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.
Once you know your Equipment Costs per hour, use QuickBooks to track these costs for job costing purposes by purchasing our 32-page eBook “Advanced Job Costing – Getting Equipment Costs into Job Costing” by clicking here. |
Hi Vicki
Insurance costs – that’s a great question!
From everything I’ve ever read or discussed with CPA’s the reason insurance isn’t included is because insurance is considered overhead and usually it changes from year to year.
These calculations just focus strictly on what it takes to “run” the equipment, not “own” it.
Hope that clears things up.
This is great – Thank you! But I have a question about insurance costs? Aren’t those a cost of running the equipment? Why aren’t those factored in too?
[…] a contractor, 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 […]
thanx….good information….richard / colorado
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