Equipment Operating Costs

The critical thing to understand about equipment operating costs is that they are variable costs incurred when the asset is being utilized (operated).

Additionally, properly allocating the operating cost of an asset requires the use of several standard financial accounting concepts, like economic life and depreciation.

What are the components of operating costs?

To calculate your cost, you need to know what data to include. The Heavy recommends the following components in your operating cost calculation, broken down by cost type:

Other Asset-Specific Variable Costs:

• Cost of a Gallon of Fuel (#1 driver of operating costs in fuel-powered equipment)
• Engine Fuel Consumption Rate
• Mechanics Hourly Wage
• Cost of New Tires/Tracks
• Lifespan of Tires/Tracks, in Hours
• Field Support, Total Hours per Year per Asset
• Field Support, Total Parts Cost per Year per Asset
• Non Capex Parts Costs per Year

Components Impacting Length of Cost Window:

• Annual Use (in hours or miles)
• Economic Life (organizational and GAAP standards exist, normally communicated in hours for assets)
• Length of Depreciation Window
• Depreciation Method, i.e. Straight Line or Market-Based

You can have a different list of inputs to go into your operating cost calculations, but the above represents a generally accepted best practice for all relevant costs.

What is the difference between equipment operating costs and ownership costs?

O&O Costs are probably one of the most misused phrases in the construction equipment universe. Ownership costs are fixed costs incurred only at the birth of the equipment and always decrease over time. These costs are all capex cost inputs generally connected to the allocation of the purchase price of the machine.

Operating costs can be controlled and improved by those operating and maintaining the equipment. Ownership costs cannot – they are financial accounting concepts not controlled through operation.

How do I calculate my equipment operating costs?

Equipment operating costs are represented as rates in two ways:

• a cost per hour for off-highway equipment
• a cost per miles/kilometer for on-highway assets

To calculate your costs, you need to have access to the cost component inputs that go into the cost equation and a consistent calculator to do the math, either in Excel or as software.

Are there tools that can help me calculate equipment operating costs?

Yes! It’s key to know that operating costs are not unique to the construction equipment market. They live in any asset-based industry, e.g. trucking, automobile and maritime.

With that in mind, here are some non-Excel based tools to help you calculate equipment ownership costs:

• Case CE Total Cost Calculator (free)
• EquipmentWatch Internal Charge Rates (paid)

What are the operating costs for rented equipment?

Operating costs for rented equipment are often a sensitive subject. Fuel is the obvious cost responsibility of the renter/operator, and general wear and tear componentry are the responsibility of the rental supplier, but often billing disputes arise over any damage that may be perceived as beyond normal use.