Life cycle system model for estimating construction equipment ownership costs

The heavy construction contractor has a substantial investment in special purpose equipment per dollar revenue. In general, construction equipment is considered to have an economic life of approximately five years. This means the contracting firm should recover at least 20% of its investment each year. If the sales are twice the investment, then approximately 10% of the firm's revenue is required for the cost of capital wastage. The heavy construction estimator is faced with the problem of deciding, not only the operating costs and production rates for each project estimated, but also the cost of ownership and a retutm on the firm's investment. Traditional estimating methods use the predetermined machine-hour rate for owning and operating costs as the basis for estimating project equipment costs. It is the purpose of this paper to challenge the use of predetermined machine-hour rates as the basis for estimating project equipment costs and to present a theoretically correct alternative.