CONTENT

• IMPORTANCE OF CONST EQUIPMENTS

• CLASSIFICATION OF CONST EQUIPMENTS
• SELECTION OF CONST EQUIPMENTS
• FINANCIAL ASPECTS RELATED TO EQPTS
• DISCOUNTED PRESENT WORTH ANALYSIS
• DEPRECIATION
• COST OF OWNING & OPERATING
• ECONOMIC LIFE OF CONST EQPTS
• EQUIPMENT REPLACEMENT POLICY
 Importance of Construction Equipments
• Project can be completed very fast.

• The cost of project is reduced.

• Less number of labourers required.

• The construction equipment and machineries of very high capacities

are available now and very large output are possible due to
mechanization, adhering to the construction schedules.
 Classification of Equipments
Based on Based on
Based on Type
Nature of Standardization of
of Work Automation Machine

• • Manually • Standard
Intermittent Operated Equipments
Type • Semi • Special
• Continuous Automatic Equipments
Flow Type • Fully
• Mixed Type Automatic
Intermittent Type: This type of equipments
have the intermittent cycle of work. They can be
operated on series of work cycles and each cycle
completes in itself.
• Bulldozers
• Scrappers
• Power shovels
• Drag lines
• Concrete Mixers
Continuous flow type: This type of
equipments have a continuous flow of work
turned out.
• Belt conveyors
• Air compressor
 Classification of equipment's
Mixed type

• This type of equipments have characteristics of both,

intermittent as well as continuous flow type
equipments.
• They are continuously operated over a defined
surface area. After completion of a particular
sweep, it requires operation cease and
readjustment of its position to resume production on
another area.
• Motor graders, bulldozers, scrapers, etc. are the
examples of mixed type equipments.
Standar
Equipments:
•The standard equipments are commonly manufactured
and are easily available to the prospective purchasers.
• They can be used for variety of construction operations
without any difficulty and they are available in standard
commercial sizes. The initial investment is less as compared to
a special equipment.
•Thedelivery of standard equipment's is very quick, as it is
readily available in the market.
• The repair parts for standard equipment can be obtained
more quickly in short period.
Standard
Equipment's:
 Classification of equipment's
Special Equipments
The special equipments are those which are
manufactured for a specific project or which does not
have readily accessible spare parts.
• The selection of special equipment's should be made
carefully after proper financial analysis.
• The initial investment in case of special equipment is
very high and there is risk of change in design, it cannot,
be used economically on the other project.
Special Equipments

• A special order is to be given to the manufacturer of

special equipment's and a special price is to be given
and therefore the delivery of special equipments can
be obtained after long period.
• Examples of special equipment include tunnel-
boring machines, large hauling units and very large
shovels, such as a 70 to 80 cubic metre shovel used
to strip-mine coal.
• Special
Equipments:
• Special
Equipments:
Standard Equipment Special Equipment

• Commonly Used. • In Special Cases.

• Initial cost is low. • Initially costly.
• Resale price is • Resale price is low.
high. • Delivery is difficult
• Delivery is easy & & delayed.
fast. • Disposal is
• Disposal is easy. difficult.
• Rent is low. • Rent is high.
Selection of Equipments
 Selection of Equipments
• Operating Costs:
• The most efficient and therefore the most economical
equipment is one whose operating cost is the minimum.
This is a full proof measure for selection of the equipment.

• Utilization of Equipment's:
• The maximum utilization of the existing machine should
be done to reduce the cost of production of various items of
the project.
 Selection of Equipments
•Availabilit of Equipment: Sometimes the
selection of equipment has to be made from the
available equipment held with the
manufacturers or dealers.

• Source of Equipment: Contractor and other

users of construction equipment frequently are
concerned with a decision as to whether to
purchase or rent (Lease) equipment's.
 Selection of Equipments
• Country of Origin:
• As far as possible, indigenous equipment's should be used. This
encourages the industry of the country and saves foreign
exchange. When imports have to be resorted to, they should be
preferable restricted to soft currency area.
• Operating Facility:
• The equipment's chosen for project should be such that the
trained operators for the machine are available.

• Suitability of Equipment for Future:

• While selecting an equipment, the useful life of the
equipment should be compared with the duration of the project.
If the life of the equipment is longer, it should be possible to use
the equipment for other projects.
 Financial aspects related to construction
equipment's
1. How to arrange finance
2. Whether to buy or
or hire Sources of
equipment
Hire

Long term Short term

(new orused) (Renting)

Lease
Buy

Down On loans Leasing with

Payment in Time lease
mobilized installments option to buy
payment
later
• How to Arrange Finance:

When the contractor place the equipment purchase order to the

manufacturers, the majority of the manufacturers, demand 10 to
30 % advance with orders, without any commitment of delivery
period.

The arrangement of finance can be done from the advances given by

the project authorities or from the advances given to the
contractor on equipment purchase.
• Now a days, the contractors are allowed for
advances on new equipment to be purchased in
case of all major contracts.
• In some cases, even foreign exchange is made
available in contracts for import of equipment's
and spares.
• Th finance can also be arranged from
eIndustrial Development Banks and leasing
Companies
 Buy or Hire
•A Piece of Equipment may be employed on a
project, in one of the following two ways:
• 1. Direct Purchase
• 2. Hiring
 Direct Purchasing
• If the equipment's are to be used frequently for
many types of jobs for a long duration of time on
a project, it will be economical for the
contractors to purchase the equipment's.
Direct purchase
 Hiring
• If the project is small and if the equipment is to
be used for a short duration of time on the
project, it will be economical for
the contractor to get it by hiring or by
renting from other agencies.
Hiring (advantages)
 Discounted Present Worth Analysis

• It involves calculating the present value of all amounts involved in

all the alternatives to determine the present worth of the proposed or
best alternatives.
What is Inflowand Outflow:
 Discounted Present Worth Analysis

Decision problems may be of two types:

a. Revenue dominated cash flow diagram
b. Cost dominated cash flow diagram
 (a) Revenue Profit dominated cash flow diagram:
• In this type of cash flow diagram, the revenue, profit, salvage value,
etc. (inflows) will be assigned a (+ve) sign while costs (outflows)
will be assigned with (-ve) sign.

• Finally, the alternative having the maximum present worth amount

should be selected as the best alternative.
 (b) Cost dominated cash flow diagram:
▪ In this type of diagram, the cost(outflows) will be assigned with
(+ve) sign and revenue, profit, salvage value(all inflows) etc. will be
assigned with (-ve) sign.

▪ Finally, the alternative having the minimum present worth amount

should be selected as the best alternative.
Depreciation
 Depreciation
• Depreciation can be defined as the loss or decrease in the
value of the property due to the use, life, wear and tear,
decay and obsolescence.
• As the equipment which is purchased today will not work
for ever. This may be due to wear and tear of the equipment
or obsolescence of technology.
• It is dependent on its original condition, quality of
maintenance & mode of use.
• Usually a % of depreciation per annum is allowed, which

gradually increases with time.

• Present value of property= Initial cost - Total amount of
depreciation
 Depreciation Fund
• The recovery of money from the earnings of an
equipment for its replacement purpose is called
depreciation fund, since we make an assumption that the
value of the equipment's decrease with the passage of
time.

• Thus, the word, depreciation means decrease in value of

physical assets with the passage of time.
 Types of depreciation

a) Physical depreciation
1.Wear and tear from operation
2.Action of time and other elements

a) Functional depreciation
1. Inadequacy or suppression
2.Obsolescence
Methods of Calculating Depreciation:

1. Straight Line method

2. Constant Percentage method

3. Sinking Fund method

4. Sum of years Digits method

5. Service Output method

Straight Line method

Assumption: Property loses its value by the same amount every year.
Therefore, Annual Depreciation= Annual Decrease in property value

where, D= Annual Depreciation

Depreciation of property after m years:
C= Original Cost

S= Scrap Value
n , m= life in years
Therefore, Book value after m years:
Constant Percentage method

Assumption: Property will lose its value by a constant percentage of its value at
the beginning of every year.

Where, p= % rate of annual Depreciation

S= Scrap value C= Original cost

n= life in years

If any age of property is m years, the value of property after m years:

 Sinking Fund method

Assumption: Depreciation of the property = the annual sinking

fund + interest on the sinking fund for that year.

If i is the rate of interest, the annual sinking fund installment(p) to

accumulate 1 Rs in m years:

If i is the rate of interest, and 1 Rs is deposited every year, total sinking

fund accumulated at the end of n years:

Rate of depreciation in n years:

Sum of years Digits method
Service output method
Factors affecting Cost of Owning operating Equipment:

▪ Cost of the equipment delivered to the owner

▪ Demand of the equipment at the end of its useful life

▪ Number of hours it is used per year

▪ Number of years it is used

▪ Severity of conditions under which it is used

▪ State of maintenance and repairs

Costs to be considered for owning and operating
equipment
▪ Depreciation Cost

▪ Investment Cost (Average investment = )

• Maintenance and repair Cost

• Operation Cost (Repair charges, Depreciation on tyres and tubes, Labour

Charges, Fuel Charges, Operators and maintenance crew charges,
Miscellaneous Supplies)

• Down time Cost

• Obsolescence Cost

• Replacement Costs
 Investment cost
Investment (or interest) cost represents the annual cost
(converted into an hourly cost) of capital invested in a machine. if
borrowed funds are utilized for purchasing a piece of equipment,
the investment cost is simply the interest charged on these funds.
if it is purchased with company assets, an interest rate that is equal
to the rate of return on company investment should be charged.
 maIntenance and repaIr
costs

The cost for maintenance and repairs include the expenditures for
replacement parts and the labor required to keep the equipment in
good working condition. Historical cost records of maintaining and
servicing equipment are the most reliable guide in estimating
maintenance and repair cost. The manufacturers of construction
equipment provide information showing recommended costs for
maintenance and repairs for the equipment they manufacture. The
annual cost of maintenance and repairs is often expressed as a
percentage of purchase prices or as a percentage of the straight-line
depreciation costs.
 operatIng cost

Operating cost is incurred only when the equipment is operated. The

operating cost of the equipment is influenced by various parameters
namely number of operating hours, location of job site, operating
conditions, category of equipment etc. The operating cost consists of
the following;
a) Repair and maintenance cost,
b) Fuel cost,
c) Cost of lubricating oil, filter and grease,
d) Tire cost
e) Equipment operator wages,
f) Cost of replacing high-wear items and
g) Cost of mobilization, demobilization and assembly.
Down time cost
It is a time that a machine is not working ,because it is undergoing
repairs or adjustments.

Obsolescence cost
It may be defined as the loss in the value of an equipment due to
improvement in designs of equipments.

Replacement Cost
Every year the cost of equipment is increasing. In view of these
factors, they are to be included in ownership cost which will allow
the unit of equipment to generate sufficient capital during its
economical life to ensure its replacement at the end of the
depreciation period.
Economic life of Construction Equipment's

Equipment should be replaced under following

circumstances:

1.Depreciation

2.Downtime

3.Inadequacy

4.Normal Deterioration
 Equipment Replacement Policy
 A firm has to face three type of decisions:

• The replacement of equipment as it wears out

• The equipment required for expansion

• The replacement of old technology by new
 Equipment is replaced before its estimated life to:

▪ Reduce production cost

▪ Reduce fatigue

▪ Raise quality

▪ Increase output

▪ Secure greater convenience, safety and reliability

 Do consider Do not consider

For equipment in use For equipment in use

1. Operating cost 1. Original Cost

2. Repair and maintence cost 2. Money already spent on repairs and
3. Down time cost maintenance
4. Salvage value
3. Unrealistic book value For New
5. Rebuilding cost
Equipment

For new equipment For new equipment

1. Initial cost 1. Any savings not clearly assessable

2. Interest on capital investment
2. Overhead charges
3. Salvage value
4. Labour savings