Glossary

Equipment Ownership Costs

Equipment Ownership Costs

What are Equipment Ownership Costs?

Ownership costs for equipment represent the cost accounting summary of all costs incurred with the fixed costs of an asset allocated across the economic life of that asset.

What else should you know?

The critical thing to understand about equipment ownership costs is that they are fixed costs incurred when the asset is purchased.

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

 

What are the components of ownership costs?

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

 

Costs Incurred at Purchase, To Understand True Total Acquisition Cost:

  • Purchase Price
  • Sales Tax
  • Shipping Costs

 

Other Allocated, Organizational Fixed Costs:

  • Organizational Overhead
  • Overhaul Costs, Parts (assumes capex-ing of overhaul costs)
  • Overhaul Costs, Labor (assumes capex-ing of overhaul costs)

 

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

 

Value at End of Economic Life, To Reduce Depreciable Amount of Purchase Price

  • Salvage Value

 

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

 

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

O&O Costs are probably one of the most misused phrases in the construction equipment universe. Operating Costs are variable costs, which start at zero at the birth of the equipment and increase steadily over time. These costs are all non-capex cost inputs, e.g. oil changes, preventative maintenance, lubricant, new tires or tracks, fuel consumption and more.

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 ownership costs?

Equipment ownership 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 ownership costs?

Yes! It’s key to know that ownership 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:

 

What are the ownership costs for rented equipment?

Ownership costs are not directly measured as part of your rental, and the emotional benefit of no direct ownership costs is one of the greatest benefits of renting.

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© Rival Insights, LLC dba The Heavy. Born, Built and Evolving in Atlanta, GA, USA. 

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