# Tools & Equipment Estimating Guide

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.

## Tools

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.

### Process for Estimating Tools

1. Record all tool purchases.
2. Calculate the Annual Tool/Wage Ratio
• Annual Tool Cost ($) / Annual Payroll ($)
1. Calculate Project Cost of Tools
• Total Project Labor Cost x Annual Tool/Wage Ratio

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## Equipment

### What is Equipment?

Equipment includes light and heavy construction vehicles, special equipment, etc.

• Work Truck
• Backhoe
• Compactor
• Scissor Lift

### How is Equipment Acquired for Use in Construction Projects?

There are three options for accessing equipment for construction work.

• Renting
• Leasing
• Ownership

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## Equipment Rental and Leasing

### Equipment Rental

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:

• Hourly
• Half Day
• Day
• Week
• Month

### Equipment Leasing

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.

• The company pays no capital equipment expenses
• The equipment cost is expensed rather than depreciated
• The company Increases its bonding capacity
• The company always uses newer, more current equipment

• The company makes monthly lease payments for a specified contract period
• Lease payments are more expensive than loan payments
• Upon completion of the leasing period, the company does not own the equipment

### How Rental Equipment Costs are Estimated

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.

#### Example

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:

• $50.00 per hour •$150.00 per half day

• Purchase Price = $40,000.00 • Interest Rate = 10% (or .10) • Life of Loan = 5 years 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. #### Yearly Interest Cost Calculating the annual interest cost of equipment purchases uses the following components and formula: • Total Interest Cost (over the life of the loan) • Life of Loan 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. • Total Interest Cost =$10,000.00
• Life of Loan = 5 years

10,000 ÷ 5

or

2,000

2,000 ÷ 12

or

166.67

In this example, the approximate monthly interest cost of the skidsteer is $166.67. #### Hourly Interest Cost Calculating the hourly interest cost of equipment purchases requires you to calculate monthly work hours. Monthly work hours is calculated as follows: • Number hours per year 2080 • 75% usage factor (the number of total monthly work hours the equipment is used) = 1560 hours per year • 1560 ÷ 12 months = 130 hrs/month Calculating the hourly interest cost of equipment purchases uses the following components and formula: • Monthly Interest Cost • Monthly Work Hours 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. • Monthly Interest Cost =$166.67
• Monthly Work Hours = 130 hours

166.67 ÷ 130

or

1.28

In this example, the approximate hourly interest cost of the skidsteer is $1.28. Back to the Top ### Calculating Depreciation 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. #### Yearly Depreciation Calculation Estimating the depreciation of equipment uses the following components and formula: • Purchase Price • Scrap Value • Number of Years of Useful Life (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. • Purchase Price =$40,000
• Scrap Value = $10,000 • Number of Years of Useful Life = 5 years (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.

#### Monthly Depreciation Calculation

Estimating the depreciation of equipment uses the following components and formula:

• Yearly Depreciation

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.

• Yearly Depreciation = $6,000 6,000 ÷ 12 or 500 In this example, the approximate monthly depreciation of the skidsteer is$500.

#### Hourly Depreciation Calculation

Estimating the hourly depreciation of equipment requires you to calculate monthly work hours. Monthly work hours is calculated as follows:

• Number hours per year 2080
• 75% usage factor (the number of total monthly work hours the equipment is used) = 1560 hours per year
• 1560 ÷ 12 months = 130 hrs/month

Estimating the depreciation of equipment uses the following components and formula:

• Monthly Depreciation
• Monthly Work Hours

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.

• Monthly Depreciation = $500 • Monthly Work Hours = 130 hours 500 ÷ 130 or 3.85 In this example, the approximate hourly depreciation of the skidsteer is$3.85.

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### Calculating Taxes, Insurance, and Storage

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

#### Yearly Taxes, Insurance and Storage

Calculating the yearly tax, insurance, and storage cost of equipment requires following components and formula:

• Yearly Tax
• Yearly Insurance
• Yearly Storage

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.

• Yearly Taxes on the Skidsteer = $350 • Yearly Insurance for the Skidsteer =$2,000
• Monthly Storage for the Skidsteer = $100 350 + 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.

#### Monthly Taxes, Insurance and Storage

Calculating the monthly tax, insurance, and storage cost of equipment requires following components and formula:

• Yearly Tax
• Yearly Insurance
• Yearly Storage

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.

• Yearly Taxes on the Skidsteer = $350 • Yearly Insurance for the Skidsteer =$2,000
• Monthly Storage for the Skidsteer = $100 350 + 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.

#### Hourly Taxes, Insurance and Storage

Calculating the hourly tax, insurance, and storage cost of equipment requires following components and formula:

• Monthly Cost Items
• Monthly Work Hours

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.

• Monthly Cost Items = $295.83 • Monthly Work Hours = 130 hrs 295.83 ÷ 130 or 2.28 In this example, the hourly cost items of the skidsteer total$2.28.

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### Estimating Operating Costs

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:

• The Cost of the Wear Item
• The Life of the Wear Item (in hours)

Cost ÷ Life in Hours

#### Tire Cost Example

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. • The Cost of Tires =$3,000
• Life of the Tires = 4,000 hrs

3,000 ÷ 4,000

or

.75

In this example, the hourly operating cost of tires for the skidsteer $.75. #### Fuel Cost Example 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.

• The Cost of Fuel = $3.00 per gallon x 6 gallons per hour =$18.00
• Life of the Fuel = 1 hrs

18 ÷ 1

or

18

In this example, the hourly operating cost of fuel for the skidsteer is $18. #### Lubrication Cost Example 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. • The Cost of Fuel =$60 (labor) + 4 x $2.50 (lubricant) =$70.00
• Life of the Lubricant = 150 hrs

70 ÷ 150

or

.47

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