Introduction

Effectively managing construction equipment costs is an important part of ensuring operational efficiency and profitability. A clear understanding of total cost of ownership (TCO) and operating costs can help construction professionals make informed decisions about pricing and utilization.

This analysis provides a structured model for calculating ownership and operating expenses, using a hydrovac truck as a case study. While hydrovac trucks are widely recognized, the methodology applies to any specialized construction equipment. Without a solid grasp of these costs, setting competitive rental rates or internal usage costs becomes challenging.

Calculating the Hourly Cost of Ownership

When acquiring and operating construction equipment, companies must evaluate the true cost of ownership beyond just the initial purchase price. The cost of ownership includes not only the upfront capital expenditure but also ongoing expenses such as depreciation, financing, insurance and taxes. These costs accumulate over the equipment’s lifecycle and must be distributed across its expected usage hours to determine a realistic hourly cost.

Understanding the hourly cost of ownership is essential for several reasons:

Accurate Pricing: Ensures rental rates or internal cost allocations cover all ownership expenses.

Budget Planning: Helps businesses forecast expenses for projects involving owned equipment.

Profitability Analysis: Identifies whether a piece of equipment is financially viable over time.

Investment Decisions: Supports decision-making when comparing leasing versus purchasing equipment.

A hydrovac truck is a significant investment, often costing several hundred thousand dollars. If these costs are not appropriately accounted for, businesses may underprice their services or fail to recover expenses, leading to financial losses.

To determine the hourly cost of ownership, several cost components must be considered:

Key Cost Components Defined

Depreciation – This represents the loss in value of the equipment over time due to wear and tear and obsolescence. Depreciation is calculated by subtracting the estimated salvage value from the purchase price and dividing it by the equipment’s useful life in years.

Financing Costs (Interest on Loan) – If the truck is purchased using a loan, the owner incurs interest expenses. This is calculated by multiplying the loan amount by the interest rate and considering the average balance over time, assuming linear depreciation.

Insurance Costs – Insurance protects the asset against damage, theft and liability. Typically, annual insurance costs range from 1% to 5% of the purchase price. The exact percentage depends on the asset type, location and provider.

Taxes and Registration Fees – Equipment owners must pay property taxes, licensing and registration fees, which vary based on jurisdiction. These costs are typically factored as a percentage of the equipment’s value.

Annual Operating Hours – This is the total number of hours the equipment is expected to be in use per year. Heavy construction equipment, such as hydrovac trucks, generally operates 1,500 to 2,000 hours per year in full-time use. The greater the number of operating hours, the lower the per-hour fixed ownership cost

Formula for Hourly Ownership Cost

\[ \text{Hourly Ownership Cost} = \frac{\text{Annual Ownership Cost}}{\text{Annual Operating Hours}} \]

Where:

\[ \begin{array}{c} \text{Annual} \\ \text{Ownership} \\ \text{Cost} \end{array} = \frac{ \text{Purchase Price} – \text{Salvage Value} } {\text{Useful Life (Year)}} + \begin{array}{c} \text{Annual} \\ \text{Interest} \\ \text{Cost} \end{array} + \begin{array}{c} \text{Annual} \\ \text{Insurance} \end{array} + \begin{array}{c} \text{Annual} \\ \text{Taxes} \end{array} \]

Cost Breakdown

Depreciation

Example: If a truck has a 10-year useful life and a salvage value of $50,000:

\[ \frac{$350,000 – $50,000}{10} = $30,000 \text{ per year} \]

Financing (Interest Cost on Loan)

\[ \text{Annual Interest Cost} = \text{Loan Amount} \times \text{Interest Rate} \]

This assumes an average balance over time (considering linear depreciation).

Insurance & Taxes

Typically estimated at 1–5% of the purchase price per year.

Annual Operating Hours

Heavy equipment typically runs 1,500–2,000 hours per year in full-time use.

Two Approaches to Cost Allocation

In construction equipment management, accurately allocating ownership costs is crucial for financial planning and operational efficiency. The two primary methods for cost allocation are:

Per Work Hour Method (Traditional Approach)

This method distributes ownership costs over the expected usage hours of the equipment. For instance, if a hydrovac truck is anticipated to operate 1,800 hours annually, the total ownership costs are divided by these hours to determine an hourly rate. This approach is beneficial when equipment usage is predictable, such as in scheduled work shifts. However, if actual usage falls below expectations, the effective hourly cost increases because fixed ownership expenses remain unchanged. This method aligns with traditional cost accounting practices, ensuring that each hour of operation contributes proportionally to covering ownership costs.

Pure Fixed Cost Method (Annualized Approach)

In this approach, ownership costs are treated as a fixed annual expense, independent of equipment usage. For example, a hydrovac truck incurs ownership costs of $45,750 per year, regardless of how many hours it operates. This method is advantageous for financial planning, providing a clear picture of annual expenses. It is particularly useful when equipment usage is variable or unpredictable, as it simplifies budgeting by treating ownership costs as a constant. This approach is consistent with principles outlined in GAAP, which emphasize systematic and rational allocation of costs.

Importance of These Methods

Focusing on these two methods provides a balanced perspective on cost allocation. The Per Work Hour Method offers a granular view, linking costs directly to equipment usage, which is essential for setting accurate pricing and assessing operational efficiency. The Pure Fixed Cost Method, on the other hand, offers simplicity and stability in financial planning, ensuring that all ownership costs are accounted for regardless of usage fluctuations. By understanding and applying these methods, construction professionals can make informed decisions that align with both operational realities and financial objectives.

Per Work Hour Method (Traditional Approach)

Spreads costs over expected usage hours (e.g., 1,800 hours per year).
If actual usage is lower than expected, the real hourly cost is higher because fixed costs remain constant.
Best for scenarios with predictable operating hours (e.g., work shifts).

Pure Fixed Cost Method (Annualized Approach)

Ownership cost is a flat yearly expense, regardless of usage.
The truck costs $45,750 per year, whether it’s used or not.
Best for financial planning when hourly efficiency is not the primary concern.

Implications for Decision-Making

If billing clients hourly, estimate usage conservatively so the truck covers its own costs (e.g., setting rates based on 1,500–2,000 hours per year).

If tracking total ownership cost, the key figure is the fixed annual cost of ~$45,750.

Step-by-Step Cost Calculation

Step 1: Define Daily Work Pattern

Work Component	Time Allocation
Total Workday	10 hours
Vacuum Operating Time	7 hours (70% of workday)
Unloading & Refilling	3 hours (30% of workday)
Driving Distance	5 miles per hour (50 miles/day)
Operator & Swamper Work	10 hours each

Step 2: Cost Breakdown

Fixed Daily Ownership Cost

\[ \text{Daily Fixed Cost} = \text{125.34} \]

Driving Cost (Per-Mile Basis)

“Total Miles”=50, “Per-Mile Cost”=$1.75

\[ \text{Driving Cost} = 50 \times $1.75 = $87.50 \]

Vacuum Operating Cost (Per-Hour Basis)

“Operating Hours”=7,”Per-Hour Cost”=$25

\[ \text{Vacuum Cost} = 7 \times $25 = $175 \]

Labor Cost (Operator & Swamper)

Each earns $31.83/hour (burdened wage).
Both work 10 hours.

\[ \text{Total Labor Cost} = 10 \times 2 \times $31.83 = $636.60 \]

Step 3: Total Daily Cost Calculation

\[ \text{Total Cost} = \text{Fixed Cost} + \text{Driving Cost} + \text{Vacuum Cost} + \text{Labor Cost} \] \[ $125.34 + $87.50 + $175 + $636.60 = $1,024.44 \]

Final Cost Breakdown

Cost Component	Calculation	Total Cost
Fixed Daily Ownership	$125.34	$125.34
Driving Cost (50 mi × $1.75)	$87.50	$87.50
Vacuum System Usage (7 hr × $25)	$175.00	$175.00
Labor Cost (10 hr × 2 workers × $31.83)	$636.60	$636.60
Total Daily Cost		$1,024.44

Next Steps

Now that the operational cost per day is determined, this data can be used to:

Estimate total project costs over multiple days.
Determine a competitive customer billing rate (markup/profit margin).
Adjust for downtime, overtime or variable work schedules.

Understanding Travel Costs vs. Operating Costs

It’s important to distinguish between travel costs and operating costs to ensure accurate budgeting, pricing and financial planning.

Travel Costs (Cost per Mile)

Travel costs are incurred when moving equipment between job sites and are calculated on a cost-per-mile basis. These expenses include:

Fuel consumption: The cost of diesel or gasoline used during transport.
Wear and tear on tires: Frequent travel accelerates tire degradation and increases replacement costs.
Transmission and drivetrain usage: Long-distance travel places strain on mechanical components, leading to maintenance and repairs.
Driver wages: If the equipment requires a dedicated operator for transport, labor costs must be included.

Since travel costs do not contribute to direct revenue generation, minimizing unnecessary travel and optimizing logistics are crucial for cost efficiency.

Operating Costs (Cost per Hour)

Operating costs refer to expenses incurred while the equipment is performing its intended function. These are typically measured on an hourly basis and include:

Vacuum system operation: Running the hydrovac system requires substantial power and fuel.
Hydraulic functions: The truck’s hydraulic components consume energy and require regular servicing.
Labor expenses: Operators and swampers must be paid for their time, adding to total operating costs.
Fuel usage under load: Unlike travel fuel consumption, operational fuel costs tend to be significantly higher due to increased engine load.
Wear on specialized components: Operating components such as vacuum pumps, booms and water systems experience higher rates of wear, leading to increased maintenance needs.

Key Takeaways

Travel costs are predictable and can be reduced through better logistics planning.
Operating costs fluctuate based on workload intensity and must be carefully monitored.
A clear understanding of these cost categories ensures more accurate financial planning and pricing strategies.

Conclusion

Effectively managing the Total Cost of Ownership (TCO) for construction equipment, such as hydrovac trucks, is vital for maintaining profitability and operational efficiency. This article has provided a structured approach to calculating ownership and operating costs, emphasizing the importance of accurate cost allocation. By using methods like the Per Work Hour and Pure Fixed Cost approaches, businesses can ensure that equipment costs are fully recovered, enabling competitive pricing and informed financial planning. Adhering to established accounting principles, such as those outlined by the U.S. Army Corps of Engineers and GAAP, further ensures that cost allocation is both systematic and rational, supporting the long-term financial health of construction enterprises.

References:

U.S. Army Corps of Engineers. (1995). Construction Equipment Ownership and Operating Expense Schedule. Retrieved from https://www.publications.usace.army.mil/Portals/76/Publications/EngineerTechnicalInstructions/ETL_1110-2-561.pdf
Financial Accounting Standards Board. (n.d.). Accounting Standards Codification (ASC) 360: Property, Plant, and Equipment. Retrieved from https://asc.fasb.org/section&trid=2123307