Whether you own a construction company, a manufacturing plant, or a transportation service, knowing your equipment’s hourly cost, allows you to accurately estimate project costs, determine pricing for services, and make informed decisions about equipment maintenance and replacement.
In this article, we will explore the various factors that go into calculating equipment cost per hour and provide step-by-step instructions on how to calculate the hourly cost of your equipment.
Formula
The formula for calculating equipment cost per hour is relatively straightforward:
Equipment Cost Per Hour = Total Equipment Cost / Total Number of Hours Equipment Used
IMPORTANT: To calculate the total equipment cost, you need to include all the costs associated with owning and operating the equipment. This includes the purchase price, taxes, insurance, fuel, maintenance, and repairs.
This simplified example calculates the high level equipment cost per hour annual estimate. You can also calculate the total lifetime cost using the same formula, see example below.
Let’s say you own a backhoe that you purchased for $100,000 and by the end of the year backhoe depreciates its value to $60,000. So the ownership cost here is ($100,000 – $60,000) $40,000. You estimate that the backhoe will be used for 1,500 hours over the course of a year.
You also estimate that the backhoe will require $15,000 in fuel, $10,000 in maintenance, and $2,000 in repairs over the year.
Using the formula, you can calculate the equipment cost per hour as follows:
Equipment cost per hour = ($40,000 + $15,000 + $10,000 + $2,000) / 1,500 = $44.66 per hour
Variables
To calculate equipment cost per hour, there are a number of variables that need to be taken into account. Here is a list of the most important ones:
- Equipment cost: This is the cost of the equipment itself, including any financing costs or depreciation.
- Fuel cost: This is the cost of the fuel used to power the equipment.
- Maintenance cost: This is the cost of maintaining the equipment, including repairs and regular maintenance.
- Utilization rate: This is the percentage of time that the equipment is used. A higher utilization rate means that the cost per hour will be lower.
- Expected lifetime: This is the expected lifetime of the equipment, which will affect the depreciation and financing costs.
By taking all of these variables into account, you can get a better understanding of the true cost of operating your equipment.
It is important to keep track of these variables over time, as they can change depending on a number of factors, such as fuel prices, maintenance needs, and changes in utilization rates.
Real Example
Suppose you own a landscaping company and have a skid steer loader that you use for various tasks. You want to know the cost of operating the skid steer loader per hour, so you can accurately price your services.
First, you need to gather some information. Here’s what you’ll need:
- Purchase price of the skid steer loader: $35,000
- Estimated lifespan of the skid steer loader: 10 years
- Estimated annual usage hours: 500 hours
- Estimated salvage value after 10 years: $5,000
- Annual maintenance costs: $2,500
- Fuel consumption rate: 4 gallons per hour
- Cost of fuel: $3.50 per gallon
- Operator wage: $20 per hour
Now, let’s calculate the hourly operating cost of the skid steer loader:
- Determine the total ownership cost: Total ownership cost = (Purchase price – Salvage value) / Estimated lifespan + Annual maintenance costs ($35,000 – $5,000) / 10 + $2,500
Total ownership cost = $5,500 per year - Determine the hourly ownership cost: Hourly ownership cost = Total ownership cost / Estimated annual usage hours ($5,500 / 500 hours)
Hourly ownership cost = $11 per hour - Determine the hourly operating cost: Hourly operating cost = Hourly ownership cost + (Fuel consumption rate x Cost of fuel) + Operator wage ($11 + (4 x $3.50) + $20)
Hourly operating cost = $45.00 per hour
So, the hourly operating cost of the skid steer loader is $45.00. You can use this information to determine the cost of using the skid steer loader for various tasks and adjust your pricing accordingly.
Remember, this is just one example, and the costs will vary depending on the equipment, usage, and other factors. But by following these steps, you can calculate the equipment cost per hour for any piece of equipment in your fleet.