equipment is owned by a manufacturer or dealership, and the construction company pays them for the long-term use of the equipment as if they were the owner for a defined period of time. The only meaningful difference between renting and leasing is that leasing is used for time periods beyond one year.
Cost per Rented Time Period is how much the rental company charges per Rented Time Period.
Length of Time Needed is the length of time the construction company plans to use the rented equipment, expressed in Rented Time Period units.
A construction company requires a backhoe for 6 hours of work. They do not own a backhoe, so they must rent or lease one. The scope of work does not merit leasing, so they choose to rent the equipment from a rental company.
The rental company provides the following cost schedule per rented time period for backhoes:
The job scope calls for 6 hours of backhoe usage. Based on the rental company’s cost schedule, which option is the most economical for the construction company?
Renting the backhoe for a full day is the most economical choice for the construction company.
In this scenario, the equipment is purchased and owned by the construction company, often with a loan from a bank or other financial institution.
There are two categories of costs associated with purchasing and owning equipment, ownership costs and operating costs.
These costs are incurred by the equipment owner regardless of whether the equipment is actually used.
There are multiple ways to calculate interest costs. Each of the following methods have specific applications, and not all are exact figures.
One easy way to approximately calculate interest costs uses the following components and formula:
Purchase Price X Interest Rate X Life of Loan ÷ 2
Example
A construction company purchases a skidsteer for $40,000. Before deciding how much of the purchase price will be covered by the company’s cash, and how much will be covered by a loan, they apply the above formula to get a rough idea of how much interest they will be paying.
40,000 x .10 x 5 ÷ 2
or
4,000 x 5 ÷ 2
or
20,000 ÷ 2
or
10,000
In this example, the approximate interest cost for purchasing a $40,000 skidsteer will be $10,000.
Calculating the annual interest cost of equipment purchases uses the following components and formula:
Total Interest Cost ÷ Life of Loan
Example
A construction company purchases a work skidsteer for $40,000. The approximate total interest cost is $10,000. To estimate the cost of interest for the skidsteer for a specific fiscal year, they apply the above formula.
10,000 ÷ 5
or
2,000
In this example, the approximate yearly interest cost of the skidsteer is $2,000.
Calculating the monthly interest cost of equipment purchases uses the following components and formula:
Yearly Interest Cost ÷ 12
Example
A construction company purchases a work skidsteer for $40,000. The approximate yearly interest cost is $2,000. To estimate the cost of interest for the skidsteer for a single month of ownership, they apply the above formula.
2,000 ÷ 12
or
166.67
In this example, the approximate monthly interest cost of the skidsteer is $166.67.
Calculating the hourly interest cost of equipment purchases requires you to calculate monthly work hours. Monthly work hours is calculated as follows:
Calculating the hourly interest cost of equipment purchases uses the following components and formula:
Monthly Interest Cost ÷ Monthly Work Hours
Example
A construction company purchases a skidsteer for $40,000. The approximate monthly interest cost is $166.67. To estimate the cost of interest for the skidsteer per hour of use, they apply the above formula.
166.67 ÷ 130
or
1.28
In this example, the approximate hourly interest cost of the skidsteer is $1.28.
Depreciation is the reduced value of a piece of equipment over the time of ownership. Used equipment can be purchased more cheaply than new equipment due to depreciation.
Estimating the depreciation of equipment uses the following components and formula:
(Purchase Price - Scrap Value) ÷ Number of Years of Useful Life
Example
A construction company purchases a skidsteer for $40,000. The scrap value is estimated at $10,000. Its useful life is listed at 5 years. To estimate the yearly depreciation of the skidsteer, they apply the above formula.
(40,000 - 10,000) ÷ 5
or
30,000 ÷ 5
or
6,000
In this example, the approximate yearly depreciation of the skidsteer is $6,000.
Estimating the depreciation of equipment uses the following components and formula:
Yearly Depreciation ÷ 12
Example
A construction company purchases a skidsteer for $40,000. The yearly depreciation is estimated to be $6,000. To estimate the monthly depreciation of the skidsteer, they apply the above formula.
6,000 ÷ 12
or
500
In this example, the approximate monthly depreciation of the skidsteer is $500.
Estimating the hourly depreciation of equipment requires you to calculate monthly work hours. Monthly work hours is calculated as follows:
Estimating the depreciation of equipment uses the following components and formula:
Monthly Depreciation ÷ Monthly Work Hours
Example
A construction company purchases a skidsteer for $40,000. The monthly depreciation is estimated to be $500. To estimate the hourly depreciation of the skidsteer, they apply the above formula.
500 ÷ 130
or
3.85
In this example, the approximate hourly depreciation of the skidsteer is $3.85.
Taxes, insurance, and storage are all cost items related to owning equipment. Calculating how these cost items factor into individual project estimating requires a simple formula.
Annual Cost Items ÷ Number of Hours of Usage
Calculating the yearly tax, insurance, and storage cost of equipment requires following components and formula:
Yearly Tax + Yearly Insurance + Yearly Storage
Example
A construction company owns a skidsteer. The cost items for taxes, insurance, and storage or listed below. To calculate the annual cost items, they apply the above formula.
350 + 2,000 + (100 x 12)
or
350 + 2,000 + 1,200
or
3,550
In this example, the yearly cost items of the skidsteer total $3,550.
Calculating the monthly tax, insurance, and storage cost of equipment requires following components and formula:
Yearly Tax + Yearly Insurance + Yearly Storage ÷ 12
Example
A construction company owns a skidsteer. The cost items for taxes, insurance, and storage or listed below. To calculate the monthly cost items, they apply the above formula.
350 + 2,000 + (100 x 12) ÷ 12
or
350 + 2,000 + 1,200 ÷ 12
or
3,550 ÷ 12
In this example, the monthly cost items of the skidsteer total $295.83.
Calculating the hourly tax, insurance, and storage cost of equipment requires following components and formula:
Monthly Cost Items ÷ Monthly Work Hours
Example
A construction company owns a skidsteer. The cost items for taxes, insurance, and storage or listed below. To calculate the monthly cost items, they apply the above formula.
295.83 ÷ 130
or
2.28
In this example, the hourly cost items of the skidsteer total $2.28.
Unlike ownership costs, which the equipment owner accrues whether they use the equipment or not, operating costs are expressed in hours of usage. Calculating the hourly operating costs of equipment requires following components and formula:
Cost ÷ Life in Hours
A construction company owns a skidsteer. New tires for the skidsteer cost $3,000 (installed), and they are rated for 4,000 hours of use.
3,000 ÷ 4,000
or
.75
In this example, the hourly operating cost of tires for the skidsteer $.75.
A construction company owns a skidsteer, which is rated at using 6 gallons of fuel per hour of operation. The cost of fuel is $3.00. In this specific example, you can adjust the cost and life of fuel so that both are expressed in hours.
18 ÷ 1
or
18
In this example, the hourly operating cost of fuel for the skidsteer is $18.
A construction company owns a skidsteer. The service manual calls for lubrication every 150 hours of operation. The cost of labor for lubrication is $60. The lubricant is $2.50 per quart, and the skidsteer requires 4 quarts.
70 ÷ 150
or
.47
In this example, the hourly operating cost of lubrication for the skidsteer is $.47.
To calculate the cost of equipment for an individual project requires the following components and formula:
(Hourly Ownership Cost + Hourly Operating Cost) x Total Equipment Operating Hours
A construction company has a project that requires the use of a skidsteer, which the company owns. This is all the information the estimator has related to the equipment and the project:
Ownership Costs | Hourly Interest Cost | $1.28 |
Hourly Depreciation Cost | $3.85 | |
Hourly Tax, Insurance, & Storage | $2.28 | |
Operation Costs | Hourly Wear Items Cost | $0.75 |
Hourly Fuel Cost | $18.00 | |
Hourly Maintenance Cost | $0.47 | |
Project Hours | Hours Using Equipment | 75 hrs |
(1.28 + 3.85 + 2.28 + .75 + 18 + .47) ÷ 75
or
26.63 ÷ 75
or
1,997.25
In this example, the estimate for the use of the skidsteer on this project is $1,997.25.
This content is provided to you freely by BYU-I Books.
Access it online or download it at https://books.byui.edu/construction_estimat/tools__equipment_est.