How to Calculate Equipment Use Cost

Key ways to calculate your equipment cost and how to use that information to be more effective in your project bids.

How to Calculate Equipment Use Cost
A better understanding of your equipment costs can better inform your overall bidding process.
Adobe Stock Images | By Wisut

One of the most important and challenging aspects of the bidding process is including the cost of machine usage. Many construction companies struggle to determine whether they should be including just the hourly rate of the operator(s), the equipment’s average cost over the time frame of the project, or some combination of these factors. The true cost of equipment usage in construction projects is likely higher than many construction bids would suggest.

Consider the below to better understand the keys to equipment cost. You can then better inform your overall bidding process and reap the benefits of bidding with better information.

Equipment Cost

This may seem obvious, but it’s important to not skip any portion of the important information surrounding equipment use cost calculations. There are a couple of different ways to calculate equipment operation costs, but the most common criteria are fixed and variable costs.

Fixed costs include the purchase cost of the equipment and the annual depreciation. These are important figures to understand for more than just the bidding process, as the balance sheet of any construction company should include a detailed breakdown of equipment depreciation.

Your variable costs might be more obvious and include the maintenance costs and the hourly cost of operating the equipment. That may include gasoline, diesel, or electricity costs as well. If you’re not including these costs when calculating bids, you might be spending more on each project than you thought you would. Also, if any portion of the equipment includes other consumables, like welding rods, you should consider those costs as well.

Preventative Maintenance Costs

The importance of maintenance should be above any other portion of the equipment-use-costing analysis.  "Band-Aid" or reactive maintenance where the contractor fixes problems with construction equipment as they occur is not consistent with best practices. Instead, we propose is proactive maintenance. Where "Band-Aid" maintenance is reactive, proactive maintenance can address equipment concerns before they happen.

Now, this isn’t as obvious as reactive maintenance; reactive maintenance is usually fairly straightforward by fixing machines when they break down. Proactive maintenance requires you to know about your machines and the best maintenance schedules for them, as well as having staff trained to not only undertake this maintenance but to recognize the signs of unforeseen issues with equipment operation as they happen.

Your maintenance costs should definitely be included in your bidding process. They are an often overlooked portion of equipment usage costing.

Without effective maintenance, you could run into unexpected downtimeone of the worst enemies of construction projects. If an important machine breaks down at a crucial point, costs and scheduling could quickly get out of hand.

Labor Costs

The labor costs associated with equipment operation are another area where you need to focus your attention. It’s not hard to calculate the average hours of operation for the equipment in question, and then apply the operator’s hourly wage to calculate the total labor cost. There may be other types of labor costs that should be considered.

Training is the first of these areas and is very important. Proper training pairs very well with your effort towards preventative maintenance and well-trained operators can adapt on the fly to new challenges. For these reasons, you should make sure you are training your machine operators to be effective parts of the big picture. During the bidding process, include the cost of your operators and the value their effective training brings to the project.

Problems with equipment can arise if training is neglected, setting back the project. This can cost you more in the long run than the initial cost of effective training would be.

Rentals vs Ownership

Renting or owning equipment can have a significant impact on the bidding process. The cost of ad hoc rentals should be simple enough to include in a bid, as they’re easy enough to calculate. If you’re renting or leasing equipment long-term, you should be including them in the bidding process as though you own the equipment. This can be done by the method described above, and should also be reasonably straightforward.

Any equipment that’s owned by the organization should be costed into the bidding process based on usage, labor costs, consumables, and fixed cost. 

How to Include this Information in the Bidding Process

Knowing all of these calculations, we can start to formulate an effective bidding strategy. When beginning the bidding process, one of the first questions you should consider includes knowing which equipment will be required for the project. This is only the first step in a holistic approach to bidding based on the total costs of the equipment usage.

One of the great benefits of this approach is that over time you will get a firmer understanding of the true operating costs of your equipment, and the return on investment of your equipment purchases and rentals. It may seem like a lot of extra work at first, but after one, five, or ten years of owning the equipment you will begin to see the true costs associated with this aspect of your business. In turn, you will then be able to be even more effective in the bidding process. 

About the Author

Lauren Lake is the COO and co-founder of Bridgit. Lake has been highlighted on several lists of top entrepreneurs in the industry, including the Forbes Manufacturing & Industry 30 Under 30.