RHACOVA

Labor and overhead

How to Calculate the True Cost of Owned Equipment

Equipment costs money on the days it sits still. An hourly rate turns that standing cost into something a job can carry.

The short answer

A machine you own costs money every year whether it runs or not. Add its ownership cost (depreciation or replacement reserve, financing, insurance, registration, storage) to its operating cost (fuel, maintenance, wear parts, repairs), then divide by the hours you realistically use it. That hourly rate is what a job should be charged.

Definitions

Ownership cost
What the machine costs you for existing: value consumed over its life, finance interest, insurance, registration and storage.
Operating cost
What it costs while running: fuel, oil, filters, blades, tyres, tracks, scheduled service and repairs.
Utilization hours
The hours you actually put on it in a year. Not the hours it is available.
Replacement reserve
Money set aside so the next machine can be bought without financing it under pressure. It is a cost of using this one.

The formulas

Annual ownership cost = value consumed + interest + insurance + storage + registration

Annual operating cost = fuel + maintenance + wear parts + repairs

Equipment cost per hour = (annual ownership cost + annual operating cost) ÷ annual utilization hours

Equipment cost on a job = hours used × cost per hour

Worked example: building the hourly rate

A machine bought for $42,000, expected to be worth $12,000 after six years, used around 350 hours a year:

  • Value consumed: ($42,000 − $12,000) ÷ 6 years = $5,000 per year
  • Insurance, registration and storage: $1,400 per year
  • Fuel: 350 hours × $6.00 = $2,100 per year
  • Maintenance, wear parts and repairs: $2,850 per year
  • Total annual cost: $11,350
  • Cost per hour: $11,350 ÷ 350 = $32.43 per hour

Every figure above is an input you supply about your own machine — there is no industry table behind them. Change the utilization to 700 hours and the rate roughly halves; that sensitivity is the whole point of the exercise.

Where the rate lands in a job cost

Charged into a job at, say, 32 hours of use, equipment becomes its own line rather than a rounding error inside labor:

  • Material: $4,200.00
  • Loaded labor: $6,800.00
  • Equipment: $1,050.00
  • Subcontractors: $0.00
  • Disposal: $450.00
  • Permits and fees: $300.00
  • Mobilization and delivery: $400.00
  • Other direct costs: $0.00
  • Direct cost: $13,200.00

Keeping equipment visible is what makes the comparison possible later: if the machine costs more per hour than renting the same thing, you want to find that out from your own numbers rather than from a feeling.

Own or rent is a utilization question

Ownership spreads a fixed annual cost over your hours; a rental converts the same capacity into a per-use cost with no standing charge. Below a certain number of hours a year, renting is cheaper per hour almost by arithmetic. RHACOVA does not publish a crossover point, because it depends on your machine, your rates and your utilization — but once you have the hourly figure above, you can compute your own crossover instead of guessing.

Common mistakes

  • Treating a paid-off machine as free and charging jobs nothing for it.
  • Charging the loan payment instead of the cost — the payment ends, the cost does not.
  • Dividing by available hours instead of hours actually used.
  • Burying equipment inside the labor line, which destroys the comparison with actuals — see true job cost and employee labor vs subcontractors.

Quick answers

Is a paid-off machine free to use?
No. It still consumes fuel, maintenance, insurance, storage and its own remaining resale value, and it will have to be replaced.
Should equipment be overhead or job cost?
Equipment used on specific jobs is best charged to those jobs at an hourly rate. Equipment nobody can attribute to a job belongs in overhead — but then every job's price has to carry it.
How many hours should I divide by?
The hours you realistically use it, not the hours it is available. Dividing by optimistic utilization understates the rate.

Run the numbers

Every cost class separately, the direct cost subtotal, any overhead you explicitly allocate, and the true job cost.

Open the True Job Cost Calculator

Free, no account, and the answer stays on the page.

Cost equipment as its own class

A RHACOVA Estimate holds equipment as a separate cost class, so it never disappears inside a labor line and can be compared against actuals on the Job.

Start an estimate

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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