Determining the cost-per-hour for each piece of equipment or machinery that your company owns and uses on a job site is a great tool for understanding, and even eventually, recouping the actual cost of the machine itself. Once you have this information, you can improve the accuracy of your bidding, book equipment and machinery costs in your accounting software, and even identify ways in which you can maximize expenditures throughout the year.
Equipment and machinery cost-per-hour rates are calculated by adding together three distinct pieces of information:
- What it costs to own or lease (acquisition cost-per-hour)
- What it costs to maintain (maintenance cost-per-hour)
- What it costs to run operate it (running time fuel consumption cost-per-hour)
1. Calculating Acquisition cost-per-hour (ACPH)
Formula: Divide the total price paid (including interest paid) by the projected number of lifetime hours.
Example:
| 21” rotary mower purchase price: | $1,100.00 |
| Interest | none |
| Lifetime hours: | 750 hours (2.5 hours/day, 5 days week/30 weeks/year for 2 years) |
| Salvage value: | none |
Acquisition cost-per hour: $1,100.00 divided by 750 hours = $1.47 per hour
2. Calculating Maintenance cost-per-hour (MCPH)
Formula: Divide the estimated lifetime maintenance cost (repairs, parts, labor, blades, spark plugs, oil changes, filters, etc.) by the number of lifetime hours.
Example:
Lifetime maintenance cost: $600.00
Maintenance cost per hour: $600.00 divided by 750 hours = $0.80 per hour
3. Calculating Running-time Fuel Consumption cost-per-hour (RT/FC CPH)
Formula: Determine how long one gallon of fuel lasts for the piece of machinery. Divide the price per gallon of the fuel by the hours used each day.
Example:
Cost per gallon of fuel: $2.50
Running-time fuel consumption cost-per-hour: $2.50 divided by 2.5 hours = $1.00 per hour
| Total Cost-Per-Hour:$1.47 Acquisition cost-per-hour (ACPH)$0.80 Maintenance cost-per-hour (MCPH)
$1.00 Running-time Fuel consumption cost-per-hour (RT/FC CPH) $3.27 |
Let’s look at another example, this time determining the cost-per hour for a compact tractor.
| Purchase Price: | $23,000.00 |
| Interest: | $ 5,520.00 |
| Salvage Value: | $ 8,000.00 |
| Life Expectancy: | 3,000 hours (300 hours per year for 10 years) |
| Lifetime Maintenance Cost: | $18,000.00 |
| Fuel Price: | $2.50 per gallon |
| Fuel Used per hour: | 1.5 gallons |
Acquisition cost-per-hour (ACPH): ($23,000.00 + $5,520.00 – $8,000.00 = $20,520.00)
$20,520.00 divided by 3,000 hours = $6.84
Maintenance cost-per-hour (MCPH): $18,000.00 divided by 3,000 hours = $6.00
Running-time fuel cost-per-hour (RT/FC CPH): $2.50 divided by 1.5 hours = $1.67
Total Cost-Per-Hour: $6.84 + $6.00 + $1.67 = $14.51
| Notes: Your dealer should have data regarding estimated lifetime maintenance cost and fuel consumption. If you buy used equipment, cost it out using the “new” purchase price. The total cost-per-hour is usually the same for new and used equipment, and useful life, repair and maintenance costs, are easier to determine for new equipment. Using the new purchase price also automatically adjusts your rates for inflation and price increases.You can cost out leased machines using the same formulas and adjusting the life expectancy, lifetime maintenance and fuel price, to account for the shorter term.
To determine fuel cost, you can also fill up the tank and divide the fill-up price by the total running hours. Even if you prefer to base your estimates on a per-labor-hour rate, the Cost-Per-Hour method prevents you from understating or overstating the actual equipment cost for the job being bid. |
You can verify your Cost-Per-Hour figures in several ways:
- Compare your hourly rates to those of your local equipment rental company. Reduce their rental rates by 40-50% to remove their markups. Your rates should be reasonably close to theirs.
- Contact your local dealer to verify maintenance costs, production rates, fuel consumption, lifetime hours, etc.
- Contact your local Department of Transportation (DOT) office, they have manuals containing CPH data for maintenance, and will often share these figures with you for comparison purposes.
Ways in which you can reduce your Cost-Per-Hour figures:
- Take advantage of multi-unit discounts offered by some manufacturers.
- Check with your local dealer about new engine technologies.
- Use the CPH calculations to develop a better understanding of which piece(s) of equipment will lower your field operation costs over time.
You can also use the Equipment Cost-Per-Hour (ECPH) to develop a better understanding of which pieces of equipment, or brand, could actually lower your field operation costs over time. By matching up the purchase price of several different pieces of machinery against long-term variables, such as annual maintenance cost and serviceability, production rates, fuel costs, etc., the ECPH will help you to confirm the truth of you get what you pay for.
Armed with the knowledge of equipment cost-per-hour, bring this into your accounting program and job costing. This will help you to take the “guess-work” out of future bidding and increase your company’s bottom line.
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Realizing that these formulas are complex and time-consuming to perform; and the fact that given the current state of the economy, that it is extremely critical to be able to quickly and accurately, update these prices at a moment’s notice – we’ve developed an Excel spreadsheet that will allow you to quickly and easily update these figures.
Download our Equipment Cost Calculator at http://www.sunburstsoftwaresolutions.com/view-document-details/equipment-costs-calculator.htm.
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Once you know your Equipment Costs per hour, use QuickBooks to track these costs for job costing purposes by downloading our FREE 17-page eBook “Advanced Job Costing – Getting Equipment Costs into Job Costing” by clicking here. |
From the Hire Act of 2010 website
President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. This new $17.5 billion legislation (scaled down from an earlier $150 billion package) is of particular interest to businesses as it includes new tax benefits directly related to hiring employees and writing off investments in equipment.
The new tax incentives for businesses to hire unemployed workers:
- payroll tax exemption of the employers share of Social Security taxes on wages paid to these workers after March 18, 2010.
- employer tax credit of up to $1,000 per worker
The new employees must meet these criteria in order to qualify for the business tax credits.
- hired between Feb 3, 2010 & Jan 1, 2011
- newly-hired employee was unemployed during the 60 days prior to starting work, or worked fewer than 40 hours for someone else during the 60 day period
Household employers are not eligible for the new tax benefits.
The HIRE Act is aimed at providing hiring incentives to restore some of the jobs lost in the latest economic recession. The goal is to help put Americans back to work as soon as possible. Business owners that hire qualifying workers sooner rather than later will get the most out of the tax credits, as the tax credits diminish over time, disappearing completely by January 1, 2011.
Another item of interest in this federal jobs bill is to permit small business owners to write off equipment investments of up to $250,000 this year, instead of taking years to depreciate. This in a doubling of the previous amount of $125,000. This will provide tax incentives for small businesses to grow while stimulating the economy with their investment spend.
President Obama’s job creation bill also includes provisions for putting people to work by reforming municipal bonds. Build America Bonds will allow the money to be spent on construction & repair of public projects like schools, highway and transit programs, as well as green and clean energy conservation projects like wind turbines and solar energy devices. Some of this money comes from moving $20 billion into the highway trust fund.
All politics aside, we will let the Americans going back to work decide how well the HIRE Act actually accomplishes its goals of a national recovery and job growth.
More details of the HIRE Act, including tax incentives like the payroll tax holiday can be found here.
A transcript of President Barack Obama’s signing of the HIRE Act at the White House can be found here.
The complete text of H.R. 2847 “Hiring Incentives to Restore Employment Act” can be found here.
