How to Calculate Your Equipment Hourly Rate

Are you charging your customers for the use of your capital equipment?

How to recover your investment costs after purchasing construction equipment

For contractors who have purchased equipment to increase job performance and productivity. Trucks, tractors, forklifts, compactors, etc. = Capital Investments in your business

Did you buy a skid steer loader or a mini-excavator because it made sense from a convenience and productivity point of view?

The new dump truck your company just purchased did not come to you for free. And it costs you to operate it every time your driver turns the key in the ignition.

You have the driver’s time and wages, taxes, insurance, fuel, and maintenance cost. Oops, don’t forget the purchase price…money spent and to be spent to operate them everyday.

These machines help you perform your services and make money

Maybe you got tired of renting, you have the equipment storage capacity, and you justified the purchase expense to make the “job-life” easier and more productive.

This is a great move. But…have you calculated what the True Burden of Cost is to your company?

The cost of the purchase needs to be recovered through an hourly-use-rate applied in your bidding procedures.

Just like the rental yard who charges you an hourly rate to use their machines, you should calculate and charge your client the equipment’s hourly rate to recover the purchase and operating costs.

Well, you’re in luck, I’m going to help you calculate the hourly rate based on some simple calculations anyone can make.

Concepts covered in this article

• Capital Expenditures – Property, Plant & Equipment (PP&E) purchases
• Equipment Cost Recovery – Purchase Price – Salvage Value = Cost to recover through the equipment Burden Rate
• Useful Life – Estimate productive life of equipment (hours/year X number of years expected service life)
• Salvage Value – Estimate resale value at the end of useful lifetime
• Burden Rate – Calculated hourly rate to charge your customers for the use of your machinery

Special Note: Because capital purchases have specific IRS tax and depreciation implications, including Depreciation Recapture rules, always consult with a qualified tax advisor. This article’s focus is entirely on calculating a reasonable capital expenditure recovery rate.

How to Calculate Your Company’s True Burden of Cost and Make a Profit in Nevada Construction

Calculate the hourly rate just like an equipment rental company does

Here is what you need for the first part:

• The purchase price
• The salvage value
• Expected life of the equipment in years
• Hours used per year

Let’s use an example tractor purchase for clarity

You purchase a Bobcat Skid Steer loader with an hydraulic PTO, a few different auger sizes, the bucket, and a cab heater & cover for use when clearing snow.

Total price—with add-ons and attachments…and dealer discount incentives—$92,885

Now we do the Recovery Math to get your investment hourly recovery rate

1. 1. Purchase price = $92,885
   2. Life expectancy = 10 years
   3. Hours of use per year = 1800
   4. Total life hours— 10 x 1800 = 18,000 hours
   5. Salvage value = $18,000

Here’s the example purchase recovery calculation

This gives a portion of the equipment Burden of Cost hourly rate

We haven’t included other costs like

• Insurance burden
• Maintenance & repairs burden
• Fuel burden
• Labor burden.

So, we’ve reached our goal of calculating the tractor recovery rate per hour for the new Bobcat skid steer. This only covers the burden cost for the purchase price. We would still need to do the other tractor burdens to come up with the Total Burden of Costs (TBOC) for this one piece of equipment.

Now, our accounting division can help you with calculating the TBOC for any capital equipment purchase. Schedule and appointment with Manny by calling 775-525-6212 extension 1