EQUIPMENT OWNERSHIP

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EQUIPMENT OWNERSHIP
CHAPTER - 11
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Hand Held RFID Device
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RFID APPLICATION in CONSTRUCTION

• The Need for tracing and identifying
  construction equipment on construction sites.
• With RFID technology, no line of sight or direct
  contact is required between the reader and the
  tag.
• Since RFID does not rely on optics, it is ideal
  for dirty, oily, wet or harsh environments.
• RFID is an automatic identification technology,
  similar to bar code technology.
• The Technology consists of two major components
  (reader and the tag) which work together to
  provide the user a non-contact solution to
  identify people, assets, and locations.
• Since RFID tags are read by low voltage radio
  waves instead of light waves (as with bar codes)
  they will communicate through non-metallic
  materials such as paint, plastic, grease and dirt.

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GENERAL

• Equipment resources play a major role in any
  construction activity.
• Decisions regarding equipment type and
  combination can have a major impact on the profit
  sizing of a job.
• Manager must be capable of calculating the rate
  of production of the piece or combination.
  Managers goal is to select the equipment
  combination that yields the maximum production at
  the best or most reasonable price.
• Construction equipment can be divided into two
  major categories productive equipment and
  support equipment.
• Productive equipment describes units that are
  alone or in combination lead to an end product
  haulers, loaders, rollers entrenchers.
• Support equipment is required for operations
  related to the placement of construction such as
  movement of personnel and materials hoists,
  lighting sets, vibrators, scaffolds and heaters.
• Heavy Construction vs. Building and Industrial
  Construction.

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EQUIPMENT OWNING and OPERATING COSTS

• The costs associated with construction equipment
  is of two types fixed costs and variable costs.
• Fixed costs depreciation, insurance and
  interest. These accrue and are directly related
  to the time equipment is owned.
• Operation costs operation of the machine, tires,
  gas, oil and operators wages. Other costs occur
  as a result of the need to set aside moneys for
  both routine and unscheduled maintenance. Thus
  operating costs are variable costs.
• The total of owning and operating costs for items
  of equipment such as tractors, shovels, loaders
  and backhoes is expressed on an hourly basis.
  These two costs accrue in different ways
• Ownership costs are arrived by using estimated
  total service life in hours to the total of those
  costs. Idle hours is part of general operating
  O/H
• Operating costs are variable, being a function of
  a number of operating hours
• The hourly charge for a piece of equipment is
  made up of four elements. Estimates of hourly O/H
  costs are added to the ownership and operating
  costs. The fourth element is the profit. See fig.
  11-1
• A unit of equipment. A percentage markup is added
  or profit element

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EQUIPMENT OWNING and OPERATING COSTS (Continued)

• Ownership costs are composed of two elements
• First, an estimate for depreciation. Each piece
  of equipment represents an estimated number of
  hours of useful service life and the depreciable
  value. The major part of its original costs is
  divided by the total hours to yield a charging
  rate for this element of equipment costs
• Second component of ownership costs consists of
  estimation of allowance for interest, insurance
  and taxes
• Operating costs cover a broader range of items
  fuel oils and lubricants, hydraulic fluid,
  grease, filters and other supplies maintenance,
  general overhauls and repairs. Also included are
  direct costs, the operators wage including
  his/her benefits
• General O/H expense and indirect costs of
  supervisory labor
• This total establishes the total hourly cost of
  owning and operating

Figure 11-1 Cost Components in a Production Unit
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DEPRECIATION of EQUIPMENT

• IRS establishes a standard for tax purposes
• Federal law has introduced fixed percentages to
  calculate depreciation for various classes of
  equipment
• The taxes have replaced accelerated methods,
  declining balance and sum-of-years-digits methods
• The four most commonly used methods are1)
  straight line, 2) declining balance, 3) sum of
  years digits and 4) production
• Declining balance and sum-of-years are referred
  to as accelerated methods since they allow larger
  amounts of depreciation in the early years
• Contractor usually selects a method that offsets
  or reduces the reported profit for tax purposes.
  Companys pay taxes at the corporate (assume
  34), each dollar of depreciation reduces the
  amount of tax paid by 34 cents

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DEPRECIATION of EQUIPMENT (Continued)

• The three major factors to be considered in
  calculating depreciation are 1) initial costs or
  basis in dollars, 2) service life in years or
  hours and 3) salvage value in dollars (see fig.
  11-2)
• Example suppose a 75,000.00 scraper is
  purchased. The tires cost 15,000.00. The tires
  are considered a current expense and therefore,
  cannot be depreciable. Hence Initial value of
  scraper for depreciation is 60,000.00. Purchase
  price minus major expenses, items such as tires,
  freight taxes are included in net first cost
  and are part of the amount depreciable.
• The initial depreciable cost or basis is known as
  the net first cost. See example for rubber-tired
  wheeled tractor depreciation on pg 173.
• The concept of salvage value implies that there
  is some residual value in the piece of equipment
  (i.e. scrap value) at the end of its life
• IRS publishes labor indicating appropriate
  service life values. Most construction equipment
  items fall into the 3-, 5- or 7 year service life
  categories

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Figure 11-2 Factors in Depreciation
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STRAIGHT-LINE METHOD

• Depreciation or loss in value through use is
  uniform. In other words, net first cost minus
  salvage value is deductable in equal annual
  amounts over the estimated useful life of the
  equipment (see fig. 11-3)
• This is also called Linear Method (see example on
  pg. 174)
• What happens if you sell before the useful life
  says 3rd year? (see pg. 174)
• How do you handle capital gain? (see pg. 174)
• Currently capital gain is taxed at 34
• What happens if you perform a major modification
  on the engine in the third year? (see fig. 11-4)

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Figure 11-3 Straight-line Depreciation
Figure 11-4 Adjustment of Basis
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DECLINING BALANCE

• When applied to new equipment with a useful life
  of at least 3 years, the effective rate at which
  the balance reduced may be twice the
  straight-line rate hence, called Double
  Declining balance
• For used equipment, the rate is 150
• For new equipment the rate is calculated by
  dividing 200 by the service life years (see
  table 11-2)
• Interesting fact, the amount of depreciation
  taken over the 5-year service life is less than
  the depreciable amount hence, the method is
  changed to straight-line approach in the 4th or
  5th year

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(No Transcript)
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PRODUCTION METHOD

• Contractor tries to claim depreciation at the
  same time equipment generating profit to reduce
  tax. The production method allows this since the
  depreciation is taken based on the number of
  hours the unit was in production. The asset cost
  is prorated and recovered on a per-unit-of-output
  basis. (see pg. 177)
• Unless this method is used, the units may be
  depreciated during a period when they are not
  generating income. (see example on pg. 177 Alaska
  pipeline)

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Figure 11-5 Comparison of Double-Declining-Balanc
e and Straight-Line Methods
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DEPRECIATION BASED ON CURRENT LAW

• Prior to 1981, straight-line and DBB methods were
  used
• 1981-1986 ACRS or Alternate ACRS was used which
  is equivalent to straight-line or production
  method
• With ACRS, equipment is depreciated according to
  3, 5, 10 and 15 years
• After 1986, a set of tables defines accelerated
  depreciation amounts. The tables are referred to
  as MACRS. Changes to ACRS include
• 7 and 20 year property added
• The amount depreciated is calculated per
  prescribes depreciation methods. In addition, the
  half year convention is used for 1st year
  calculation
• Certain assets have been reclassified to
  different property classes
• See example pg. 178 and table 11-4

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Table 11-4 MACRS Table for Accelerated
Depreciation
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DEPRECIATION VS. AMORTIZATION

• Depreciation is a legitimate cost of business,
  because of loss in value over time. As such, can
  be deducted from revenue to lower taxes. This
  helps the contractor to replace the equipment.
• However, this savings is only 34 (corporate
  rate) of the original value
• To replace, contractors charge the client an
  amount
• This practice of charging clients an amount is
  called amortization
• See example pg. 179. Contractor should consider
  depreciation of 3,400.00when he back charges the
  clients

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INTERESTlt INSURANCE and TAX (IIT) COSTS

• In addition to the amortization/depreciation, the
  ownership costs includes fixed costs Insurance,
  taxes and interest
• Recovery of these charges is based on percentages
  developed from accounting records. The
  percentages for each cost is applied to the
  average annual value of the machine to determine
  the amount recovered each hour or year
• See equation pg. 180. The equation assumes zero
  salvage value. The formula levels the declining
  value. See fig. 11-6 and the example pg. 181
• If we consider the salvage value, the area under
  the stepped curve (fig. 11-6b) is increased by
  the area of the shaded segment. Therefore, AAV is
  increased. See equation and example on pg. 181
• See example pg. 181 of the operation for the unit
  says 2,000 hours/year, using this 2000 hrs/yr
  and IIT of 13 of AAV, the IIT cost per hour is
  0.62 per hour

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Figure 11-6 Interpretation of Average Annual
Value

• Average Annual Value Without Salvage Value
  included
• Average Annual Value Considering Salvage Value

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Figure 11-7 Guide for Estimating Hourly Cost of
Interest, Insurance, and Taxes
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OPERATING COSTS

• The major components contributing to the
  operating or variable costs are fuel, oil, grease
  (FOG), tire replacement and normal repairs
• Historic records help in establishing rate of use
  of fuel, oil and tires
• Maintenance records indicate the frequency of
  repair (see fig. 11-8)

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OVERHEAD and MARKUP

• O/H charges include the costs such as, the cost
  of operating the maintenance force and facility
  including 1) wages of mechanics and supervisor 2)
  clerical and record support and 3) rental or
  amortization of the maintenance facility
• The industry practice is to prorate the total
  charge to each unit (see example pg. 183)
• The last component of the total charge is the
  profit expressed as a of the total hourly
  operating costs, which in turn, may be expressed
  in cubic yards, square feet or linear foot
• In a competitive market, allowable margin of
  profit that still allows the bidder to be
  competitive may be only 1 or 2

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Figure 11-8 Repair Cost Profile