What Is the True Cost of Equipment?

The true cost of equipment generally includes two types of expenses:

Ownership Costs

These are costs associated with owning the equipment whether or not it is operating.

Examples include:

• Purchase cost
• Financing or interest
• Depreciation
• Insurance
• Registration
• Property taxes
• Storage
• Licensing

Operating Costs

These occur as the equipment is used.

Examples include:

• Fuel
• Maintenance
• Repairs
• Oil and filters
• Tires
• Tracks
• Wear parts
• Lubricants
• Other usage-related expenses

Both need to be considered when deciding what equipment actually costs the business.

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Why Equipment Hourly Cost Matters

Suppose you own a skid steer.

You may think:

“It's paid for, so it really doesn't cost me much anymore.”

But the machine still consumes fuel, requires maintenance, wears out tires or tracks, needs repairs and eventually has to be replaced.

If those costs are ignored when pricing work, your jobs may appear more profitable than they really are.

Knowing an equipment hourly cost can help with:

• Job costing
• Estimating
• Equipment billing rates
• Rent-versus-buy decisions
• Replacement planning
• Crew production analysis
• Comparing equipment options
• Calculating actual job profitability

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How the Equipment Cost Calculator Works

The calculator combines several categories of cost.

You enter:

• Purchase price
• Expected resale value
• Expected ownership years
• Annual financing or interest cost
• Annual insurance and registration
• Other annual ownership costs
• Fuel cost per operating hour
• Annual maintenance and repair cost
• Other annual operating costs
• Expected operating hours per year

The calculator then estimates:

Annual Depreciation

Annual Ownership Cost

Annual Operating Cost

Total Annual Equipment Cost

Cost per Operating Hour

Cost per 8-Hour Day

Cost per 10-Hour Day

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How to Calculate Equipment Depreciation

A simple way to estimate equipment depreciation is:

Purchase Price − Expected Resale Value

divided by:

Expected Years of Ownership

For example:

Purchase price: $60,000

Expected resale value: $20,000

Ownership period: 5 years

Total depreciation:

$40,000

Annual depreciation:

$8,000 per year

This is an economic planning estimate, not necessarily the same depreciation method your accountant uses for tax purposes.

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Why Operating Hours Matter

Equipment cost per hour is heavily influenced by how much the machine is actually used.

Suppose a machine costs:

$20,000 per year to own and operate

If it runs:

1,000 hours per year

the average cost is:

$20 per operating hour

But if it only runs:

400 hours per year

the average cost becomes:

$50 per operating hour

The equipment did not necessarily become more expensive.

Its fixed ownership costs are simply being spread across fewer productive hours.

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Fuel Cost Per Hour

Fuel is one of the easiest costs to calculate separately.

If a machine burns:

2.5 gallons per hour

and fuel costs:

$4.00 per gallon

fuel expense equals:

$10 per operating hour

Over 800 annual operating hours:

$8,000 per year

The calculator allows you to enter the fuel cost directly as an estimated hourly expense.

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Paid-Off Equipment Is Not Free Equipment

One common mistake is treating paid-off equipment as having no ownership cost.

Even without a loan payment, equipment still loses value and eventually needs to be replaced.

Ignoring depreciation can make today's projects look more profitable while quietly failing to reserve enough money for tomorrow's replacement equipment.

For internal job costing, including an economic depreciation allowance can provide a more realistic view of equipment cost.

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Equipment Cost vs. Equipment Billing Rate

Equipment cost is not necessarily what you should charge a customer.

If a skid steer actually costs your company:

$45 per operating hour

charging exactly $45 may only recover the equipment's cost.

Your selling rate may also need to contribute toward:

• Company overhead
• Mobilization
• Transportation
• Operator labor
• Risk
• Profit

Equipment cost is the starting point.

Your billing rate is a pricing decision.

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Don't Double-Count Equipment Costs

Consistency matters.

If your annual maintenance estimate already includes tires, tracks and repair expenses, don't enter those same costs again under another category.

Likewise, if equipment insurance is already included in your company overhead and you also include it here, you may accidentally count the cost twice when pricing jobs.

The goal is to identify the true cost clearly, then use it consistently within your estimating and accounting system.

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Equipment Cost Calculator FAQ

How do I calculate equipment cost per hour?

Estimate the machine's total annual ownership and operating costs, then divide those costs by the expected annual operating hours.

Should depreciation be included in equipment cost?

For business planning and job costing, including depreciation can help account for the declining value of equipment and the eventual cost of replacement.

Should the equipment loan payment be included?

Be careful not to count principal repayment and depreciation as if they are separate economic costs. For this calculator, enter financing or interest cost separately while depreciation represents the loss in equipment value.

What if my equipment is already paid off?

The machine can still have depreciation, insurance, maintenance, fuel, repair and replacement costs. Paid-off equipment is not necessarily free equipment.

Should operator wages be included?

This calculator focuses on the equipment itself. Operator labor should generally be calculated separately as a labor cost.

Should transportation to the job be included?

You can include recurring transportation costs in other operating expenses, but for many contractors mobilization is better calculated separately for each project.

How many annual operating hours should I use?

Use your best estimate of actual machine use. Hour meters, job records or maintenance logs can provide better information than assuming the equipment operates every working hour.

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