Ownership cost versus operating cost
Equipment costing splits into two families of cost, and the distinction matters because they behave differently. Ownership costs — depreciation, insurance, storage, licensing — are incurred whether the machine works or sits. Operating costs — fuel, tyres, undercarriage, repairs, operator — scale with use.
The practical consequence: ownership cost per hour rises when utilisation falls. A $148,000 excavator used 1,100 hours a year spreads its fixed costs over a lot of hours; the same machine used 400 hours a year carries the same fixed costs over a third of the work. Low utilisation is the most common reason a machine "does not make money" when it plainly should.
Depreciation/hr = (Purchase price − Salvage value) ÷ Life hours
Ownership/hr = (Insurance + Storage) ÷ Annual usage hours
O&O/hr = Depreciation + Fuel + Maintenance + Ownership + Operator (burdened)Why hours-based depreciation beats calendar depreciation
Accounting depreciation is usually straight-line over years, because that is what the tax code and financial statements require. But equipment wears out in hours, not in months. A machine that runs 2,000 hours a year reaches its rebuild point four times faster than one that runs 500.
For internal costing, depreciate over hours: purchase price minus salvage, divided by expected life hours. This produces a rate that is stable across utilisation levels and gives your estimators a number they can trust without knowing how many hours the machine has run this year.
| Asset | Life hours | Major rebuild interval |
|---|---|---|
| Compact excavator | 8,000–12,000 | 4,000–5,000 hrs |
| Skid steer | 6,000–10,000 | 3,000–4,000 hrs |
| Wheel loader | 12,000–16,000 | 6,000 hrs |
| Crawler dozer | 10,000–14,000 | 5,000 hrs undercarriage |
| Telehandler | 8,000–12,000 | 4,000 hrs |
| Dump truck (class 8) | 350,000 miles | Engine 500k miles |
Idle hours are not free
When a machine sits, fuel stops but everything else continues. Depreciation continues because the machine is ageing toward its rebuild. Insurance, storage and licensing continue. The operator, if retained, continues to be paid and burdened. An idle hour on a $90/hour machine commonly costs $65.
This is why standby and delay hours belong in your change orders. If a subcontractor’s delay keeps your excavator on site for three extra days, the cost is not zero just because it did not dig.
- Idle cost = O&O per hour − fuel per hour. Compute it once and use it consistently.
- Standby rates in construction contracts typically sit between 50% and 100% of the operating rate.
- Track utilisation monthly. Below 50% of the annual target, the asset is being cross-subsidised by other work.
- Sell underutilised equipment rather than keeping it for occasional convenience — the carrying cost usually exceeds the rental cost of the handful of jobs that need it.
From cost to an internal charge rate
An internal charge rate is what your job costing will pay when the machine is used on a project. It should equal your O&O cost plus a margin that funds the eventual replacement of the asset. Skip the margin and you are consuming the machine without funding its successor — a pattern that shows up three years later as an inability to replace equipment.
Publish the rate annually, apply it consistently, and review actual utilisation against plan. Uniform application is what makes job costing comparable; a rate that changes per job makes every project look profitable or unprofitable for reasons unrelated to execution.
- Internal charge rate = O&O per hour ÷ (1 − target margin %).
- Include a replacement reserve: equipment must fund its own successor.
- Apply the rate to every job, including your own divisions, so utilisation data stays honest.
- Review rates when fuel moves more than 20% or when the market rental price diverges from your cost.
How to use this tool
- Enter the asset and its usage. Purchase price, salvage value, expected life hours and annual usage. The life hours input drives everything downstream.
- Add operating costs from real data. Fuel per hour from your consumption records, maintenance as a percentage of depreciation, insurance and storage from actual invoices.
- Compute the O&O cost per hour. Read the composition breakdown to see which component dominates. Fuel-heavy and maintenance-heavy machines need different management attention.
- Set the internal charge rate and allocate jobs. Download the workbook, set a target margin, then allocate hours per job to see contribution and utilisation against your annual target.
What is inside the download
A year-by-year depreciation schedule with book value and maintenance, an ownership and operating cost build per hour, and an internal charge rate sheet with job allocation and a break-even utilisation calculation.
Asset Depreciation Table— a separate worksheet inequipment-hourly-cost.xlsx.Operating Cost Inputs— a separate worksheet inequipment-hourly-cost.xlsx.Internal Job Charge Rate— a separate worksheet inequipment-hourly-cost.xlsx.