Adequate bookkeeping is a basic necessity both for intelligent estimating and profitable operation. Most earthmoving contractors start in business with some knowledge of how to get work done, but with little or no understanding of how to keep track of what they are doing.
Fortunately, it is not necessary for the contractor to keep the books personally. Large organizations have their own bookkeeping departments with full-time employees. A very small operator can hire an accountant or bookkeeper for part-time work, even for one evening per week or month, for a fraction of the money that will be saved. Even if the contractor can do the figuring, he or she will be wise to have a trained person check the books regularly.
A usual procedure for the small contractor is to hire a bookkeeper to make up a system, and to train him or her or an employee in using it. Daily entries and rough work are done by the contractor, and the bookkeeper makes periodic inspections of the records, posts items to the proper accounts, balances the books, and calls attention to mistakes and omissions. The frequency of the book-keeper’s visits will depend on the volume of work, and upon the care and competence with which the contractor keeps the books.
Books should be kept on a double-entry system, in which a record is made of two sides of each situation or transaction. For instance, a sale might result in the receipt of cash; therefore both the receipt and the sale are entered, and the books are “in balance.”
The checking account is usually the basis for the books and records. Entries are made on the stubs and/or in a separate book, to correspond with both bank deposits and checks written. The figures are reconciled with the bank statement monthly. In this manner each month is put into balance.
Balance Sheet. The balance sheet shows what the business owns and what it owes. An individual owner of a business that is not incorporated may include the nonbusiness property and debts. It is better practice to keep them separated as much as possible.
A contractor’s balance sheet might include the items in Fig. 11.1.
Equipment plays an important part in the company’s financial picture, so their managers must understand how their equipment decisions affect the balance sheet. Several financial ratios figured by use of the balance sheet measure company performance, liquidity, profitability, leverage and efficiency.
A current ratio, which is current assets divided by current liabilities, is important from an equipment point of view because, if a new piece is paid for with cash, it strains both working capital and the current ratio.
Leverage is the debt to equity ratio. It is found by dividing the total liabilities by the total net worth. A value of 3 or less is considered acceptable. The fixed asset ratio is the net fixed assets divided by the total net worth. The assets may be owned by lenders whereas the net worth is the company owners’ equity. Most heavy and highway contractors have fixed asset ratios over 50 percent.
Net worth is the amount left after subtracting total liabilities from total assets. It is listed as a liability in order to balance the two columns, and because it may be said that the business owes this amount to its owner or owners.
Day Book. Every contractor should keep a daily record in a book of what he or she does. It should show jobs worked, labor time, machine time, services provided, and materials used. Definite figures in feet (meters), yards (cubic meters), tons (kg), hours, and/or dollars are best. Such a record is easier to use than a collection of sales and job tickets, that are likely to get mixed up or lost. However, these tickets should be kept also, at least until payment for the work is received.
The day book may also serve as a diary for nonbookkeeping matters, such as important contacts with customers; promises of work and material to customers or from subcontractors or suppliers; important difficulties with weather, footing, breakdowns, or employees. It should record money spent, at least if it is in cash.
Such a daily record provides data for settling disputes about work done, payroll, and other matters, keeping track of work in progress and materials used, for obtaining adjustments in insurance rates, and backing up income tax returns.
Other Records. Contractors, like everyone else in business, must fill out forms for income tax for themselves and for withholding and social security for the employees. The contractor will probably have to keep track of sales and use taxes, fuel taxes, compensation insurance, and perhaps truck mileage.
Other records will depend on the volume and variety of business, and how much he or she believes in paperwork. Records can get too numerous and too detailed, but in the construction field they are usually too few and too carelessly kept.
Ownership Costs versus Operating Costs. These costs all have to be known for the success of a job, but the ownership costs have to do with finance and accounting whereas operating costs depend on how many hours the equipment or the job is ongoing. The various costs included in each category will be discussed and covered in the following sections.
It is customary to divide contractors’ costs into overhead and operating expenses. Overhead, often miscalled “fixed cost,” may be divided into overhead and job overhead.
Overhead. Overhead is made up of costs which do not vary immediately or directly with volume or type of work. It may include the following items:
Drawing accounts, or living expenses, of owner or partners
Management and supervision—salaries of executives, engineers, superintendents, and foremen
Office rent, payroll, and supplies
Interest paid on loans, or charged against capital investment
Insurance for fire, theft, and liability if paid on the ownership of equipment and premises
Ownership taxes on land, equipment, and other capital assets
Depreciation
It is better to base the overhead cost recovery on the revenue generated by the equipment or the job rather than on the cost of the equipment or the labor. Then, if the job generates more than it was expected to, the overhead cost recovery rate will be less per unit produced.
Job Overhead. This heading may include any of the overhead items which are increased to take care of a particular job. When a contractor takes on a big project, the office and supervision force may be enlarged several hundred percent for its duration. This increase, arising from the one job, can justifiably be charged against it.
If job conditions require providing guaranteed pay, meals, rooms, or services to field employees, such expense may be labeled overhead, operating, or job overhead.
Job overhead may also include a proportion of home office overhead.
Operating Costs. This heading includes
The field payroll of employees hired by the hour or day, or for the job
Payroll taxes
Liability and compensation insurance based on payroll, work, volume, or job conditions
Machinery fuel, lubrication, maintenance, and repair
Machinery rental, delivery, and changing rigs
Expendable supplies
Borderline Costs. It is often difficult to classify particular expenses, to decide just which account should carry them. As long as the contractor is consistent, he or she can list them very much as desired. However, following accepted practices makes it easier to keep bookkeepers, and to explain matters to banks or bonding companies when it is necessary to do so.
Personal expenses. The contractor who runs his or her own business should keep books sufficiently to distinguish between business and personal expenses. However, he or she should bear in mind that these come out of the same pocket, and that living costs are part of business overhead to the extent that it is up to the business to provide money to cover them.
It is common practice for owners to draw a fixed amount, and to consider this to be the only personal charge on the business. However, if personal expenses are in excess of the drawings, and the difference results in running up bills, these will ultimately have to be paid by the business, and might better be considered a charge against it from the first.
If personal expenses are not closely accounted for, a one-person business which is profitable in itself may go steadily downhill, without the proprietor’s ever understanding why.
Importance. An important consideration for a contractor or a pit operator is the amount of capital required to carry customers’ accounts. In most localities it is difficult or impossible to work on a cash basis. Even when the primary business is selling a commodity in great demand, as gravel in a gravel-scarce area, and operations are started successfully on a cash-for-each-load formula, good customers have a way of working away from it through a series of steps, such as pay after several loads, at the end of the day, at the end of the week, and at the end of the month, to a regular charge account, perhaps tying up thousands of dollars for long periods. Losses on jobs, or difficulty in collecting accounts, may change a well-heeled customer into a slow-paying one.
Credit granted to one makes it triply difficult to refuse it to others.
It takes more backbone, or perhaps uncooperativeness, than is possessed by the average contractor to resist this technique of opening and increasing accounts. Also, it is often true that an enterprise cannot maintain a profitable volume except on credit, particularly if competition is severe.
The contractor who does small and medium-size jobs for a number of different customers has no choice but to extend credit. Insistence on cash in advance or even on payments during work usually means the loss of too many jobs.
Receivables not only tie up a large amount of working capital, but include a probability of bad-debt losses. These can be minimized by good judgment in extending credit and skillful collection methods, but they cannot be entirely avoided.
A bank is usually willing to lend money on receivables. If the account has a good credit rating or local reputation, it may advance the full amount, less a discount which serves for an interest payment, on the understanding that any money received from that customer goes directly to the bank. Or a certain portion of the total amount of receivables may be lent on a regular interest-bearing note.
The cost of such discounts or interest, and an allowance for uncollectible accounts, should be figured into the prices charged for material and services.
Offering discounts directly to the customer for cash or prompt payment is helpful in bringing quick money from good accounts, but is not very effective with those who are really hard up, and who constitute the major problem.
If a business is run partly with owned machinery, and partly with units rented from others, an over-large or doubtful account with a contractor may be tactfully collected by hiring the customer’s machinery until he has worked it off. Sometimes an arrangement is made to pay the customer partly in cash to enable him or her to keep up with the payroll, and to apply the balance to the bill.
Liens. A contractor or subcontractor can usually file a lien for an unpaid bill against the property on which the work was done. Such a lien stays in force for a number of years, and must be paid when the property is sold, mortgaged, or remortgaged.
In most states it is necessary to file a lien quite soon after completion of the work. The contractor or supplier must be aware of the local time limitation, and not allow an unpaid account to run until it is too late.
An old account can sometimes be brought up to date for lien purposes by making one more shipment of material, or performing one more service for which a charge can be made, as it is the date of the last item that determines the last date for filing.
Filing a lien does not prevent a contractor from taking other collection action, such as a lawsuit or attachment of other assets.
Bonds. Government and government agencies can usually be depended on to pay their bills, although they are sometimes slow and they may dispute amounts. But a subcontractor may have to be careful that the general contractor does not collect without paying out.
In almost all public jobs, and in many large private ones, the general contractor must put up a bond. This usually means that a responsible insurance company guarantees that the contractor will complete the work and pay all suppliers and subcontractors. If the contractor fails to pay any bill incurred on the job, the creditor can collect from the bonding company.
However, claims under bonds must be filed very promptly, often within 90 days of the date of the work, or protection is lost.
Most losses due to late filing of liens and claims under bonds are due to originally friendly relations between the parties, so that collection of the account is not handled in a businesslike way.
Work in Progress. A contractor may tie up substantial amounts of cash and credit in jobs before he or she is able to even ask for payment. On small jobs he or she may have to wait until the work is finished, on big ones there is usually an arrangement by which the contractor is paid in installments as the work progresses.
Installments may become due on completion and approval of parts or stages of the work, as a building contractor may receive a first payment when the foundation is completed, another when framing is done, and so on. The owner, in turn, may receive installments on the mortgage loan at such times.
In highway and other large heavy construction projects, a number of different stages may be worked at the same time. Rough grading and even clearing may be in progress on one part of the job while fine grading is being completed on another.
For this reason payments are made at regular intervals on the basis of measurements and estimates of the amount of work completed. Five or 10 percent of the amount due is usually held back until the end of the job. Payment may be made 1 to 20 days after the end of the work period, which is usually a month, but may be at shorter or longer intervals.
A schedule involving frequent and prompt payments reduces the contractor’s need for working capital. However, the contractor must have money on hand to keep going if a payment is delayed by disagreements or other difficulties.
The extent of such delays is largely dependent on the policies of the owner, and the owner’s reputation may enable the contractor to make proper allowance for them in advance.
Cumulative Cost and Income. The graph in Fig. 11.2 shows a simplified example of the drain on a contractor’s resources during an installment-payment contract. The job is assumed to use no more than the contractor’s regular equipment, so that none need be purchased specially. Costs are actual expenditures, plus calculated machinery depreciation.
The cost curve shows the approximate amount spent at any time during the job. The stepped line indicates the total received in payments. The vertical distance between these lines first shows the amount “loaned” to the job, and later the profit.
FIGURE 11.2 Cash requirements of job.
The line “Maximum Loan to Job” is the greatest distance, and indicates the minimum amount of cash and credit that will be required to carry the job under normal conditions. If the May payment were smaller or the June payment were delayed, the line would be longer, indicating a need for more money.
Purchase of a machine, whether new or used, involves consideration of the type and amount of work in hand and expected, price and availability of suitable models, as well as operator skills, work habits, and personal preference. With the establishment of large national equipment rental companies offering lower rental rates, the alternative of renting construction equipment versus purchasing it should be considered.
Size. The arguments about machine size can appropriately be restated here. A big excavator is more costly to buy and to move, and requires more working space. It will dig more dirt in a given time, will handle harder and coarser formations, and will show a lower cost per yard (cubic meter) if it has space to work and is teamed with other equipment of proper size. It is harder to service and repair because of volume of fuel and lubricants used, and weight of parts. It gets stuck more easily and seriously in soft spots, but seldom hangs up on rough ground.
When space is restricted, ground is soft, or other conditions are unfavorable to the large unit, a small machine may not only work at a lower cost per yard (cubic meter), but may handle a larger volume as well.
Under conditions of equipment shortage, the large unit often has a proportionately higher resale value than the small one. There is a steady trend toward the use of bigger equipment, resulting in reduced labor expense per unit of production.
New or Used? Some successful contractors buy nothing but new equipment, while others buy only used pieces. Before the Tax Reform Act of 1986 in the United States there was a tax incentive to buy new capital equipment. Now, with the ever-increasing cost for new equipment, more contractors resort to buying used equipment, or rent (short-term) or lease (long-term) new equipment. In general, but not always, a new machine will have less mechanical trouble, and will receive better service from the dealer. It is more costly in purchase price, and in percentage of loss when sold. It has advertising or prestige value. It may be difficult or impossible to secure in the make, size, and model wanted within a reasonable time.
A purchaser of used equipment should have a good knowledge of mechanical condition and current values, and must be alert for liquidations, auctions, and other forced sales where good values can be obtained. Considerable time may be required to find a particular make and model at a good price, and haste may make it necessary to pay too much. On the average, repairs will be more costly and service less satisfactory than on new units.
The expert buyer of used machinery is often able to sell the purchases at a profit, sometimes obtaining considerable work from them first. The average buyer, however, will seldom accomplish this, and is liable to be stuck with worthless machines now and then.
Primary production machines such as excavators and wheel loaders are replaced about every three years with a new generation of equipment that significantly outperforms its predecessor. Firms competing in a market that endeavors to constantly improve quality at low cost can not afford to hang on to key machines through two or three rebuild cycles. If they do not upgrade production units regularly, their competitors using new machines will be able to outproduce them.
Cost. A contractor should figure the cost of an intended equipment purchase in two ways—total outlay of cash and credit involved in buying the machine and putting it to work, and the relationship between its cost of ownership and operation and the money it can earn.
The expenditure, particularly the cash down payment, is the most important figure to the contractor with limited capital, but may be merely a factor in considering long-term costs for the large or well-financed operator.
FIGURE 11.3 Example of purchase cost, 2-yard (1.5-cu.m) track loader.
Care should be taken to include in the estimated cost all expenses involved. These may include list price, taxes, delivery to the freight station and then to the job or yard; extra front ends or other units to adapt the machine to different types of work; accessories such as cabs, lights, spare tires, parts, and special tools; repairs or alterations necessary immediately; and allied equipment required to get full use of the machine.
Some of these items are self-explanatory. Immediate repairs are required only on used machines and include such items as replacement of worn tires or tracks, mechanical repairs, engine work, or complete overhaul.
Alterations may be changes made to adapt to overloads or special work, or may be necessary to correct mistakes or omissions of the manufacturer. They can include fishplating and other types of reinforcement, building up wearing surfaces with hard steel, and adding safety guards.
Allied equipment might be a trailer to carry the machine, ramps for loading it, and different sizes of excavator or hauler to match its size.
It is also advisable to add up the interest or finance charges that will be incurred in making the purchase. As these are not actually part of the price, they should be added after the original cost figures are determined.
For example, if a contractor decides to replace an old loader with either a new or a used 2-yard (1.5-cu.m) machine, he or she might study the comparative costs by setting up figures such as those in Fig. 11.3.
When contractors buy a piece of equipment at a fair price, they do not “spend” the amount they pay. They invest it. They exchange their money for something of equal value.
But the value of machinery starts to decrease as soon as it is delivered, because of use, wear, weathering, and passage of time. This decline in value represents the true spending of the invested money, and it is entered in the books and deducted from taxable income as an expense—depreciation.
It would be expensive and unsatisfactory to have a machine appraised every year to determine how much it had depreciated. It is also necessary to estimate in advance the rate of depreciation, as it is an important factor in establishing the price to be charged for the machine’s work.
Depreciation, also known as accelerated cost recovery, is therefore calculated in advance according to various formulas. Each of them provides a basis for balance sheets, profit and loss statements, and income tax. Annual depreciation is converted to an hourly figure for estimates and cost records.
More simply, hourly depreciation is the cost of a machine divided by the number of hours that it is expected to work.
Useful Life. Depreciation schedules must be based on the number of years the equipment is expected to be in service. Its useful years depend on the type of equipment, the class of work it will do, how much of that work it does, the care it receives, industry standards, and income tax decisions. At best, the time selected represents only an informed guess.
Bulletin F was the United States Internal Revenue Service’s guideline to equipment life for many years. Extracts are shown in Fig. 11.4. It has been retired as a guide, but may still be used as a reference and basis for discussion.
FIGURE 11.4 Depreciation periods from Bulletin F.
FIGURE 11.5 Guideline for depreciation periods.
There is now a class life setup, with 5, 7, or 10 years as life periods for the contractor, shown in Fig. 11.5.
Schedules calling for more increased early depreciation than is allowed under the declining-balance method are likely to be disapproved.
Used equipment may be given the same depreciation period as if it were new, or any shorter period that appears to be reasonable.
Fast Writeoff. It is considered to be good practice to depreciate equipment at the fastest possible rate. This is called fast writeoff. It permits charging the largest proportion of costs against the machine when it is new and best able to carry the burden, and when it is doing the specific work for which it was bought.
Fast writeoff also keeps the book value of equipment down near its real value.
The most important advantage of fast writeoff is related to income tax. The faster the depreciation, the greater the deduction that can be made now, and the less to be left for an uncertain future. However, this expected advantage might turn out badly, as a contractor may waste the heavy depreciation on unprofitable years, and not have the deductions in later profitable periods.
Capital Gain. If a machine is sold for more than its depreciated value, the profit is a capital gain that is generally taxed at less than the rate of ordinary income, while depreciation is deductible at the full rate. A substantial tax saving may therefore result from a fast writeoff that overdepreciates equipment. The U.S. Internal Revenue Code now allows an equipment exchange provision that saves money in the turnover of a piece of equipment for similar replacement.
Salvage Value. This is the value of a machine after it is fully depreciated. It may be the actual sale price, or the value it might be assumed to have to the contractor when it is theoretically overage and worn out.
Salvage value varies greatly with the type of equipment, its condition, its scarcity, and the local prosperity of the construction industry. Sometimes it is only a few dollars per ton for scrap, at other times, but more rarely, as much as 60 percent of new cost. It is usually estimated at somewhere between 5 and 20 percent of purchase price.
The declining-balance depreciation method leaves a small salvage value automatically. With other methods, any estimated salvage is subtracted from purchase price before figuring depreciation.
Amounts allowed for salvage can be adjusted to simplify arithmetic. For example, if a machine with a 5-year life cost $16,346.93 and might be expected to bring $1,000 to $1,500 salvage, the salvage value could be taken as $1,346.93, leaving an even $15,000 to be depreciated.
Internal Revenue sometimes insists on deducting salvage value before figuring depreciation, and sometimes does not. It is better to depreciate the full purchase price when possible. This simplifies bookkeeping and makes an allowance for a probable increase in replacement cost, a matter that will be discussed below under Price Increases.
There are two official tax methods of computing depreciation for periods of 3 years or longer. These are known as the straight-line and the declining-balance methods. For short periods of less than 5 years only straight-line is used.
Information in regard to taxes may become obsolete while it is being printed. It should always be checked before use.
Straight Line. Straight-line is the simplest method, gives a uniform basis for figuring machine costs, and avoids complications in reserve for depreciation. The only thing it lacks is fast writeoff.
The cost of the machine, less any salvage value, is divided by the number of years it is expected to be useful. The resulting figure is the annual depreciation. It is the same amount each year.
Declining Balance. This method is based on the total cost of the machine. The maximum depreciation rate is twice that allowed by the straight-line method, but it is applied only to the value at the beginning of the year, which is the original cost less all depreciation that has been deducted.
For example, a $20,000 piece of equipment with a 5-year useful life would depreciate 20 percent or $4,000 each year under the straight-line method. With declining-balance, depreciation the first year would be 40 percent of $20,000, or $8,000, the second year 40 percent of $12,000, or $4,800, the third year 40 percent of $7,200, or $2,880. At the end of the fifth year a salvage value of $1,555.20 would remain.
If the machine’s life expectancy were 8 years, the depreciation each year would be 25 percent of the value at the beginning of the year.
Sum-of-the-Years Digits. This method, formerly recognized by the Internal Revenue Service, is based on cost less estimated salvage value. The number of years of useful life is taken as the first figure in a descending series, which for a 5-year period would be 5, 4, 3, 2, 1, and for 8 years 8, 7, 6, 5, 4, 3, 2, 1. The series is added together, giving 15 for the 5-year period or 36 for 8 years.
A fraction is made by placing the number of years of life from the beginning of the year over the total obtained by adding all the numbers in the series together. This is multiplied by the cost to give the depreciation for the year.
On a $20,000 machine with a 5-year life, first-year depreciation will be 
(or ⅓) times $20,000, or $6,666.67. In the second year, machine life from the beginning of the year is 4 years, so the fraction is 
, or $5,333.33.
The whole series of deductions would be , , 
, 
, and 
, totaling 
, or the entire cost.
On an 8-year basis the first-year depreciation would be 
(or 
) of the cost, or $4,444.44. The next year would be 
, and so forth.
Choice of Method. Declining-balance and sum-of-the-years-digits formulas are designed to put more of the depreciation at the beginning of the life. They provide the fast writeoff that is liked by industry, and they conform most accurately to the actual loss of value of equipment in normal markets.
However, they cause problems in converting to an hourly basis for use in figuring job costs. Using a different rate each year would be difficult. If there were several machines of the same model but different years, the attempt to charge different prices for them would be confusing to the bookkeeper and aggravating to the customers, and would make accurate pricing of a job almost impossible.
The contractor should use straight-line depreciation in figuring hourly costs, regardless of the method used for income tax and annual reports.
Figure 11.6 shows graph lines for these three types of depreciation, and Fig. 11.7 gives annual depreciation figures per $1,000 of cost. This table can be applied for calculations on any price of machine, by multiplying by its cost divided by 1,000. That is, for a machine costing $15,500, the table figures are multiplied by 15½.
Hours of Use. A contractor may elect to depreciate machinery on an hourly-use basis, without regard to calendar time. The contractor may buy a bulldozer for $25,000 and expect to use it 5,000 hours. He or she will charge $5.00 per hour against its jobs, and at the end of the year depreciate it by $5.00 times the number of hours it worked. If it were busy 600 hours, depreciation would be $3,000; if working time were 1,400, the year’s depreciation would be $7,000.
Units of Work. A machine’s production may be used as a basis for depreciation, if it can be measured accurately. A mine may buy a 5-yard (3.8-cu.m) shovel for $900,000 in the expectation that it will work 20,000 hours and load 8,000,000 tons (7,280,000 metric tons) of rock and ore before it is scrapped. If business is good, it may work 6,000 hours per year; if it is very poor, the machine might be entirely idle.
Under such conditions annual depreciation would not be appropriate. Instead, the $900,000 value of the shovel might be divided by the 8,000,000 tons it is expected to handle, giving a depreciation figure of $0.1125 (11¼¢) a ton. Each year it is depreciated on the basis of the number of tons loaded.
FIGURE 11.6 Three depreciation methods.
FIGURE 11.7 Annual depreciation on $1,000 cost.
Tires. It is common practice to deduct the value of tires from the purchase price of equipment, charging them as operating expense and depreciating the balance as a capital investment.
The advantages and disadvantages of this approach will be considered later. It is subject to disapproval by the Internal Revenue Service unless the contractor can prove from records that such tires usually last 1 year or less.
Repairs as Capital. Repairs are considered an operating expense as long as they do not add greatly to the value of a machine. But major overhauls, particularly if done late in the depreciation years, may be considered to be a capital expense that must be depreciated over several years.
For example, if a contractor spends $4,000 rebuilding a $10,000 machine in the last year of its depreciation schedule, he or she may have to list the expense as a capital investment, and set up a new schedule for it.
Fully Depreciated Equipment. If a machine is kept beyond the end of its depreciation period, no further depreciation is charged against it. However, the hourly price for it should remain the same. The part of its earnings that formerly paid for depreciation becomes profit, one of the “hidden profits” that help to keep contractors in business.
However, this extra profit may easily turn into a loss because of high repair costs and too much downtime. It is not good business to run old machines unless they are in good condition.
Short-Term Use. Many contractors buy machines for particular jobs, and sell them as soon as they finish. Others have a policy of turning in equipment after a certain amount of use, to reduce maintenance and job delays and to have the prestige value of up-to-date machines. Cost estimates are then based on the difference between purchase price and estimated sales price.
For example, a contractor may buy a fleet of $240,000 scrapers for use in two seasons of about 1,200 hours each, after which they will sell for one-third of their cost. Each of them will depreciate $160,000, and that cost per hour will be $33.33. This would compare with no-salvage depreciation of $24.00 for 10,000 hours or $48.00 per hour for 5,000 hours.
When periods of use are to be very short, it may be cheaper and/or less risky to rent equipment. This will be discussed later in the chapter.
The contractor who intends to stay in business should set up a depreciation reserve, in which funds can accumulate to replace equipment as it wears out or becomes obsolete. This reserve may be a separate bank account, a fund maintained inside the regular account, or perhaps only a page in the ledger.
As depreciation is charged against a machine and deducted from income, it should be paid into the reserve. If emergencies prevent saving the actual cash, the amount should at least be entered as a liability so that it will not be forgotten.
Need for Reserve. Machines wear out and must be replaced. Money is needed for the replacement, and it should be provided by the machines as they work. Otherwise the capital invested in them is consumed and destroyed.
If whatever money it made has been eaten up, the contractor may not even have the down payment on new equipment. Without adequate books the contractor will find it hard to understand why he or she should finish a number of busy and apparently successful years without money to replace machinery.
Inventory and Reserve. When a machine is purchased, its value is listed as an asset under Equipment Inventory or some such heading. The depreciation is deducted from this each year, and added to the Depreciation Reserve. On a $16,000 machine with a 5-year life, the straight-line method would work out as in Fig. 11.8.
FIGURE 11.8 Inventory depreciating into reserve, 5-year basis.
Inadequate Depreciation. Most manufacturers recommend that construction equipment, aside from big loaders and special units, be depreciated on the basis of 10,000 hours of use in 5 years. But as we will see later, most contractors are doing all right if they work 1,000 hours per year.
On the recommended basis a $100,000 bulldozer would depreciate $20,000 per year and $10.00 per hour, and its price on jobs would be set accordingly. But at the end of a year, it might have worked only 1,100 hours because of weather, job delays, and repairs.
The jobs would owe the depreciation reserve $20,000 for the year, but the machine would have earned only $11,000 for this purpose. There would be a deficit in the reserve of $9,000, which would have to come out of profits, or if there were none, out of other funds.
If this machine use had been more realistically figured at 1,000 hours per year for 5 years, depreciation would be $20,000 per year and $20.00 per hour. In 1,100 hours of work in 1 year, the machine would have been able to provide the full $20,000 for the reserve, plus a $2,000 surplus for profit. The extra $10.00 an hour might make jobs harder to get, but if that is the actual depreciation, the contractor must charge accordingly or lose money.
If experience shows that the machine will last 10 years at the 1,000 hours per year rate, its schedule could be set up for 10,000 hours in 10 years, and $10.00 per hour. On this basis the 1,100 hours of work would pay the $10,000 depreciation charge, with $1,000 left over. But if the machine had to be scrapped at the end of 5 years, the reserve fund would be short $50,000.
It may seem to the reader that this is just a matter of juggling figures. But the figures are very real, and understanding them and arranging them properly may mean the difference between prosperity and bankruptcy.
A contractor who can really use a machine for 10,000 hours is justified in basing estimates on long use. But if he or she is getting only 3,000, 5,000, or 6,000 hours out of the equipment now, basing costs on longer use is foolish and dangerous.
Price Increases. Contractors share with all other users of modern machinery the problem of price increases. The price of any equipment is likely to increase during its life, so that the replacement cost is more expensive than the original cost. This arises both from a general rise in prices, and from improvements in equipment that add to its cost.
A properly kept depreciation account for a single machine will seldom contain enough money to buy a new one if the original unit is scrapped at the end of its calculated life. Other funds or loans have to be added to buy a replacement.
This difficulty may be partly or wholly overcome by figuring that the machine has no salvage value. Since it almost always has some salvage value, even if only for junk steel at $10.00 per ton, and is often worth a substantial amount if in good condition, its value plus the depreciation reserve may provide fully for a replacement of the same type and size.
Another hedge against price inflation is to increase the depreciation charge against the machine whenever its replacement price is increased, so that it is the same as for a new model.
For example, if a $20,000 machine were depreciated on a 5,000-hour basis, the hourly depreciation would be $4.00. If after 2 years the price of similar machines were increased by the manufacturer to $23,000, the depreciation charge against the old machine would be increased to $4.60. This is for internal bookkeeping only, and cannot be used on income tax returns.
This has the advantage of partially providing for replacement at an increased price, and of keeping prices uniform with new units that might be added.
Advance in prices to cover rise in replacement costs is particularly important for firms that obtain a substantial part of their income from renting out machinery.
Improvements may be made in equipment so that a new model is not strictly comparable to one 2 or 3 years old. However, the only point of importance in regard to upgrading the old model in price per hour is whether the changes produce an important increase in production. They often do not.
There are at least three different ways to consider an investment in equip ment. They are: initial, total, and average annual investment.
Initial Investment. This is the net cost—the total of cash paid and debts incurred to buy a machine. It causes a shift in the balance sheet, adding to machinery inventory by reducing cash and/or increasing liabilities. This could be called the market value method for covering the equipment cost.
At the beginning of each year the value is estimated and covered by the estimated hours the piece of equipment will be used that year. This method results in a higher charge in the earlier years but lower in the years nearer the end of the machine’s life
Total Investment. It is customary, although not particularly reasonable, to charge equipment with the interest on any cash invested in it. Also, property taxes and loss insurance are paid on the basis of machine value. This method could be called the amortization method which uses a discounted cash flow annuity calculation. It is the method banks and finance houses use. It will likely result in a charge slightly higher than with the average annual investment method.
Since a certain part of the initial investment is amortized—that is, paid off in depreciation charges—each year, the investment on which such charges are figured is reduced in a series of steps. For the first year it will be the purchase price, the second year purchase price less one year’s depreciation, and so on.
Such charges are most easily worked out for the whole life of a machine by using the total investment. This is found by adding the machinery inventory value for every year of the unit’s life. In Fig. 11.8 the total of the first column, $48,000, is the total investment for that machine.
Total investment (TI) may also be found by adding 1 to the depreciation period in years (DP, yrs), and multiplying by one-half the original cost. Stated as a formula, this is
TI = (1 + DP, yrs) × cost/2
For a $16,000 machine used for 5 years,
If interest were to be charged against the unit at 6 percent, the total interest for its life would be 6 percent of $48,000, or $2,880.
Average Annual Investment (AAI). This is a more realistic figure that averages the purchase cost over the years of machine life. It can be found by dividing the total investment by the number of years.
FIGURE 11.9 Average annual investment for $1,000 cost.
Average annual investment may also be obtained by multiplying the cost by the years of depreciation (DP, yrs) plus 1, and dividing by twice the years of depreciation. Stated as a formula,
Figure 11.9 gives the average annual investment for $1,000 purchase cost for the most used depreciation periods up to 25 years. To use this, multiply the figure appearing after the number of years of life by the number of thousands of dollars in machine cost.
Rates. Interest rates vary greatly with different types of loans, with the risk and bookkeeping involved for the lender, and with the general level of interest rates at the time the loan is made. They can be very confusing.
If a person borrows $100 and pays it back at the end of a year, plus $6.00 interest, the interest rate is 6 percent. If he or she keeps the money for 2 years and pays only $6.00 interest at the end of that time, the rate is 3 percent.
If the $100 is borrowed on a discount basis with the interest paid at the beginning, the borrower will receive $94 when the loan is made, and pay back $100 at the end of the year. Here the real rate is 6.38 percent (100/94 – 1).
On an installment loan with an advertised rate of 6 percent on the unpaid balance, the borrower will receive $100 and pay $106 in 12 equal monthly payments. The real interest rate is about 11 percent, as the average indebtedness for the year is only $54.16.
True interest rates can be found by dividing the amount borrowed into the interest paid, and multiplying by a fraction made of 1 over the time in years, or 12 over the time in months.
If $5.00 in interest is paid on $100 borrowed for 2 years, we have
If the term of the loan were 4 months, then
Interest on Equipment. As mentioned before, interest should be charged against a machine even if it is bought for cash. If the purchase is financed at a rate of more than 6 percent, the higher rate is charged, while if interest is less than 6 percent or if none is paid, the charge is kept at 6 percent. Interest is figured on a yearly basis on the average annual investment.
This custom does not conform to good accounting practice, and is in conflict with methods of treating money tied up in other ways.
Equipment Debt. There is good reason for charging interest on equipment purchase loans against the equipment, although a good case could also be made for charging it to general overhead. Carrying it as an equipment expense has the advantage of simplicity and of automatically identifying the source of the charge.
General Debt. A second case is to charge bought-for-cash equipment with the same interest rate being paid on open loans for general purposes. It should be considered that money borrowed for general business use is a general overhead item, and responsibility for it is shared by field, shop, and office equipment, materials on hand, cash in the checking account, accounts receivable, and work in process.
The value of owned equipment is usually much greater than the amount of the general debt. If a machinery inventory of $100,000 were charged with 6 percent interest because of a debt of $20,000, it would be paying $4,800 more than the cost of the interest.
If this equipment were charged with the actual interest, the $1,200 paid would be applied to the whole $100,000, so that interest would be at the rate of 1.2 percent. If the debt were carried by all the money-consuming items mentioned above, which might easily total $150,000, the effective interest rate would be only .8 percent.
No Debt. A third situation is to assign an interest charge of 6 percent to equipment, even though its owner pays no interest on any kind of debt. The idea is that the contractor could invest money elsewhere if he or she did not buy equipment. But the only investments that a contractor can make and still keep the money available in the business are savings accounts and short-term bonds, that might pay 5 percent or less.
It is of course both possible and likely that funds invested outside the business would fail to return 6 percent interest, and might be partly or wholly lost.
Equipment is not a bond or mortgage that justifies itself by paying interest. It pays its way by production. To saddle it with interest charges is to ask it to produce a profit before it goes to work. In this highly competitive business, such an arbitrary increase in its cost basis may make the difference between getting a job and losing it.
However, since assuming of interest charges is now a widespread practice in the industry, it will be taken into account in some of the cost calculations that follow.
Installment Interest. The interest rate on an installment contract is found by dividing the total debt into the total interest.
Total debt (TD) is a figure that is similar to total investment. It is found by adding 1 to the number of monthly installments (1), multiplying by the loan, that is, the amount borrowed before interest, and dividing the result by 24. The formula is
The amount of interest is found by adding all the installments together, or multiplying their number by their amount, and subtracting the amount of the loan.
For example, $12,000 of a $16,000 purchase is financed in 36 monthly notes, 35 for $393.33 each and a final one of $393.45, totaling $14,160. Subtracting $12,000, we find that the interest totals $2,160. By the formula above, the total debt is $18,500. Dividing $18,500 into $2,160, we have .117, or an interest rate of 11.7 percent.
Some contractors want to know the interest rate of finance charges on the whole purchase price. If the above machine had 5-year depreciation, its total investment would be $48,000. This would be divided into the $2,160 interest, showing a rate of 4.5 percent on the machine.
If the machine is to be charged with 6 percent interest on the nonfinanced part of the investment, the total debt is subtracted from the total investment, and the remainder multiplied by .06. In this example, we would have $48,000 minus $18,500, or $29,500, multiplied by .06 to give an interest charge of $1,770. Added to the finance charge, this would give a total interest cost of $3,930 and an average rate of a little less than 8.2 percent.
It is worthwhile for a contractor to understand interest rates. The contractor will then have a clear picture of the extra expense involved in financing equipment, and may be able to save substantial amounts by being able to detect mistakes or fraud in papers.
The cheapest way to finance the purchase of a piece of equipment is to borrow from a bank on a straight time note at the regular rate of interest. Such a loan may be obtained by pledging collateral such as stocks, bonds, or accounts receivable. A substantial contractor may be able to obtain such a loan without putting up security.
Installment Plans. Most equipment financing is done on a straight-line installment basis, with a down payment of 20 to 40 percent (usually 25 percent) and the balance plus interest paid in equal monthly installments over a period of 1 to 5 years, with 18-month to 3-year terms the most common.
The finance or interest charge may be 10 percent per year on the original amount of the loan. That is, if $1,000 is borrowed to be repaid in 12 monthly installments, the interest is $100.00. If installments extend over 3 years, this charge is $300.00. It works out to an actual rate of around 19 percent, the higher cost being found on the longer terms.
Installment payments are secured by a chattel mortgage on the equipment, that is recorded in the town or city records. The borrower must be sure to have this canceled by filing a release from the finance company or bank when she or he has completed payments.
When the value of the equipment and/or the contractor’s ability to make the payments is questionable, the lender may ask for additional security, such as an endorser on the notes, or a mortgage on additional pieces of equipment that have no debt against them.
If loan installments are not paid on time, an extra charge may be made for each one that is delayed. The lender also has the privilege of demanding immediate payment of the whole sum if even one payment is unreasonably delayed, and may seize and sell the equipment to collect. Machinery sold in such proceedings is not likely to bring its full value, and the contractor may still owe a balance even after the equipment is lost.
Schedules may be made up to allow omitting payments in off seasons, usually three or four winter months. Such a provision will either make the other payments larger, or stretch them over more years. Most contractors manage to make regular winter payments with surplus from working months, collection of accounts, or short-term borrowing from banks.
Property Tax. The contractor must pay a variety of taxes, including real estate, personal property, excise, and payroll levies. Here we are concerned wit the personal property taxes payable on the assessed value of equipment.
This is entirely a local matter. In some states the local governments are permitted or required to tax machinery and other movable property in the same manner as real estate. This tax may range from 2 to 5 percent of the assessed value of the equipment, depending on the type of equipment, its costs, age, and condition. In other states or localities there are no property taxes whatever on construction equipment.
It is customary for estimating advice to suggest using the nationwide average tax of 1.5 to 2 percent of value in figuring ownership costs. However, in this case, average costs have little bearing on particular costs. Contractors must find out what taxes, if any, they will pay before they can use them in figuring.
The tax is usually low in country districts and high in cities, but it varies with local financial policies. A high rate with a low assessment may mean a lower tax than a lower rate and full-value assessment.
Assessments may or may not follow the depreciation schedule of the contractor. But it is a general practice to assess a machine for at least 20 percent of its cost as long as it looks as if it might run.
Registration. Highway vehicles must have registration plates. The cost is moderate for cars, pickups, and jeeps, but may be very heavy for big trucks.
In most states this tax is based on weight and/or capacity. In some there is an additional mileage charge. There is no close relationship to purchase price, so that it cannot be handled on a percentage basis.
Registration is an overhead expense, mileage an operating item. Both are added to other costs in setting a price on a truck’s services, but this must be done on an individual basis.
Liability Insurance. Highway vehicles are not covered by a contractor’s general liability and property damage insurance. They have special coverage at much higher rates.
This is another ownership expense that is not related to purchase cost. Its amount is affected by vehicle weight, type of use, accident record of the owner, and miles driven.
Loss Insurance. The cost of insurance against fire, collision, upset, and theft is an ownership cost that is charged against each piece of equipment in proportion to its value. There are equipment theft prevention systems available that should reduce the insurance cost if one is installed.
The charge for insurance of this type is known in insurance circles as a judgment rate, as it is set for each locality or contractor according to the insurance companies’ judgment of the risks involved.
The rate for fire, collision, and upset in a combined extended-coverage policy is usually about 1 percent of the actual value of the equipment, for the small contractor with a few machines used in miscellaneous work. Very large earthmoving or construction projects, such as the St. Lawrence Seaway sections, may be given a rate as low as ½ percent. This is in spite of the fact that some of the machines work under very dangerous conditions, as the extreme risk positions are outbalanced by many behind-the-lines units working under safe and stodgy circumstances.
The highest rates for this coverage may be 1½ to 2 percent. These are charged where the job conditions are more dangerous than average, or where the contractor is considered to be careless or reckless in management.
Theft insurance may be written into these policies as an extra coverage. With a $50.00 deductible clause it may be free in country districts where stealing is rare, and up to ½ percent of value in cities. One-quarter percent is a usual charge. Companies may refuse to issue theft coverage at any price in certain cities or areas.
Premiums are usually charged on the basis of the contractor’s valuation of his or her equipment, as long as the contractor follows any reasonable and consistent system of depreciation. Each year, or at more frequent intervals, the contractor sends the insurance company a list of equipment, showing date of purchase, original cost, and present value. The premium is charged as a percentage of the total.
Caterpillar offers the Cat Machine Security System (MSS) on individual machines and it has proven successful in stopping thievery of those machines.
Topcon’s Tierra device on a piece of equipment provides for bidirectional communication and data sharing with a central base and remote computers. With Internet connections and a global positioning system (GPS) it shows the locations of pieces of equipment on a given jobsite. If a piece unexpectedly goes outside the jobsite an e-mail or text message alert is sent to people monitoring that job to prevent a theft.
If a unit must be replaced because of insured loss, payment is made on the basis of the actual value of similar equipment in the locality at the time of loss. However, the company has the right (which it may not use) to refuse to pay more than the value of the machine stated in the policy schedule.
Therefore, if the value stated in the policy schedule, which should be the same as in the equipment inventory, is more than the actual value, the premium on the excess might be wasted money. If schedule value is less than real value, the equipment is not fully protected against complete loss. However, complete loss is rare except in very small units, and most payments under these policies are for repairs.
Storage. It is unusual for there to be any storage cost directly chargeable to a piece of equipment. Most contractors have at least one home lot, often near their repair shop. This has room for a number of pieces of equipment. The rest are kept out on jobs, where they must be to earn their keep. They usually can be left on or near a job until they are moved directly to the next one.
Ownership and maintenance of a storage yard are strictly a general overhead expense, as this facility is not expanded and reduced with purchase or sale of machines.
However, a contractor who wants to charge it against individual machines can do so by finding the annual cost per square foot of the yard, and charging each machine according to the number of square feet it occupies when it is there.
For example, a piece of industrial land in outskirts of a city might cost $75,000 per acre ($18.50 per sq.m), including a graded and stabilized surface. It might be assessed at full value, with a tax rate of 4 percent. As this is not an income-producing investment, 6 percent interest might be charged against it. Cost per square foot ($/sq.m) might be worked out as in Fig. 11.10, to $0.413 ($4.44/sq.m).
A large scraper might occupy a space 50 feet (15.2 m) long and 12 feet (3.7 m) wide, or 600 square feet (55.7 sq.m). Allowing 400 more feet (122 m) for maneuver space, its requirement would be 1,000 square feet (93 sq.m). Annual cost would then be 1,000 × .413, or $413. This machine might cost about $50,000, and have an average annual investment of $90,000, so storage would be nearly 0.5 percent of value. A shovel of similar value would need less than half as much space.
It is unusual to store large pieces of equipment indoors. If it is considered necessary to do so because of vandalism, extreme cold, or other conditions, the cost may be as high as 5 percent of investment.
FIGURE 11.10 Cost of storage yard.
FIGURE 11.11 Ownership costs per $1,000 average annual investment, without depreciation.
Summary. Figure 11.11 shows the normal range in ownership costs or carrying charges, on a per year per $1,000 of average annual investment basis.
There is a wide range, from .5 to 23.5 percent. Most estimating advice recommends using 10 to 13 percent. Ten percent is an easy figure to remember and to use, but 8 percent is likely to be more accurate if interest charges are limited to those actually paid.
The contractor or estimator should not rely on any general average of costs, but should find out what they really are for her or his own situation.
Trimble’s Connected Community. (TCC) is an online collaboration tool that enables construction contractors and clients to manage project data, by keeping track of the project and communicating with employees and others who need to know the information.
One of TCC’s important features is its file-management system, where an equipment fleet manager can organize and analyze equipment data, such as travel times, fuel costs, and down time. That data can be shared by anyone else, say, an equipment operator who has access to the community via the Internet.
Another important use of the TCC is to upload a new design change that needs to go to the field as soon as it is approved. With approval the field supervisor can have the change downloaded and made available to a loader, excavator or whatever equipment needs the information.
TCC can collect digital photos of the project site on a daily basis for progress reporting. It can also provide a calendar of project meetings and deadlines, and equipment availability.
Annual depreciation and other ownership costs are converted to an hourly figure as a basis for charging out equipment time. At first glance this appears to be easy. It is only necessary to divide the annual costs by the hours worked per year, or the total work hours by the total costs.
For example, a machine whose fixed costs during a year are $3,600 and that worked 1,200 hours in that year will show fixed cost per hour of $3.00. Or if its total costs for life are $18,000 and its total hours of work are 6,000, the figure is still $3.00.
But it is difficult to settle on the number of hours that equipment can be expected to work, as that is affected by a number of variable factors.
This discussion will be limited to the problems of those contractors who work a single shift and are subject to delays in weather, getting jobs, and keeping equipment running—which includes most of them. It will also deal chiefly with the contractor’s first-line equipment that has work most of the time.
Maximum Use. Estimating advice from manufacturers usually recommends a basis of 2,000 hours per year, and a 5-year life. But most construction work is done in 8-hour days and 5-day weeks, with shutdowns for a minimum of six holidays. The maximum number of hours that can be worked in a year is 2,040 on this program. It is usual to lose an extra 5 days in special holidays or shutdowns, reducing the year to 2,000 work hours.
Bad Weather. Weather often makes outdoor heavy construction work impractical or impossible. One New England state highway department estimates that weather and ground conditions permit the following number of days per quarter:
These figures are on the optimistic side for the area, and they are based on working Saturdays when necessary to make up for rained-out weekdays.
A 5-year survey by the U.S. Bureau of Public Roads indicates that the nationwide average of shutdowns on highway jobs that are due to weather amount to about ⅕ of working time.
The southeast and south central states do not have to stop work for snow and ice, but they do have rain that may have equally bad results. Only in certain areas in the southwest can the 2,000-hour figure be even closely approached on a permitted-by-weather basis.
Maximum working hours are affected by job conditions. Work in rock, gravel, or sand, or on surfaced haul roads, can continue under conditions that would make a job in loam or clay impossible. Pressure of a deadline can make it worthwhile to work under very unfavorable conditions, just in the hope of making some progress.
The type of equipment also affects lost time during weather. A dragline piling wet soil may not be affected by rain unless it is flooded out. Crawler equipment keeps going after rubber-tire types give up. Vehicles may carry part loads where full ones would make them bog down.
If there is a lack of any specific information to the contrary, the estimator should allow for a loss of 20 percent of annual working time because of unfavorable weather.
No Work. Equipment can work only when there is a job. This means not only work in general, but for the specific machine under consideration.
Some contractors find little difficulty in keeping busy all working season or all year; others must get through frequent or prolonged periods of insufficient work or no work. The differences depend on construction activity in the area, the specialties of the contractor and the demand for such specialties, the aggressiveness and reputation of the contractor, and a factor of luck in bidding and in selling services.
Even when a contractor has a job, it may not be for all the equipment. The contractor may even have to leave his or her own machinery idle and work with hired equipment at a job that is outside the regular field.
As a general average, a capable contractor may hope to keep the first-line equipment busy on jobs about 80 percent of the time that weather permits working.
Downtime. Even when weather is good and work is available, a machine may not be able to work because of need for repairs to itself or to another unit whose operation is necessary to it, or as a result of shortage of materials, strikes, or other causes. This nonworking time on the job is called downtime.
Studies conducted by the U.S. Bureau of Public Roads, now the Federal Highway Administration, show that equipment downtime on the job is likely to be between 20 and 65 percent of working time, with age and condition of equipment and competence of management being the most important factors in the variation.
Most of this downtime is considered to be working time (if the machine were rented, rental would be charged), but the owner must take its loss into consideration in figuring the work gotten out of the machine.
Such downtime is in addition to the small delays that are taken into account by using a 45- or 50-minute work hour.
Work Hours Summary. A rule of thumb for the hours that heavy equipment will work is to assume a one-shift, 2,000-hour year; take off 20 percent for bad weather, leaving 1,600 hours; take off another 20 percent for lack of work, leaving 1,280 hours, and another 20 percent (an absolute minimum) for lost time on the job, leaving a net working time of 1,024, or say 1,000 hours. This is the Rule of the Three Twenties.
Like all rules of thumb, this can be way off. But before it is discarded, the estimator should study his or her own conditions carefully to see if they are really better, or quite possibly worse.
This rule does not apply to mines and pits, that may work three shifts on a 7-day week, and have up to 8,600 scheduled machine work hours in a year. They do not ordinarily lose as high a proportion of this time.
A number of machine cost computations in this book use a 1,200-hour year as a basis. This is due partly to the fact that many contractors consider the lost time on the job to be working time, and partly to the longer-than-5-year life enjoyed by many machines. That is, the hourly costs come out nearly the same whether the machine is used 1,200 hours per year for 5 years or 1,000 hours for each of 6 years.
Equipment Training. The John Deere company has what they call an Equipment Training Simulator introduced in 2008. It is used for training operators of backhoes and complements their simulator for four-wheel-drive loaders. Another simulator will be introduced for motor graders in 2009.
Eight highly detailed and realistic lessons teach the proper operator technique, machine control, and safe operation on a virtual job site.
Equipment Life. The useful life of construction equipment varies depending on how it is used and maintained, also how long the contractor wants to keep using it as opposed to replacing it with a new piece. A study conducted for Construction Equipment magazine in the 1990s found that the average life of major equipment kept in a contractor’s fleet was about 7,000 hours. Figure 11.12 shows the range of useful hours to replacement for key types of equipment according to the study.
A contractor might use a fleet information system (FIS) computer program to help decide on the equipment life for a piece or set of equipment he or she owns. The program calculates what-if costs based on current information. The computer software projects ownership and operating costs of a machine being analyzed for replacement. Estimated downtime is calculated based on the reliability and life averages for similar equipment. Cost and life data is drawn from the database maintained with the firm’s fleet management records.
The FIS system then balances costs with the expected revenue the machine will earn, based on its past averages of usage and revenue earned. The system also estimates residual value expected at the time of replacement, including any repairs that might have to be made.
The result is an expected cost per hour for a rebuilt machine, which can be compared to the costs for buying and operating a new machine. If the decision is to retire the old machine, the equipment life of that machine has been determined.
Equipment Life Based on Repair Cost. It has been shown that the life of a piece of equipment depends on cost of repairs to the machine. The cost of those repairs per hour is at a minimum after 7,000 to 10,000 hours of use depending on the type of equipment and its use. Then they jump because of requirements for a new set of tires, hydraulic pump, rebuild of the transmission, or maybe a new engine. That time of minimum cost of repairs in the life of a piece of equipment might be called its sweet spot.
FIGURE 11.12 Useful life targets for key machines.
Auxiliary and Emergency Equipment. Most contractors own a certain amount of equipment for which they find little use. For example, a general contractor who seldom does rock work may keep a compressor and drill to have them immediately available if required.
If a contractor owns a compressor or pump that is used only 50 hours per year, the depreciation per working hour is 20 times as much as that of another contractor who uses hers 1,000 hours. The depreciation on such a unit must be charged to general overhead, as the machine cannot hope to earn it.
Equipment Investment Analysis. The total investment analysis for a piece of construction equipment is an involved process. Major factors to take into account are the selling price, resale value, financing costs, accelerated cost recovery (depreciation), insurance, and a variety of taxes. These must account for the estimated market value, the finance period, the finance charge or addon interest rate, and the residual book value. To make a satisfactory analysis is more involved than can be shown properly in this book. It can be done with the help of a professional financial person or using a guide like the one produced by Caterpillar, Inc.
The expense of operating a piece of equipment is likely to include the following:
Fuel: both fuel and handling
Lubrication: cost of oil, grease, lube equipment, and labor
Maintenance and repair: parts, supplies, shop equipment, and labor
Labor: operator, oiler, helper, ground men, supervision
Fuel. Fuel cost varies widely with the power, type, and condition of engines; the type and condition of equipment; type of work; and the grade of fuel.
Fuel consumption in relation to horsepower and load is discussed in the next chapter.
Fuel costs vary with the prices of crude oil, distance from the source, quantities delivered, seasonal demand, and taxes imposed.
The delivery quantity may be very important. The contractor with a tank of 275- or 550- gallon (1,040- or 2,080-liter) capacity may have to pay up to 5¢ per gallon more than a big competitor who can take 2,000 or 3,000 gallons (7,570 or 11,400 liters) at a time. However, this difference can be reduced or eliminated if the small order can be filled on the same trip as others in the locality.
There are state taxes of 9¢ to 36¢ per gallon that apply to fuel used in highway vehicles, and the federal gasoline tax in the United States is nearly 20¢ per gallon. Generally, any vehicle that is registered for highway use must be charged with the state tax, even if operation is off the roads.
Taxes may be paid by the distributor at the highest rate and passed on to the contractor, who then must report the amounts used at lower tax rates to obtain a refund. Or the fuel may be delivered tax-free, and the user required to make monthly or quarterly statements of use, with payment of tax due. Payment by the distributor is usually most convenient.
These taxes are substantial enough that it pays the contractor to keep careful account of her or his use of fuel. A tally sheet must be kept at the pump or in the distribution truck, showing quantities, type of equipment, and class of use. The bookkeeper needs the information on these sheets to make up reports, for either tax payment or refunds.
Lubrication. There is considerable variation in lubricant prices and applications, with resulting confusion to the purchaser. In general, the best quality and most suitable lubricant is the most economical regardless of its price per gallon or per pound, as the cost of labor in using it, and the expense of repairing wear and damage resulting from poor lubrication are vastly greater than the price differences.
Oil. Equipment manufacturers recommend that engine oil be changed at regular intervals, that may vary from 75 to 200 hours in different makes or models. The time between changes may be shortened under dusty or extreme temperature conditions, or lengthened where work is light, air is dust-free, and/or a special type of filtering or reclaiming apparatus is used.
Crankcase capacities vary widely with size and design of engines. They may hold a quart of oil for every 3½ horsepower (2.6 kw), or only a quart for 13 horsepower (9.7 kw).
While oil consumption may be negligible in new engines, it may be as high as 
of fuel consumption in engines that have badly worn piston rings and/or external leaks. However, no properly run job would tolerate oil loss of more than 
of fuel use, as pumping oil into cylinders is accompanied by losses of fuel and power, and leaks are likely to allow dirt to get in.
Oil in transmissions, rear ends, and final drives is usually changed twice per year, the most important change being in the fall. Loss between changes is usually negligible, but may become severe because of failure of seals and gaskets, or cracks in housings. Any type of leak may allow dirt to enter, so prompt repair is important.
In general, an allowance of 3 times the reservoir capacity per year will take care of two changes and losses by leakage or accident.
Grease. Equipment varies tremendously in its requirement for grease. For example, a 20-ton (18,200-kg) crawler tractor may use from 1 to 5 pounds (0.5 to 2.3 kg) of grease in old-fashioned track rollers every 8 hours or less. A similar machine having positive seals may need lubricant in the rollers only at 1,000-hour intervals or when the rollers are rebuilt.
Here records are the only indication of what to expect. Even if they only indicate the pounds of grease bought and the total equipment work hours in a year, they will at least provide an average requirement for the fleet.
Small equipment is carried in the tools account and is difficult to separate, while big units are depreciated in the same manner as other equipment. Lacking information to the contrary, a 6,000-hour life may be assumed for them.
Lube Labor. The pay of the people who operate a grease truck or a stationary rack is definitely charged to lubrication. But an oiler on a shovel, in addition to taking care of oiling and greasing, is likely to assist the operator with other maintenance, repair, moves, and in many other ways. It is usual to carry their pay in the same account as that of the operators.
A great deal of lubrication is done by the operators themselves. They may be paid for ½ hour overtime a day to take care of this and fueling, or may do it during the shift in pauses in the work.
A grease truck crew can take care of about three machines per worker hour. This figure is an average of daily lubrications that may take 5 minutes or less, periodic thorough jobs where all points are reached and all reservoirs checked, and complete lubes including oil change.
Rule of Thumb. In view of all the variables and borderline costs, the estimator is justified in accepting and using the rule of thumb that costs of lubrication equal one-third of the cost of diesel fuel or one-quarter of the cost of gasoline. There will usually be some error as a result, but it is likely to be less than that resulting from a superficial attempt to work out the actual figures.
The important thing about keeping track of these costs is to decide on a system and stick to it. A contractor who uses a different method each time he or she thinks of one will not be able to make comparisons between different jobs and different years.
Always keep in mind that the biggest lube expenses are the failures—the breakdowns that are caused by improper or neglected lubrication.
There is no definite line of division between maintenance and repair. It is usual to say that maintenance includes items such as cleaning, inspection, adjustment, routine replacements, and hard face or other build-up welding, while repair consists of fixing or replacing worn or broken parts.
Lubrication is often treated as a maintenance expense, and it is probably the most basic and important of all the maintenance operations.
Many contractors and most equipment rental firms divide repairs into two classes—major repairs, overhauls, and painting; and small repairs and maintenance. The first class may be called shop work, as it should be done in the repair shop even if it actually has to be done in the field, and the second class is called field repairs and maintenance.
In rental arrangements, the shop repairs are usually done by the owners, the others by the lessee, although the contracts do not say so specifically.
A repair, whether in the shop or the field class, serves simply to fix or replace a defective or broken part, together with any associated parts that have caused the breakdown or have been affected by it. An overhaul involves thorough inspection and all necessary rebuilding of an entire unit.
For example, a transmission with a broken gear may be repaired by simply replacing the gear; but if it were overhauled, it would be completely disassembled, all parts would be cleaned and checked, and any defective ones replaced.
Whatever classification is used, there is nothing that is more important to the contractor’s success than careful maintenance and prompt repair, as it will save equipment and money.
Estimating Repairs. A contractor must have a fairly accurate idea of the future cost of maintaining and repairing a machine, before a price can be put on its use. If good records have been kept, the contractor can check his or her own experience, and use it as a basis on which to allow for future expenses.
If there are no records, or if new equipment and/or new jobs are so different that old records do not apply, estimating must be done on the basis of reports of other people’s records or ideas. These must be modified to suit particular conditions.
Most manufacturers and estimating books recommend setting total nontire repair cost during the life of the machine at 60 to 100 percent of depreciation. However, most of these same sources set machine life at 10,000 hours of use in 5 years. But we have seen that the contractor usually does not get over 5,000 or 6,000 hours of machine time in 5 years. This leaves the question of whether these authorities really expect life to be 10,000 hours or 5 years.
There are so many variables in this field that experience records can be found to support almost any estimate. Records can be obtained at any time in the field by handheld instruments reading data in bar code form from the equipment. The bars may be set to give: hours of operation, hours since last oil change, and other such data. Costs are affected by the quality of the machine, accessibility of its parts, standards of lubrication and maintenance, skill of mechanics, work conditions, hours and years of use, and quality of supervision and operation. There is also an important factor of luck.
The contractor who has just one important machine may be made or broken by different combinations of these factors. But possession of a number of machines will usually cause good and bad features of individual machines to average out, and a succession of jobs is likely to smooth out the ups and downs of work conditions.
Equipment Monitoring. Remote control monitoring systems are now available in heavy equipment. The systems monitor machine conditions such as operating hours, temperature of coolant and various oils, oil pressures, and shaft speeds. They use a global positioning system (GPS) to fix the current position of the machine, then they communicate detailed location and the performance data over a wireless link to the company’s computer, pager, or cellular phone. The cost of the hardware for this monitoring system in a machine is only in the thousand dollar range and monthly fees may be as low as $20 per machine.
The monitoring, that can be done on a continuing basis, is able to pick up danger signals from a piece of equipment that suggest it be stopped for maintenance work and repair, if necessary. The information is received in a timely manner before a major breakdown would occur and allows for preventive maintenance to be done. The system can be set up to tie in with the on-board computer so that the operator can be aware of the need for maintenance.
It has been shown by a contractor with a large fleet of equipment that scheduling machine service based on the gallons of fuel consumed is more effective than scheduling based on hours or miles (kilometers) run. That reduced the frequency of regular maintenance in most cases.
Commercially available monitoring packages usually include the GPS tie for location and the hours of use. But then the user can choose to monitor: coolant temperature, hydraulic temperature, engine or hydraulic oil pressure, or other functions of working parts. For instance, on hard driving machines, like bulldozers and scrapers, the maintenance manager may want to monitor the transmission oil temperature.
In the beginning of equipment monitoring systems the hardware bounced data off satellites, but satellite air time can be expensive. So vendors have worked out the system to transmit data using commercial radio frequencies and cellular phone systems. That way the charge may be as low as $15 per month per machine. A major problem for the monitoring system is the massive volume of data, so it needs to be stored in short term memory and delivered to a maintenance decision maker for early action as needed.
Repair Factors. Figure 11.13 gives a table of repair factors that may be useful in determining probable repair costs over the life of a machine, in adjusting experience records to new conditions, or in explaining expenses that have already been incurred.
In using this table, the estimator selects the description under each heading that most nearly represents the conditions expected, and takes the figure that follows it. These figures are multiplied by each other to produce a combined repair factor, that is then multiplied by 1/10,000 of the purchase price of the piece of equipment.
Unless special conditions have an unusual effect on tire life, these factors may be used for the whole machine, including tires. When tires have exceptionally short or long life, these factors should apply only to the nontire part of the equipment, and the factors in Fig. 12.104 used to determine tire life.
For example, a contractor may buy a crawler-mounted front loader for $190,000. It is a top-quality machine, maintenance is expected to be good, work conditions are heavy, temperature is normal; experience, work pressure, and operation are average; and the machine is expected to be used a total of 6,000 hours in 5 years.
FIGURE 11.13 Repair cost factors.
For the given example see the following table:
Dropping the 1.0 factors because – - they do not affect the multiplication, we have
1.4 × 1.4 × .8 × .8 = 1.2544, say 1.25
We multiply this by $19.00, which is 1/10,000 of the purchase price of $190,000. Then
Hourly repair cost = 1.25 × 19 = $23.75
These factors should be used only by persons experienced in heavy equipment use, as judgment is required in selecting the correct factors, and in deciding whether the results obtained are reasonable.
If equipment is not used in its proper jobs, in relation to its size and its design, repair costs will be affected. For example, a ½-yard (0.38-cu.m) shovel used in coarse blasted rock would be in the rough-conditions classification, even if the bank were average digging for a 2½-yard (1.9-cu.m) machine.
A highway-type dumper used in off-the-road work will suffer severely. Repairs are likely to be those of rough conditions, even if the job were average or light for an off-the-road hauler.
End-of-Period Cost. Repair cost increases as equipment ages, and the increase is faster than is indicated by whole-life averages. It is desirable to estimate its actual rate at the end of possible life periods, to determine whether it is likely to be so high as to make it uneconomical to keep using the machine.
Average repair cost can be converted into the end-of-period rate by multiplying by the proper one of the following factors:
Repair Cost. Figure 11.14 is offered for those who prefer taking a quick approximation from a graph to working out an answer with a set of factors. It shows hourly repair costs for a piece of equipment in average and heavy work conditions on a $1,000 cost basis. Both average and end-of-period figures are included.
FIGURE 11.14 Depreciation and repair.
This graph takes care of groups 2 and 5 in the factor table. Its figures can be adjusted for any other of the groups simply by multiplying by a factor in that group.
Percentage of Depreciation. Repair costs are often calculated simply as a percentage of depreciation, varying from 60 to 100 percent. Depreciation periods also vary, from 5,000 to 10,000 hours or more, so here the estimator can select from a wide range of possibilities.
Percentage of Cost. The Associated General Contractors of America publishes a table of ownership expense of construction equipment, compiled from reports from members. This lists a combined item of “Overhauling, Major Repairs, Painting” that is 12, 15, or 20 percent of the purchase price for most items of earthmoving machinery.
Heavy repairs are considered as an ownership expense for the purpose of computing charges for renting equipment to others where the owner pays the major repairs and the user the smaller ones. They make up from 50 to 80 percent of total repair and nonlubrication maintenance expenses.
Using these figures, the hourly cost for heavy repairs alone for each $1,000 investment would be
As we will see later, repair expense on rented equipment tends to be higher than normal.
Usefulness. Tables, factors, and percentages are all based on averages from large numbers of machines, and do not necessarily hold good for any one machine. Use bar code data for a machine where possible.
The increase in costs with longer use is also an average. Any machine, and even most fleets of equipment, will go through good periods of little expense, and bad periods of frequent breakdowns.
In the same manner, July should be a good month for earthmoving and January a bad one, but occasionally the reverse condition occurs. But the contractor still must figure on working the next July and losing time during the next January.
Rising Repair Costs. As a machine gets older, its repair costs increase. Fuel and lubrication bills also increase unless held down by first-class maintenance.
Depreciation cost per hour decreases steadily with longer use. This serves partly to offset rising repair costs. Figure 11.14 shows a curve, (A), for net depreciation, and lines (B) and (C) for normal and extraheavy repairs. Curves (D) and (E) give combined net depreciation and repair.
The low parts of curves D and E show the most economical life period in hours. For average medium repair costs this is 5,000 to 6,000 hours, with little difference shown from 4,000 to 8,000 hours. For extraheavy repairs a 2,000-hour machine life appears to be less costly, with moderate increase to 4,000 hours and then a steep rise in expense.
Such very heavy repair costs with resulting short economical life can be combatted by using bigger and stronger equipment, reducing work pressure and loads, stepped-up maintenance with frequent overhauls including bracing and substituting heavier components when they are available, and by various combinations of these methods.
Light Duty. The heavy repairs usually incurred by using a machine late in its useful life can sometimes be avoided by assigning the unit to light or standby duty. A bulldozer may be assigned to cleaning up loose dirt around a shovel or shovels, a tired wheel tractor may pull a water wagon, and an old shovel be kept in soft digging. Such assignments are more easily made in open-pit mining than in general earthmoving, and they help to explain the large number of over-age machines that continue to render satisfactory service in pits.
Downtime. An item that does not appear on the bill at all is often the most expensive part of equipment repair. That is the lost time on the job while mechanics and parts are being located and the repair is being made. This cost is usually at its highest rate during the first few minutes or hours of the breakdown, while operating costs are still at a maximum and before the work program has been changed.
If the shutdown is a short one and only one machine is affected, for example, if a hose bursts in a self-loading scraper working alone, it causes loss of only the production of that one unit. The same difficulty in a loader might stop the loader, a string of trucks, a dozer, and compacting equipment also.
Conditions involved in downtime are so variable that they cannot be put into graphs or tables. Losses are kept down by alert supervision, new equipment, and expert maintenance.
Tires may represent an important part of the cost of new equipment, and they have several characteristics that make them difficult to fit into the same cost calculation as the rest of the machine.
Noncapital Treatment. Some contractors follow the practice of deducting the cost of tires from the price of a new machine before setting up its depreciation account. If this deduction is made, it should be on the basis of the actual cost of replacing such tires, but list price is sometimes used.
The chief reason for subtracting tire cost is to obtain the fastest possible writeoff. The excuse used is that tires are not physically part of the machine and wear at a faster rate, so that the ordinary long depreciation period does not apply.
A hauler may go through two or four sets of tires before it wears out itself. If the original tires are capitalized, the owner may be still deducting depreciation on them years after they have been scrapped. He or she will have paid the cost of replacing them before having been able to get a tax reduction on all of their original cost.
Another reason for keeping tire accounts separate from the machines that carry them is that they wear at different rates and are affected by different conditions. Mechanical parts may be little affected by differences between sandstone and shale, but they may cause a 3-to-1 difference in tire wear. Extreme cold may increase equipment repair costs and prolong tire life.
None of these factors entirely justify separation of tires from the rest of the machine in bookkeeping. The same arguments could be advanced for separate accounts for crawler tracks and rollers, blade and bowl edges, batteries, and even shovel buckets. And the double bookkeeping does exaggerate the cost of tires.
If earthmover tires have an average life of a year or less, the Internal Revenue Service agents will approve their deduction from capital investment. If average life is over a year, they have the right to disapprove. In general, they are against any type of separation of a unit into various pieces for separate depreciation treatment.
Operation Cost. The major operating expense of a tire is its replacement. The actual cost divided by the number of hours it operates gives this cost on an hourly basis. Since many tires reach an early and sudden end through accident or abuse, the life of a number of tires must be averaged to obtain a fair figure.
Tire maintenance and repair are assumed to cost about 15 percent of replacement.
In spite of mechanization, labor accounts for a big part of every heavy construction dollar. No estimator can afford to overlook any of the labor costs.
Current pay rates on a national basis are shown in Fig. 11.15.
Operator pay is often left out of equipment costs in estimating advice, because it varies so widely from place to place. Estimators must be very careful not to leave it out of their figures.
Almost every piece of construction equipment has an operator. Many shovels have an oiler too. Laborers are needed to handle supplies, spot trucks, direct traffic, pick up rocks, trim banks, scrape sticky soil out of bodies and buckets, and do many other tasks.
Supervision at the superintendent level is considered an overhead expense. Foremen may be charged to overhead also, but it is more usual to enter their pay as an operating expense. It may be charged against the job in a lump, or divided by the number of workers supervised, and added in as part of operator payroll.
An operator is usually paid for a good many more hours than her or his machine works. He or she may get a full day’s pay just for reporting, whether the machine runs or not. The operator is certainly kept on the payroll during short delays for adjustment and repair, and when standing by during various job delays. The operator may be paid for extra nonoperating time in which he or she greases and services the equipment.
If an operator is paid on an annual salary basis, the wage should be divided by the number of hours the equipment works or is expected to work during the year to obtain an hourly rate.
Mine workers are usually paid on a portal-to-portal basis, that is, from the time they check in at the gate or the main building until they get back to the time cards. They receive full pay for time spent between the entrance and the place of work. This may make a substantial reduction in the time actually worked during a shift. To look at it another way, it means a higher per hour cost for the time they are working.
Construction workers usually check in close to the work, and are usually expected to have equipment running and ready to go at the start of a shift.
FIGURE 11.15 Representative pay rates, September 2003.
To find the full cost of labor, it is necessary to add in payroll taxes, both for Social Security and unemployment compensation insurance, and fringe benefits such as paid holidays and sick time, reserve for pensions special travel or subsistence allowances, and pay for nonworking time on temporary job shutdowns. These extras may increase base pay from 10 to 30 percent or more.
Shift. A shift is the continuous (except for breaks for meals) time worked by one crew in one day. It is usually 8 hours, but it may be 7, 10, or even 12. The longer shifts usually include an overtime pay rate.
Multiple Shifts. Work may sometimes be speeded by working two or three shifts. Three shifts are commonly 8 hours each, one crew taking over from another without any shutdown. The day shift is from 8:00 a.m. to 4:00 p.m., the “swing” until midnight, and the “graveyard” until the day gang takes over. Pay time is 8 hours, but a “lunch” period, and time lost in the changing of the shifts, reduces work time to less than 7½.
Two shifts may be of either 8 or 10 hours each. The job is usually shut down after each shift, except for lubrication and repair crews.
Night work is less efficient than day because of the need for artificial light and the lessened accuracy and usually lower mental and physical vigor of the workers.
Multiple shifts may work at cross-purposes, or at least with insufficient understanding of what has been done. This difficulty is somewhat less when the new crew arrives before the other leaves. If there is no contact, the supervisors should meet in the idle period to discuss the work and coordinate their efforts.
There should be a system for rotating workers among the shifts, but it should be administered intelligently. Night shifts are generally unpopular, but some individuals prefer them and they should be left in them. Swapping of shifts among equally qualified workers should always be allowed. Rotation should be at rather long intervals to enable the workers to adjust to changes in sleep and work hours. Two weeks is the shortest period which should be considered.
Overtime. Where the industry operates on 5 working days of 8 hours each per week, additional hours worked on any of the 5 days and any time worked Saturdays are called overtime, and paid at 1½ or 2 times the regular hourly rate. Sunday and holiday work may be time-and-a-half, double, or even triple time.
A contractor who must finish work before a contract deadline, or before bad weather, or who wishes to take advantage of a busy season, may ask workers to work overtime; hire additional personnel to work two or three shifts; or may buy or rent additional equipment to work one extra shift.
In general, it is profitable to work large machines overtime, as the extra wages are more than offset by the drop in hourly ownership costs caused by spreading them over a greater number of hours. Small machines may show either increased or reduced profits.
It should be remembered that payroll insurance premiums increase in direct proportion to the amount of pay, although some payroll taxes do not apply over a certain amount.
The small contractor whose machine operators are frequently able to work for extended periods without help or supervision, is more likely to work overtime than the large-scale operator.
When work is being done on a fixed price contract, or at a fixed hourly rate, overtime costs must be carefully watched. If the work is on a basis of cost plus a fixed fee, overtime will merely require a larger investment to obtain the same profit. If payment is cost plus a percentage of cost, overtime, as well as any other extra expenses, will increase the contractor’s profit.
Cost-plus contracts may require that a contractor obtain written permission before incurring overtime or special expenses.
Time can be used as a measurement in direct clock and calendar divisions, or on a basis of working times that are fractions or combinations of them.
Efficiency Hour. A second and a minute always have the same time meaning in construction as they do on a clock. But an hour may contain the regular 60 minutes, or may be an “efficiency hour” of 50 minutes or less. This special hour allows for lost time in a way that can be easily included in calculations.
For example, a machine may be able to move 2 yards (1.5 cu.m) of earth per minute in steady digging. This would represent an output of 120 yards (92 cu.m) in a full hour. But no machine can be counted on for absolutely steady work because of delays from such causes as need for adjustments and minor repairs, changing positions, lack of supporting equipment, cigarette time, digging obstacles, and so forth.
The actual production of the machine, averaged over many hours of work, may be only 90 yards (69 cu.m) per hour. This is 75 percent of its maximum potential output, and is called 75 percent efficiency. It means that the machine is working to capacity only 3 out of every 4 minutes.
It is customary to express the reduced ability to produce by reducing the number of minutes in the hour, rather than by deducting a percentage from production. In this example the work hour would be ¾ of 60, or 45 minutes. Multiplying 45 minutes by the maximum production of 2 yards (1.5 cu.m) per minute, we get an hourly production of 90 yards (69 cu.m), which is where we started.
In the excavation industry it is usual to assume an average efficiency of 83 percent, so that many calculations are based on a 50-minute hour. This efficiency is not unknown, but the average is very much lower. Most examples in this book will use a 45-minute hour.
Day and Week. A workday includes all the hours of work during a regular 24-hour period. This is usually 8 hours, but may be 8½, 10, or some other time. If there is one shift, the shift and the day are the same time measurement.
In construction, a workweek is usually 5 days, with overtime pay for working additional days. Weeks in which holidays occur are shorter. In mines, 6- and 7-day weeks are common.
If business is poor, work may be stretched out by shortening the work week to as little as 1 or 2 days. This practice is rare in construction, but is common in mines.
Job. The time that elapses between starting a job and finishing it is known as job time. The completion date may be stated in the contract, either with or without penalties for not meeting it, or may be set by the contractor’s own schedules. It may be measured in hours, days, weeks, or years. The number of workdays must be carefully distinguished from the number of calendar days.
Job time gives an excellent check on progress. Daily or weekly plottings of accomplishment against percentage of time used will indicate whether the job is on schedule.
Progress charts. A form that indicates the percentage of work intended and accomplished in each time period is shown in Fig. 11.16. Time is shown on the horizontal scale, percentage on the vertical. Dashed-line curves are drawn in for the schedule, and a solid line is plotted in week by week according to progress made in the field, through the week of May 5 in this example.
The dashed curves usually have somewhat the shape of a letter S, as work starts slowly, speeds up as workers and equipment become adjusted to it, and slows again as the workforce is reduced for finishing operations toward the end.
Taking the heavy grading work for an example, we can tell from the graph that it started a week late, but in one week was a little ahead of the two-week schedule. But it then fell behind, as there was no work the next week because of rain and mud, and progress was poor the following week because of mud. After that progress was good, and another week at the present rate should reach or pass the scheduled output.
The next set of lines indicates that finish subgrade work started early and is running well ahead of schedule.
A highway job involves many other items, and if each is to be followed, it will be necessary to use several graphs to avoid confusion from crossing lines. Colored pencils are always helpful in making graphs easy to understand.
A contractor seldom expects the work to correspond closely to her or his ideal curve, but it is important to know how far off it is, and why.
FIGURE 11.16 Work schedule graph.
For many earthmoving operations there are alternative equipment selections that can be considered. The object is to select the piece of equipment, or the combination of equipment, that will produce the lowest overall cost per yard moved, assuming that the earthmoving operation is the primary one that governs the total work to be done. This is a tall order, but one that must receive careful attention. Side-by-side analysis in the field probably is the most conclusive way of answering most of the questions for a specific job. However, computer simulation is a valuable tool to cover all the “what if” variations that should be considered.
The variations that might be considered for an earthmoving operation include crawler or rubber-tire equipment, weight-to-horsepower ratios, tandem or single-engine power, large-capacity or smaller, more maneuverable equipment, self-loading scrapers or scrapers with pushers, scrapers or top-loaded haulers, and other alternatives. These differences are more evident when the variations of job requirement and conditions are included in the selection process. The tabulation given in Fig. 11.17 suggests possible equipment selections for differing job requirements and job conditions.
There are many different types of equipment rental arrangements. The one that we will discuss here is the renting of a machine owned by a contractor, distributor, or rental agency to a contractor who will use it as his or her own during the period for which payment is made.
Rental of equipment with fuel, maintenance, operator, and supervision will be considered later under Contracts.
A contractor may decide to rent part or all of the machinery needed on a job because of short period of use, availability, lack of confidence in future work, lack of capital, and/or other reasons.
Cost. Equipment rental is often casual in nature. A contractor who has a machine that is idle or nearly so will rent it to another contractor who has need of it. Price is likely to be strongly affected by the amount of demand for the unit, its condition, and the financial positions of the parties. Rental rates under these conditions may vary widely.
FIGURE 11.17 Possible earthmoving equipment selections. More about these alternatives is discussed in Part 2 of the book.
Rates may be based on the following references or some other formula. They are usually for the base machine, with separate rates for some buckets and equipment. Delivery and operator, fuel, lubrication, or service, if available, are extras.
Rates are usually based on one shift of 8 hours per day, 40 hours per week, and 176 hours per month of a 30-consecutive-day period. Contractors may find that it pays to work a 10-hour day or use other overtime arrangements to get full time on expensive rented equipment.
Overtime on the machine is paid at the same hourly rate as regular work time. Time may be taken from the contractor’s records, inspectors’ reports, hour meters, engineer revolution counters, or combinations of these methods.
Unless other arrangements are made, the rental period starts when the machine leaves the owner’s yard, and does not end until it is back in the yard, or is taken to or by another contractor by arrangement with the owner.
Even if the machine does not work the full number of hours, or any hours at all, during the rental period, full charge will be made except under special conditions. Most firms renting equipment will make allowances for time lost through long breakdowns, excessive bad weather, or strikes or material shortages; but the conditions under which such allowances will be made should be clearly understood in advance.
AED. The Associated Equipment Distributors (AED) used to publish every other year a Rental Compilation. Now it is published by K-III Directory Corporation as the AED Green Book. A warning in the compilation reads
The rental rates and terms set forth in this compilation are for informational purposes only and not to suggest or to influence the rates or conditions of rental of any item of equipment, as this is a matter which must be determined by the lessee and the lessor of the equipment….
For any distributor, or any other person, to enter into any agreement, understanding, combination or concerted action with one or more distributors, or with one or more other persons, to adhere to the rental rates shown in this Compilation, or to refrain from charging less than such rental rates, would be a violation of the Federal and State Anti-Trust Laws.
K-III Directory Corporation also publishes Rental Rate Blue Book for Construction Equipment. This is also a compilation. It is more detailed in that it provides rates for specific make-and-model items of equipment, and has information on regional variations.
The two references differ widely on many items. However, either (or both) may be very useful as a quick guide to relative costs and values.
Repairs. A definite understanding should be clear about repairs in connection with every rental agreement. Policies of owners vary with local custom and the type and condition of equipment.
The owner should take care of overhauls, major repairs, cleaning, and painting. The owner should do this conscientiously enough that the equipment is able to work through its rental period without major breakdowns. The renter is supposed to take care of small field repairs, all damage from abuse or accident, replacement of cables, cutting edges, and other fast-wearing parts, and to return the machine in as good condition as he or she got it, except for normal wear.
Field repairs should be the responsibility of the owner if the breakdown is in parts known to be defective at the start of the rental period.
Some rental arrangements distinguish between nontractor equipment, for which the owner assumes responsibility for wear and tear, and tractor and rubber-tired scrapers and haulers, on which the owner expects the contractor to pay all expenses, including those resulting from ordinary wear and tear in normal use.
Misunderstandings often arise as to the responsibility for major repairs needed during the rental period, and the amount of wear that can be said to be normal. Adjustment of these differences can mean a cost variation of several dollars per hour, so a clear understanding in advance is important.
The owner usually reserves the right to pull equipment off a job where it is being abused.
Ownership versus Rental or Leasing. The contractor who keeps machinery from job to job and takes good care of it operates at lower cost than if the equipment were rented. Rental prices include an allowance for greater-than-average major repairs because few people are as careful of rented equipment as they are of their own, and the owner’s profit is of course added in.
However, for short jobs with no sure usefulness for the machinery after completion, renting is cheaper than purchasing for the job.
Contractors whose work is scattered over the country usually rent machinery at each job, instead of owning and moving it. This saves heavy transportation expense, reduces hostility to a “foreign” contractor, and makes it easier to hire and control local operators.
The following will serve as an example of figuring comparative costs on one job.
Assume that a job requires a front loader to work 600 hours during a 4-month period, and that the new price of such a machine is $100,000 including incidental expenses of purchase.
If the contractor buys the loader, and keeps it employed for 1,200 hours per year for 5 years, then junks it, the average hourly cost for depreciation will be
Depreciation, 100,000/6,000 = 16.67
If the contractor buys the loader and sells it for $75,000 on completion of the job, the costs will be
Depreciation 25,000/600 = $41.67
If the contractor rents the machine at the rate of $3,000 per month, he or she will pay $12,000 plus a one-way delivery charge of $300.00. Then
Rent, 12,300/600 = $20.50
Other costs for each alternative, such as ownership or insurance, repairs, fuel, and lubrication, should be added to each, but they will be relatively small.
The advantages in renting equipment versus owning it include: no capital expenditure and modern efficient and well-maintained equipment are nearly always available. Leasing equipment is a form of renting long term with the option to buy the equipment. True leases are not included as debt on a contractor’s balance sheet which helps in assessing his or her financial stability.
A study in the United States in 2001 showed that the percentage of contractors who were buying equipment outright versus financing or leasing was decreasing so that the alternatives are practically equal. The percentage of contractors leasing versus renting short term was about the same. However, the percentage of contractors buying new heavy earthmoving equipment was slightly higher than the percentage of those renting but twice as high as the percentage of those buying used equipment and much higher than the percentage of those leasing this equipment.
Purchase by Loan versus Leasing Equipment. The advantage of a loan combined with good maintenance of the equipment is that the equipment can outlast the cost benefits of a lease. Once paid off, the benefits of ownership, with flexibility of use and leveraging working capital, are very helpful.
The tax advantages of a lease are always a lot more than purchasing with a loan. Lease payments are typically more than rental rates but less than loan payments, which are tied to the prime or some other indices. Conventional equipment loans can require up to 25% down payment, whereas leases require little or no down payment to start.
A contractor is usually called upon to estimate the time, material, and expense involved in a piece of work. This estimate may involve careful calculation of all factors, may be made up from records of similar work, or the memory of them; or, in bidding on a small proposition, be only an informed guess.
An estimate may be used as a basis for making a fixed price bid, or simply to give the customer an idea of cost while performing the work on an hourly or cost-plus basis.
The first requirement for most estimating is practical experience with the work involved. In large organizations, this experience may be only in handling cost, production, and time figures. In small firms, the figuring is often done by the same person who does or directs the work. That person should be familiar not only with excavation in general, but with the specific type or types of work to be done.
Checklist. Every estimator needs a checklist of the items involved or possibly involved in the job being figured. For simple work or rough estimates he or she may keep it in his or her head, but it is better practice to have it in writing and to refer to it frequently.
The principal use of the checklist is to remind the estimator of items he or she might forget. An experienced person might feel that he or she no longer has need for such artificial helps, but anybody can forget something.
Records of state highway departments indicate that careless mistakes are common even in multimillion-dollar estimates produced by experienced people. Errors in arithmetic are the most common failing, and leaving out operations is the next. A contractor may estimate concrete at $55.00 per cubic yard (cu.m) and put it in a bid at $5.50. Or the contractor may figure out to four decimal places what it costs to drill, blast, and shovel load a rock ledge, and entirely forget the haul cost.
An estimator, whether a contractor or hired by one, should work up his or her own checklist for each type of work, refer to it, and add to it whenever necessary. It can be one of the estimator’s most valuable assets.
Round Numbers. An estimate is an informed guess. No matter how solidly it is founded in experience and knowledge, it deals with future work in which unexpected conditions can upset the most careful calculations. It is also often the basis of a competitive bid that must be lower than that of any other qualified contractor in order to get the job.
Since the figures themselves may prove to be inaccurate, and because they may be changed in the bid to meet a price, it is usually pointless to work them out to several decimal places. Excessive detail adds greatly to the time and labor of making up a bid, and the estimator may become so lost in complicated figures that he or she will overlook errors in arithmetic, or whole items that ought to be included.
A sense of proportion must be preserved. A per-yard cost of moving dirt might well be carried out into several decimals if there is 1 million yards to move. But as final figures are approached, pennies should be dropped, and dollars rounded off to the nearest 10, 100, or 1,000, depending on the size of the job. The rounding off should be indicated at the point where it is done to avoid confusion, by writing in a word such as say or approximately or an abbreviation such as approx.
For example, an engineer’s calculation may indicate that there is 16,828 yards (12,873 cu.m) of soil in a bank, and excavation cost is figured at 51¢ per yard. Cost of digging the whole bank would be
16,828 × .51 = 8,582.28, say, $8,600
If the engineer had simplified the figure to approximately 16,800, the calculation would be
16,800 × .51 = 8,568, say, $8,600
Estimating Excavation. The gross factors in estimating excavations are the quantity of material to be dug, its digging qualities, the distance it must be moved, haul conditions, and the manner of its use or disposal; all in relation to the equipment to be used.
Quantity, which is usually measured in bank yards (cu.m), should include anything that must be dug, quarried, or moved in the course of the work. Material which is stored and reclaimed must be added in twice.
Digging qualities will include not only the hardness and coarseness of the bank, but water or sand conditions on the pit floor, danger of slides, etc. It will largely determine the type of excavators to be used, and whether blasting will be necessary or not.
The distance to be moved will dictate whether it is more economical to push or to carry it, and the types of hauling unit to be used. In general, haulage is figured from the center of mass of the cut to the center of mass of the fill, but the lengths of the longest and shortest hauls must also be considered.
Haul calculations should include attention to the type of ground to be crossed, its probable carrying capacity and tractive resistance, grades to be climbed, and the cost of making and keeping it passable.
Spoil can be dumped over a high bank more economically than it can be spread and compacted in a fill. Operations will be slowed unless there is space for equipment to maneuver and dump in, and unless the fill will support and give adequate traction to the hauling units.
Fill requirements can be greatly increased by a soft base that will compress or shift under its weight.
Digging Factors. The digging qualities of a soil are of great importance in estimating. If blasting is required, expenses are increased 5 times or more, with the extra costs per yard increasing if the quantities are small, or if precautions must be taken against damaging property.
Hard soil that can barely be dug without blasting will also prove expensive, in the terms of slower production and increased breakage of equipment. It may require the purchase or rental of special or larger machines.
Wet digging requires working from above with shovel backhoes or draglines, results in partial loads, may call for expensive drainage or pumping, and will cause mud difficulties at the dump. Operation on wet or muddy pit floors may require the use of tracked hauling units instead of rubber-tired, with a resultant drop in speed; or substitution of all-wheel drive for conventional trucks.
Fills. Trucked fill placed in thin layers requires more or larger dozers for spreading than when in high lifts. Even if no rollers are used, compaction and rain resistance will be improved because of better vertical distribution of the weight of the hauling units. If rollers are used, the thin layers will have more total surface to be treated, but compaction may be secured with lighter machines, or with fewer passes on each level.
Wet clay may require sandwiching with layers of sand or gravel to make a stable fill.
Specifications for compaction may be impractical, except for a highway, airfield, or earth dam fill, and compliance may be very costly in time and effort.
Sequences. Excavation or grading projects often involve a sequence of two or more operations. Sufficient delay in one of them will slow or stop work on those which follow it. Increase in the number of operations makes the final ones more subject to delay. If each step in a series is followed closely by the next, through physical necessity, or haste, the possibility of continuing some work after a breakdown is reduced.
As an example, in laying subsurface drains, a ditch is dug, tile is laid in it, and the ditch is refilled. If the tile is laid and the ditch backfilled immediately behind the ditcher, it cannot even stop for fuel without making the tiling crew and the dozer idle. Any delay in the supplying or the placing of tile will shut down the dozer and, if the ditch is likely to cave, the ditcher as well.
If tile is supplied by truck as required, or a little ahead of use, truck breakdown will stop work quickly. On the other hand, if several hours’ supply is laid out along the ditch line, work can continue while the truck is repaired or replaced.
In shovel loading, the sequence is digging, hauling, and spreading. If the shovel stops, the job stops. If a truck stops, shovel and dozer work is usually slowed. If the dozer quits, work may shut down after a few loads, or continue for some time, depending on dumping conditions.
Slowing or stopping of a job increases the contractor’s cost, especially when there is no other work to which machinery can be shifted for the time involved. Fixed expenses continue, and part or all of the payroll. The effect on contracts involving penalties for failure to finish on schedule may be even more serious.
Bottlenecks are another hazard of sequences. Any machine, or any operation, which is slower than those preceding and following it will set the pace, or the lag, for the whole job, until the condition is corrected. This situation may arise through improper selection of a machine, delivery of the wrong size or type, mechanical or digging difficulties, labor shortage, lack of skill, or mistakes in figuring.
In making an estimate, sequences should be studied carefully and allowance made for the probable delays.
Rush Jobs. Rush jobs usually involve very close sequences to such an extent that machines and workers are so on top of each other that a great deal of time is wasted, even if no breakdowns or serious tie-ups occur. An extra charge should be made to cover this inefficiency.
Another type of rush which is frequently experienced is that a customer, often an owner or building contractor, will demand that machinery be sent over immediately to backfill and grade around a building, dig ditches, or perform other work required to obtain a payment on a building mortgage, or to make the house look attractive to possible buyers on a weekend.
If such a call is answered promptly without investigation, it will often be found that the site is not in workable condition. Perhaps the whole area is cluttered with piles of sand, gravel, bricks, and lumber; or the foundation has not been painted with waterproofing, or the scaffolding removed; or neither the boss nor the plans can be found.
Owner Delays. An extra amount may be allowed on an estimate for excessive job delays caused by inadequate or contradictory plans, expectation of changes during the work, and owner meddling with work methods.
Such an extra charge may be based on inspection of plans, on the owner’s reputation, or both.
Some owners are poor credit risks, and work may have to be slowed or stopped during the job because of lack of money.
Public highway contracts may have a provision that excavation must be stopped immediately in any area where prehistorical or historical ruins or objects are encountered, until the objects are checked and possibly removed by experts. Such stoppages can interfere seriously with orderly work on a project.
Other contractors may have jobs in the construction area, installing or relocating utilities, that may cause confusion and delay.
Production. Most estimators are familiar with the output of the machines to be used on jobs that they figure. If they are not, production can be determined from field studies, taken from manufacturers’ charts, or worked up on paper from discussions of various classes of equipment in Chaps. 13 through 21, and from other sources.
There is a learning effect at the start of a construction operation that causes cycle times and costs to be higher than anticipated. This must be taken into account when estimating. It has been reported in Journal of Construction and Management of ASCE that the accuracy of predicting future performance gets about as good as it is going to get at about 25 to 30 percent of activity completion. After this point the difference between the predicted total remaining cost and the actual remaining cost is within plus or minus 15 to 20 percent.
Allowance must always be made for special conditions that will affect machine performance. These are usually on the bad side—water, mud, cramped working areas, high altitude, steep grades, and so forth. But there are also favorable possibilities, such as light, easily dug soil, rock with good fragmentation, or expert operators.
Cost of Production. The cost of owning and operating the job equipment must be known, so that its production can be converted into cost figures. If a shovel can load an average of 100 yards (76 cu.m) per hour after allowance for average delays, and all costs including operator are $80.00 per hour, the loading cost is 80¢ per yard.
The time the machine will be on the job is found by dividing its production into the volume of work. This same shovel would take 1,000 hours to move 100,000 yards (76,500 cu.m) of dirt. This is a year’s work, $80,000 worth. Total yards divided into total cost gives unit cost again.
It is important to figure all side expenses such as supervision, spotting, pit maintenance, and incidental labor into each part of a job.
Total Quality Management. The latest pitch is for total quality management (TQM) to improve company management running the business. Applying TQM to a contractor’s equipment maintenance department simply requires finding what the project or operations people want from the equipment and encouraging the workers, such as mechanics and lube crews, to help figure out how to deliver it most efficiently.
Overhead. When each part of a project has been figured, the costs are added together. Overhead expense must then be added. It is made up of the part of general overhead that will be devoted to the job, and any additional overhead costs that are incurred for it. This may be figured out separately for each bid, or an arbitrary percentage of the cost total may be used. Ten percent is usual.
Profit. Profit is what the contractors get out of their work and risk if they have estimated properly, get the job, and do it successfully. It is usually figured as a percentage of total estimated cost.
The contractors must decide on this amount for themselves. If they put it too high and don’t get the job, there won’t be any profit on this one. If they put it too low and get the job, they may wish they hadn’t. Five to 10 percent is often used. A combined figure of 15 percent for overhead and profit is standard in many areas.
Jobs are sometimes bid on a no-profit basis to keep money turning over so that bills and installments can be paid, or to keep an organization together in hope of profitable jobs in the future. But it should be remembered that in this business, the person who breaks even is usually losing money after hidden and delayed costs are counted up.
Small jobs may be done on the basis of verbal agreements, that may be quite specific and definite (or very vague). Big jobs should always have a written agreement, that is usually in the form of a contract.
The contract describes the work that is to be done and the price that is to be paid for it. This may be done in two paragraphs up to hundreds of pages. There are usually drawings or plans, that may be one sheet or several hundred. Standard forms should be used when possible.
If good faith exists on both sides, it is usually easy to arrange a simple contract between contractors, or between a contractor and someone who is familiar with the work involved.
In making arrangements with persons having little or no knowledge of excavating procedures, the greatest care should be taken to explain both what will be done and what will not be done.
Payment. Payment basis may be a lump sum or fixed price for the whole job, unit prices that vary with quantities, cost plus, or combinations of these methods.
Any type of contract may call for either a single payment, or installments based on the contractor’s investment, work, and/or accomplishment. Monthly payments based on a percentage of work completed are usual in large jobs.
Lump Sum. In a straight lump-sum or fixed-price contract, the owner agrees to pay an agreed price for a certain piece of work. This is a good arrangement when all the factors that will affect the job are known, but it must be based on a thorough understanding of the nature and finish of the work by both the owner and the contractor.
In a fixed-price contract the contractors are on their own as long as they keep to the job specifications and time schedule. They can reduce measurement, classification, timekeeping, and bookkeeping to what they need themselves. While the prudent owner will still have an inspector on the job, she or he has a minimum of measurement and timekeeping to do.
However, unless advance engineering work and site study are very complete, such contracts may result in disagreeable surprises for either party. The owner may have paid blasting price for a volume of rock that is readily broken out by a shovel; or for removal of valuable material that could have been dug at a profit. The contractor may be digging rock where he or she looked for loam, or running pumps 24 hours a day where the contractor thought he or she would be high and dry.
A fixed-price job that is turning out disastrously for the contractor can sometimes be renegotiated, but unless the provisions for possible change are written into the contract, the contractor is largely dependent on the goodwill and generosity of the owner for such relief.
However, the contractor can demand extra payment if the unfavorable conditions were known to and concealed by the owner, or if the owner withheld information that would have enabled the contractor to anticipate the difficulties.
Unit Prices. When quantities have not been determined exactly, or when they may be subject to considerable change during the job, parts of a contract or a whole contract may be let at unit rates.
For example, an owner might ask for bids on removing a hill of approximately 30,000 yards of dirt. The job is let to a contractor who bids 60¢ per yard. The hill is measured before work is started, at intervals during the work, and after the job is complete. It is found that 37,000 yards (28,300 cu.m) has been moved. Payment to the contractor is .60 × 37,000, or $22,200.
If the contract were let on a lump-sum basis of the estimated yardage of 30,000 times .60, payment would be $18,000. But the contractor would be likely to claim that the 30,000 figure was not honest, and disagreements and even lawsuits might ensue. On the unit basis the owner pays for just the volume that is moved, whether it is more or less than his or her estimate.
Unit prices reduce the requirement for careful prejob investigations that can be very expensive if underground conditions are involved. On the other hand, measurement of quantities is difficult and sometimes inaccurate when cuts are shallow and the ground is irregular.
Quantities can also be measured by truckload or by measurement of fill.
Unit prices for earth and rock are usually based on cubic yards, trenches on linear feet or occasionally linear yards, and clearing on acres.
A typical unit price bid schedule has a number of work items for which there are quantities estimated by the owner or the owner’s engineer. The contractor’s bid is the sum of the price for each item multiplied by the estimated quantity. The bid is said to be unbalanced if the prices for some items are higher than they should be and others are lower. The contractor may do this because he or she thinks the estimates are wrong or wants to get more money in the early time of the contract. Some owners may think this is an unethical practice.
Classified Excavation. On a big job that involves various digging conditions, excavation may be divided into a number of different classifications. These may be separated according to the type of work, as road cut, borrow, shallow trench, culvert, and deep trench. Or the classification may be according to difficulty of digging, as soil or rock, or dry or wet.
The most important classifications in regard to total money involved, and problems in estimating, bidding, and working, are earth and rock. The practical distinction is that soil can be dug directly by shovels of normal size for the job, while rock must be blasted or ripped before it is dug. The pay difference may be made on this basis, or according to geologic definitions.
It is fairly standard practice for the contractor to remove all or most of the soil over rock, then send for the owner to inspect and measure the rock for payment. Sometimes the two parties will agree on the amount of rock before excavation, depending on inspection of outcrops and depth of soil in test holes for the amounts.
Boulders are measured after they are freed from the bank, and before they are broken or loaded out.
In tunnels, and in some trenches and road cuts, payment for rock may be varied according to its position. Full price may be paid inside the bore, side, or slope lines, a lesser price for moderate overbreak, and nothing for excessive overcutting.
Numerous problems arise in connection with identifying and measuring rock. Many engineers and public works departments prefer to avoid them by letting excavation work on an unclassified basis. The contractor is given access to whatever boring and test hole data are available, allowed to look over the ground, and makes an estimate or perhaps guess about how much rock will be found. This method diminishes risk for the owner and increases it for the contractor.
Excavation prices usually include hauling to the fill and compacting. In highway work in some areas the haul distance is limited to a few hundred yards, beyond which an item called overhaul or paid haul calls for additional payment.
Cost-Plus. If conditions are such that the contractor cannot readily tell the amount, kind, or conditions of excavation; if the amount of work to be done has not been determined; if it is not practical to clearly define the extent of the work and the condition in which it is to be left; or if the job is to be done a little at a time, as equipment or funds are available, the cost-plus or hourly basis will probably be the most satisfactory.
On a cost-plus arrangement the contractor will have all the costs in doing the work repaid, and will receive either a fixed fee or a percentage of the costs in addition. This type of contract is most often let in government or other work where haste prevents thorough investigation of the site, or plans are subject to change during operations.
The fixed-fee basis is appropriate where the total amount of work can be estimated with fair accuracy, and the percentage where changes and extras can make up a substantial part of the job. The latter system is subject to grave abuses, as mistakes which add to the cost will increase the profit, so that inefficiency is rewarded.
A serious cost-plus difficulty is that it is apt to lead the customer to interfere with the contractor’s policies and management on the job. This effort to lower costs is liable to be of the pennywise, pound-foolish variety, and increases expenses more often than it reduces them.
It is important for the contractor to include all indirect as well as direct costs in this type of bid.
A variation of cost-plus is a bid listing hourly or daily rates for all machines, services, and personnel to be employed on the job. The contractor figures the profit on each unit into the price charged for it.
Hourly Work. Working by the hour is almost the standard practice on small jobs in which the expenses of investigations by the owner and estimating by the contractor are not justified by the money involved. It is also common in subcontracts and other arrangements between contractors.
A working hour may be considered to be the time that the machine is present on the job, the time it is present and ready to work, or only the time it is actively working, depending on the arrangements made.
In effect, the contractor who owns the equipment is renting it to the customer, but the contractor usually retains the right to supervise, and pays all expenses, including the operator, fuel, lubricants, and repairs. Occasionally, the customer may furnish fuel or other items if he or she can do so more conveniently than the contractor can.
If equipment is rented to a job without an operator, it is a rental rather than a working agreement.
Pay for time during which the machine is stuck in mud is usually on the lessee, as it is a mishap caused by job conditions. However, if the fault lies with a disobedient or careless operator, or if the owner has warranted that the machine will not get stuck on that job, payment may be withheld.
The machine is not paid for time lost because of mechanical failure or absence of the operator. However, stops for adjustments, minor repairs, fueling, lubrication, or cigarettes, which average less than 10 minutes per hour, may be considered working time if agreement is made to that effect.
Timing. Working or pay time may be taken from readings of electric hour meters, which register the time the engine is running; from mechanical counters which register engine revolutions in terms of hours of wide-open operation; from special checking by a foreman or timekeeper, from the lessee’s job time sheets; or from the contractor payroll records.
On operator work, it is good practice to check time daily and have the customer sign a ticket for it.
Timing by hour meter leads to the equipment owners’ operators keeping the engine running, whether it is needed or not. Many jobs involve substantial amounts of waiting time, during which noise and wear would be reduced by stopping the engine, but this action by the operator would penalize her or his employer and possibly herself or himself.
Hour meters should be checked frequently as they may become disconnected.
Engine revolution counters are more accurate, and seldom get out of order, but when used as a pay basis, offer the added disadvantage of placing a premium on running the engine at full throttle at all times. This may make it difficult to do precise or fine work and will cause excessive wear, waste, and noise.
Critical-path scheduling permits visualizing projects, study, and working out sequences, time, and costs more readily than is possible with bar graphs.
Most projects include one or more jobs or job sequences that must be completed before another phase of the work can be begun. For example, one sequence may be first clearing, then trenching a culvert site, another procuring and bringing in specially designed pipe. Completion of these two sequences is necessary before pipe can be laid.
If one job or one sequence takes longer than the others leading to the same result, its time determines the time for achieving that result, whether it is starting the next phase or finishing the project.
Because of its important effect on work scheduling, the operation or sequence taking the longest time is called the critical path.
Vocabulary. Critical-path scheduling has been set up in a somewhat formal manner as to vocabulary and format, to enable its users to understand each other, and to permit solving its more intricate problems by means of computers.
For purposes of this work, the following words are limited to the meanings listed for them:
Chain: a sequence of jobs following each other
Crash: speedup or rush work
Duration: the time required by a job
Event: the start or finish of a job or jobs, as at a, b, etc. in Fig 11.18
Float: time available for a job, minus job duration
Job: one small activity or single class of work, as clear site
FIGURE 11.18 Simple arrow diagram.
Arrow Diagram. Critical-path schedules are worked out in arrow diagrams, the simplest form of which is shown in Fig. 11.18. Each arrow represents a job or activity. It may be labeled by description as in this illustration, by code letters, or by an event numbering system. The first arrow is usually for lead time, getting ready to start work. An arrow may be added for cleanup.
Arrows are made in any convenient length, and may be straight or curved. They indicate only the sequence of the jobs in the pattern of a project, and have no scale.
Three questions should be asked and answered about each arrow:
1. What immediately precedes this job?
2. What immediately follows this job?
3. What can be concurrent with this job?
The arrow diagram must be worked out logically and thoroughly in regard to sequence and interdependence of jobs. Omission of any item gives a false picture and may lead to mistakes in scheduling. On the other hand, the simple act of placing each activity in a frame of reference with other jobs helps in building up an intimate knowledge of the project.
Overlapping Jobs. It is usual for construction projects to have overlapping sequences. Brush clearing comes long before laying pavement, yet the two operations may go on at the same time in different parts of a highway section.
As an example, let us take laying a pipeline. On a simplified diagram this may be broken down into three activities that must be done in succession: trenching, laying pipe, and backfilling. A work section of a pipeline may be many miles long, but it may be possible to start each job as soon as a few hundred feet of the previous job are completed.
Each of these jobs may be considered to be done in three sections: the initial, continuing, and finish. Initial work must be completed before the next job can start, while the other two run at the same time in different areas. Figure 11.19 shows the arrangement of arrows to indicate this situation. Note that all are the same length, although initial work may take a day or less, while continuing work may go on for months.
FIGURE 11.19 Overlapping jobs.
The pipeline may require a pumping station. Building it would be a very different type of work that might be subcontracted, or diagrammed separately. However, the line is not usable without it, so it should be represented in this master diagram as the lower arrow, D.
Events. The start and finish of every job is called an event. Therefore every arrow begins at an event and ends at one. These events are numbered, starting with 1 or 0 at the beginning of the project and continuing through an unbroken sequence of numbers to the finish. However, because of concurrent or parallel job chains, the numbers are not necessarily in sequence in any one chain. The only absolute rule in assigning these numbers is that the number at the head of an arrow must always be larger than that at its tail.
Event numbers are used to identify the arrows between them. In Fig. 11.20, A is 0-1, B is 1-2, C is 1-4, and so forth. Since diagrams often include enough arrows to use the alphabet many times over, identification by event numbers is more practical than letter codes. It is also necessary when problems are to be handled by a computer.
Sometimes two or more jobs will begin and end at the same event. A borrow pit may require clearing, testing, and measuring before digging starts. In Fig. 11.21 the three arrows B, C, and D in the next diagram would each be designated 1-2. This duplication is avoided by introducing a dummy, as shown in the two lower illustrations. The dummy may be either before or after the arrow. The junction between the arrow and the dummy is given an event number.
The rest of the illustrations in this section will use letter codes instead of event numbers, to avoid confusion with other figures. A real working diagram is drawn on a scale large enough to put in all necessary figures without crowding them.
Duration. When an arrow diagram has been completed and checked, the time that the job is expected to take is written under each arrow. This may be in hours, days, months, or any appropriate unit, but the same measurement must be used all the way through a diagram. If days are used, they must be working rather than calendar days, to avoid confusing calculations with holidays and weekends.
The duration assigned is first a normal or average time, taken from experience, job studies, or an estimator’s figures. In an ordinary construction project it would involve one-shift operation and use of equipment on hand or readily obtained, without either rush pressure or deliberate waste of time.
FIGURE 11.21 Dummy arrows for identification.
Dummy arrows are dashed or dotted lines and always have a zero duration, as they are only symbols to show connection between jobs. The top diagram in Fig. 11.22 shows duration times.
Event Times. An event time is the sum of the durations of the jobs that precede the event, and represents the time that will elapse between the start of the project and that event. If two or more chains or sequences of jobs are needed to make the event possible, its time is determined by the slowest path.
The earliest event time, abbreviated EET or sometimes e.t., is defined as the earliest finish of the event by the slowest path. It is indicated on arrow diagrams by a number inside a square, and is worked out for each event in a diagram, as in the middle drawing.
Working out the EET is simply a matter of addition until a junction of two arrowheads is reached. Here both preceding chains are figured, and the larger number is used. In the illustration, the three chains leading up to the beginning of I add up to 30, 27, and 39, so 39 is used.
The earliest event time calculation shows how long the job will take under ordinary conditions.
The latest event time, abbreviated LET or l.t., is the latest time at which an event can be finished without delaying completion of the project. It is found by working backward from the earliest event time for completion, along the slowest path. It is written in a circle, alongside the square containing the EET, as shown in the bottom diagram of Fig. 11.22.
This is simple subtraction, working backward from the finish, except at a junction of arrow tails, where the smaller number is used. In the illustration for the finish event of job A, the three chains show LETs of 13, 16, and 4, so 4 is selected and written down.
The latest event times provide a quick method for determining what chain of jobs sets the time for the whole project, and is therefore its critical path.
FIGURE 11.22 Earliest and latest event times.
Critical Path. The critical path is a sequence made up of one or more jobs or job series, whose duration is the determining factor in the length of the whole project. In order to be critical, a job or series must conform to all of the following requirements:
1. EET and LET must be equal at the start.
2. EET and LET must be equal at the finish.
3. The time available for the job must be equal to its duration.
The time available for each job is found by subtracting the starting EET from the finish LET.
In Fig. 11.22 the critical path is ADHI. Arrow F is not a critical job because the starting figures, 23 and 32, are different. Arrow G begins with an EET of 24 and a LET of 36. One noncritical job prevents a series from being critical.
As critical jobs are identified, they are marked with a double hash stripe. When the critical path is worked out, it may be emphasized by making the arrows heavier or with double lines, or by color.
There may be two or more critical paths, in which case each of them is marked.
The critical path ADHI determines the overall time of 34 days. Any efforts to save time and shorten the job should be first concentrated on it.
Float. The spare time in the quicker jobs, series, or paths is called float. In Fig. 11.23 the critical path is ADEF, with a total duration of 34. The alternate path, ABCF, would allow completion in 24 days if jobs D and E were not needed or could be speeded up. This also means that B could be started 10 days after the completion of A, without delaying project completion. This 10 days is float.
From a scheduling standpoint, float time may be regarded as waste time. It indicates a possibility of idle time for the workers and equipment doing the jobs, and it presents a problem in utilizing them to speed up critical work.
For example, our illustration might represent grading for a highway, with a small cut, B clearing and C digging, and a larger one, D clearing and E digging. The original durations might have been assigned on the basis of an equal force in each cut. By taking personnel and equipment from the small job and assigning them to the critical path, the two cuts might be done in 13 days each, permitting blue-top work, F, 5 days earlier.
This is one way of using float time. It often happens that the same crews cannot work on two jobs. Then an effort is made to shorten the critical-path durations in other ways, to squeeze some or all of the float out of the faster series.
Crashing. Rushing a job through by an intensified effort that involves a substantial increase in costs is called crashing. Some jobs can be shortened by a big percentage at moderate cost, others respond poorly to unlimited extra expenditure.
A usual relationship between job duration and job cost is shown by the lower curve in Fig. 11.24. Extending time beyond normal duration saves little money, and pouring in money after a saturation point saves very little time. The greatest gains in time for extra dollars spent occur in the first few days saved, and the smallest gains per dollar are found near the minimum time end of the curve.
One curve is for direct costs only. Overhead or indirect costs are likely to be about the same per day whether the job is crashed or allowed to sleep. The straight line shows these, and the upper curve shows a total cost against project duration. The low point in this upper curve occurs at the most efficient time for the job.
FIGURE 11.24 Speedup and cost relationship.
The shape and pitch of the direct cost curve and the steepness of the indirect cost line vary with each contractor and job. In general, the highest proportion of overhead cost to direct cost is found in the very large companies and in the very small ones. A big organization must carry many salaried people, a one-person outfit must meet her or his daily living costs out of a small work volume. In either situation, the best return will often be obtained from crashing jobs, rather than letting them just plod along.
Every year many excavating and general contractors fail, or sustain losses that force them to operate on a reduced scale, or give up. Most of the failures arise from one or more of the following causes:
Unforeseen price rises
Abnormal labor cost
Abnormal equipment breakage
Death or disability of owner or key people
Fire not adequately insured
Liability or property damage not adequately insured
Poor accident record
Failure of subcontractors
Adverse weather
Unforeseen subsurface difficulties
Faulty credit judgment
Sudden restriction or withdrawal of credit
Unavailability of materials
Taking on too much work for financial resources
Taking on too much work for adequate supervision
Speculation
Diversion of funds to nonbusiness use
Embezzlement by employees
Some of these subjects have been discussed previously; others are of a general business nature and are too complex for discussion here. Two subjects of particular importance to the excavator, however, are accidents and insurance.
An accident may be defined as an unforeseen sudden happening, or as an unintentional and damaging interruption in an orderly process.
The important accidents are those in which persons are injured. However, this is often a matter of chance rather than the character of the happening, and an accident in which no one is hurt should be taken seriously, and steps taken to prevent its recurrence.
Employees should be protected by workers’ compensation insurance. This coverage is usually required by state law, but in any case is a must for any employer interested in the welfare of his employees, and in his own. Nonemployees and property of others should be protected by liability and property damage insurance, lack of which can wipe out a prosperous business overnight. A contractor can protect his or her own equipment and property with fire and damage insurance.
However, the possession of full insurance does not justify the slightest negligence in regard to accident prevention. For one thing, the best insurance will only pay the more obvious costs. In small accidents that are most common, indirect uninsurable costs may run 5 times as high as the payments under compensation.
Some of these expenses and losses are
1. Increase in insurance rates
2. Payment to injured employee of wages for period too short for compensation
3. Loss of time of other employees who stop work at the time of the accident and because of it
4. Time spent by foremen and supervisors in assisting injured person, investigating the cause, selecting and briefing or training another person for the job, and preparing accident reports and attending hearings
5. Slowdown of job, with possible failure to finish by deadline
6. Paying full wages to employees who return to work before being capable of performing full duties
7. Loss of chance for profit on an operator and the machine
8. Lowering of morale of other workers on the job
9. Possible interference with work methods by public officials
10. Unfavorable newspaper and other publicity
Prevention. The first rule in accident prevention is to use common sense—in laying out a job, assigning machines and personnel to their duties, providing adequate supervision without fussiness, and setting up sensible and reasonable safety rules.
Too many safety rules may be worse than none. Every one of us has a limit to the amount of good advice we can absorb, and that limit is often painfully low. It is better to take a few important points at a time, and hammer them home, than to prepare long lists that will neither be read nor remembered.
Enforcement of safety rules should not be so strict as to cause workers to fail to report for first aid for minor accidents, or to lie about the way in which they occurred.
Excellent posters and leaflets can be obtained from insurance companies and safety councils, and when used in moderation bring very good results. Only those that have some bearing on the work should be selected.
Workers’ suggestions, on both safety and other matters, should be encouraged and acted upon.
A worker’s skill should not be taken for granted. In an emergency an unfamiliar machine might cause an experienced operator to make the wrong move. Judgment should be used in giving out ticklish assignments. Training and refresher programs should be given periodically and whenever needed, and reference material on proper operation and procedures should be available.
Good housekeeping is important. Piles of junk, material, litter, boards with projecting nails, carelessly piled bags of material or heavy parts, and accumulations of grease and dirt cause accidents directly, and also indirectly by encouraging sloppy work attitudes.
Crowding causes accidents. On a rush job a boss tends to jam as many machines and personnel into the work area as it will take without bulging. That may mean collisions, and collisions lose time. One person can dig a ditch faster alone than with a helper who hits him or her on the head with a pick.
Piling Materials. High piles are dangerous piles, with the exception of loose material lying at or below its angle of repose.
In excavating, even a shallow ditch can injure someone seriously by caving, and deep ones are killers. High vertical faces around a cellar excavation might stay up, but it is safer not to trust them. Shore them up, and make sure the shoring is strong enough. Do not just guess; have it designed and inspected by an experienced and careful person.
Barricades. It is not only the workers who must be kept out of accidents, but also the public. There are sidewalk superintendents who like to watch the work, and are apt to be foolish enough to fall into it if they have the chance. If there is an attractive danger spot, like a basement excavation in a city, they must be fenced out. Such a fence should be strong, and at least 7 feet (2.1 m) high.
The fence or barricade must be secure itself, so that it will not fall into the excavation, or be left partly in space by a slide. It should have windows or peep holes in it. These build goodwill for the contractor, and make spectators less likely to move into the very dangerous truck drives that penetrate the fencing.
Barricades, signs, and flares can hardly be overdone on roadways. Any excavation that extends into a road, and particularly into a high-speed highway, is just asking for trouble. And it is not enough to mark it so well that only 1 in 1,000 would fail to notice it—10,000 cars might pass while it is open. And the police, the lawyers, and the newspapers will not be interested in the 9,999 who did not crack up in it. Just in the one who did.
Insect Stings. Clearing and excavating bring workers into painful contact with hornets, yellow jackets, and other stinging insects so often that it is one of the special risks of the business. While in most cases no serious injury results, such stings can be more dangerous than is commonly realized, and they cause a number of deaths every year. They respond excellently to proper and early treatment.
There are three dangers:
Allergy to the injected poison, which will cause exaggerated reactions, and if very severe may result in shock or death from a single sting.
Stings close to the eyes or other vulnerable parts, which may disable a normally sensitive person. Multiple stings from a swarm of insects, which may produce serious poisoning.
Most trouble comes from unexpected contacts. Preliminary scouting of an area on foot may reveal the location of nests, particularly of hornets on branches.
When possible, such nests should be destroyed in advance of the work. This can be done at night with little danger, as the insects are then sluggish and nearly blind. Also, as they are all nested, a 100 percent kill may be effected.
Ground nests are eliminated by pouring ¼ or ½ cup of insecticide down the hole, then tamping dirt in the top.
Paper hornet nests should be wrapped in wire screening, mosquito netting, or cloth; cut off the branch; and burned on a hot fire or kept under water for at least 48 hours.
The worker doing this job can be protected by heavy clothing, gauntlet leather gloves, a hat or helmet, and a head-protecting mosquito net. The last item is the most important, as face stings are painful and dangerous.
If it is necessary to work among ground nests that have not been treated, they should be completely destroyed by pushing out or deep burial on the first approach. The insects then are disorganized and less likely to attack, particularly if the machine is kept in motion.
Minimum protection for operators in a danger area is a head net.
Laborers known to be particularly sensitive to stings should be kept on safer work until they can be desensitized to the poison by a series of shots.
Treatment. Treatment consists of stopping the swelling, slowing absorption of poison into the system, and stimulation to help to overcome its effects.
Three minims (a minim is cubic centimeter) of epinephrine, divided among two or more shallow injections at the edge of the swelling, will constrict the blood vessels, stop enlargement of the swelling, and wall off the poison. This treatment should be a routine precaution for any sting near the eyes.
A dose of the same size injected in the upper arm rallies the system for defense. If no “lift” is felt, the arm injection can be repeated in 10 minutes, or sooner if the patient is unconscious.
These injections are made much more effective by addition of equal amounts of Chlor-Trimeton (strong solution) or some other injectible antihistamine to epinephrine before injection.
Ordinarily, injections can be made only by a doctor or a nurse. Sometimes it is possible to obtain bee sting kits including automatic injectors, for lay use in emergencies before medical help can be obtained.
The most vital factor in treatment is quick action. Every minute of delay increases the extent of the injury, and the danger of shock. Even single stings in sensitive people, and multiple stings in anyone, should receive prompt attention.
In the absence of other remedies, absorption of the toxin may be slowed by an ice pack on the stings and/or a tourniquet above them. Danger of shock may be reduced by strong black coffee, taken by mouth if the patient is conscious, rectally if not.
Surface applications of mud or ointments may relieve pain, but have little or no effect on swelling or systemic reactions. Use of such remedies should not be discouraged, however, as they satisfy the person’s desire to “do something.”
Every contractor needs insurance. The only questions are, What kinds and how much? There are two types of insurance. One protects property owned by the insured, who is paid if it is damaged or lost. The other protects against claims for damage to other people because of the insured’s negligence. They are both important, but the second much more so than the first.
Much of the insurance protection a contractor needs is required by the majority of business people, but there are special angles.
To the layperson, insurance policies are complicated and confusing. There are many kinds of coverage, some of them overlapping; and many circumstances that affect each type. It is important to go to a good broker or agent who can explain in detail the purpose of each policy and what it covers, and even more important, what it does not cover.
Self-protection. To protect her or his own property, a contractor should have fire insurance on the buildings and their contents, and separate all risk “floater” insurance on the equipment. Cars and trucks may be covered under the floater, or under separate motor vehicle policies for fire, theft, collision, and other damages.
The building insurance is made more complete by extended coverage, added at moderate additional cost, that protects against damage from wind, storm, hail, aircraft, vehicles, smoke, and certain other causes. Vandalism, earthquake, and some other coverages may need special endorsements on the policy. It should be remembered that these, and flood damage, are not included in extended coverage.
A good tools and equipment floater policy will protect a contractor against most damages to the machines—fire, theft, overturning, tornado, upset, and collapse of bridges. But riot, vandalism, malicious mischief (increasingly important), and “loss while waterborne” are probably included only on payment of an extra premium.
Such a policy may list all pieces of equipment covered, or list the large units and lump the smaller ones. Another method is to declare a gross value for all the machinery, and pay a premium on that. If equipment is listed individually, there is usually automatic coverage of new machines for a short period after purchase.
Compensation. Workers’ compensation insurance, required of employers by law in practically all of the United States, and by common sense and self-interest in all of them, pays medical expenses, part wages (as disability benefits), and damages to employees injured on the job. Usually there is a period of time, such as a week, in which workers’ compensation pays no wages unless the disability extends over a longer period. There may also be gradations from partial to full compensation for time lost, as the no-work period lengthens.
Premiums are based on the type of work and the amount of the payroll. Rates and requirements differ in various states, and a contractor working across state lines must take care to be covered on both sides.
The cost of workers’ compensation insurance has risen sharply in the closing decades of the 20th century. In the United States between 1985 and 1993, premiums for the construction trades have increased an average of more than 10 percent. This is in spite of the fact that injury rates decreased. The premium increases were due to soaring medical costs and widespread abuse of benefits.
Liability and Property Damage. Liability insurance pays for injuries to people caused by acts of negligence for which the insured is liable. Property damage pays for similar injury to property.
A contractor is neither a good business person nor a good citizen if he or she is not well insured for injuries and damage to others. The equipment and the nature of the work both make it likely that claims will be brought against the contractor. He or she cannot afford to be put in bankruptcy by an operator’s carelessness, nor should the contractor risk causing damages for which she or he could not settle.
All too many contractors, and other business people also, think they are completely insured until an accident shows a hole in their coverage. This section will point out a few of the pitfalls, but the best precaution is to be friendly with a good insurance agent and talk to him or her freely about jobs and work methods.
Most liability policies have a minimum coverage of $25,000 for injury to one person, and $50,000 for injury to two or more in the same accident. The policy covers each of a series of accidents in the same amounts, until it expires or is canceled.
In addition to the face amount of insurance, the company pays for investigation and for legal and trial costs, bonding fees, and release of attachments, which may add up to substantial costs.
Exact coverages of policies vary from company to company and state to state, so the following discussion is only a general guide to what might be included.
First there is motor vehicle insurance, on personal and business cars, pickups, trucks, trailers, and equipment that travels under its own power or is towed on public roads. This includes wheel tractors, graders, and self-powered scrapers.
Rates on trucks increase with their gross weight. Rates on wheel tractors and other heavy, slow-moving equipment are prohibitively high. Arrangements can sometimes be made for coverage on job-to-job moves under the general contractors’ liability. Careful investigation should be made of this point.
Towing a trailer of any kind may invalidate car or truck insurance, unless provided for in the policy, or the trailer is separately insured. If such towing of an uninsured trailer is rarely done, the company insuring the vehicle should be willing to issue a special endorsement or binder to cover the combination for a specific trip or time period, at little or no cost.
If there are a number of motor vehicles, economies may be affected by insuring them together in a fleet policy, and by keeping some of them on low mileage and therefore low-rate local errands.
Contractors’ Liability. There are a number of classifications of liability risks for the contractor that can be insured separately. It is good business to lump as many as possible in a comprehensive policy, to avoid extra payments on overlapping coverage, and to avoid confusion.
A comprehensive policy may cover
Ownership, use, and operation of buildings and premises
Construction machinery, as above
Completed work (products) having defects causing injury or damage
All contractual work of kinds specified in the policy
Operations of subcontractors, except in maintenance of insured’s property
It probably will not cover
Dogs, animals, boats, aircraft, or vehicles
Blasting
Damage to subsurface pipes, conduits, and wires
Collapse of structures caused by excavation or underpinning work
Tunneling and bridge construction
Obligations assumed for others
Damage to rented or controlled equipment
The first exclusion in the above list is made because these risks should be covered by other types of policy. The next four are high-rate risks, and losses incurred under them can be more justly paid under special endorsements or other policies, by those who do such work, than by the larger number of contractors who do not.
These risks can be covered for specific jobs, usually only after inspection by the company so that it can see what it is letting itself in for, and set the premium accordingly. It is in the contractor’s interest to have such inspections made to obtain the necessary coverage; not only for her or his own protection, but because it is only the most experienced of supervisors who will not benefit from talking over a job with a good inspector.
Employers often feel that inspectors are a threat and a nuisance, but they perform invaluable services both as safety engineers and job consultants. Contractors who will listen to their discussions of methods used on other jobs will often find that they will save more than the cost of the premiums charged and the safety procedures required.
“Obligations assumed for others” is a tricky one that has caused many painful surprises. It is a too-common practice for an owner to write up a work contract specifying that the contractor assumes all liability for everything that happens on the premises while he or she is working on them. This may extend the contractor’s risks far beyond the premium paid for his or her own activities. It is much better for the owner to take out an owner’s risk policy for work in progress, and ideal if the owner can place it in the same company that insures the contractor.
If this is not possible, the contractor can show the contract to his or her own company, and pay an extra premium for an endorsement to cover any obligations assumed under it.
If such precautions are not taken, the results of the owner passing responsibilities to the contractor may be disastrous to them both, as neither of them is insured for the owner’s risks and both are responsible for them.
“Damage to rented or controlled equipment” is another joker on which many a contractor has tumbled, although the amounts involved are usually modest. Liability policies are designed to protect against claims from others. If a contractor hires a machine, it is his or hers for the period of use, and may be the subject of a claim against him or her.
Coverage to protect such equipment can be obtained by endorsement of the liability policy. The extra premium is usually based on the rental cost.
Rates. Insurance is priced so that each class of risk will bring in enough money in premiums to pay sales, administrative, and legal costs, and the claims that have to be paid, and to leave a surplus for reserves, and dividends to stockholders or policy holders.
An increase in losses automatically results in an increase in rates, although this effect may be delayed. The increase may be applied generally to all those having the particular type of insurance, or specifically to those whose accidents have piled up the claims.
Most insurance is written on one or more basic rates covering a general class of risk, with upward or downward revision depending on local conditions and experience with a particular risk or a particular customer.
Fire insurance premiums are affected by how likely the property is to take fire, how readily and completely it will burn, and the availability of firefighting equipment and water.
Contractors’ liability and property damage rates are extremely variable. They are based first on experience with a particular type of work, so that blasting will have a higher rate than landscaping. Again, coverage for blasting in the country may be at nominal cost, whereas in a city it might be as high as 50 percent of the payroll.
A small contractor may be just carried at the average of the industry. A larger operator will be assigned an experience rating, based on the number of accidents and how expensive they have been. This rating may make the contractor’s insurance more or less expensive than that of the competitors, and may thus affect his or her position in competitive bidding.
The premium for compensation insurance basically consists of a percentage of the payroll expressed in terms of dollars per $100 of wages. At the start of the policy term, the company and the insured define the risks that are to be covered, estimate the payroll for 6 months, and set the premium on the basis of the estimate. Then every 6 months the company makes an inspection of the insured’s books, or perhaps only of the payroll tax returns, and an additional amount is charged or a credit issued for any difference from the estimated charge.
If a contractor has a number of different activities, and does not keep separate payroll records for them, the rate of the most expensive coverage for all of them is used. It is therefore in his interest to keep the different classifications at least roughly divided.
Liability insurance may be assessed according to the payroll, or by the value of the work done during the period. Here also a separation should be made between jobs carrying different rates.
The contractor must pay liability premiums on all work done by subcontractors and by hired machinery unless he or she obtains and shows to the company certificates of insurance coverage from the subcontractors.
The excavating contractor shares with other forms of business the danger of serious loss through dishonesty of an employee, or employees. For a contractor, the loss is as likely to be in property taken or sold “over the fence” as it is in money.
Fidelity bonds of various types are available for protection against losses of this nature.
Construction contract bonds are required of contractors performing work for federal, state, and local governments. There is an increasing use of them in contracts with private owners.
A bond is a three-party agreement, made by the contractor and the bonding or surety company to protect the owner. It usually covers all obligations that the contractor assumes on the job, including completing the work to specification, and paying subcontractors and employees so that no liens or actions can be brought by them against the owner.
Three types of bonds may be involved. The first, the bid bond, accompanies a bid or proposal on a job, and guarantees that the bidder who is given the job will enter into a formal contract to complete it and will supply bonds to complete the contract.
The bond supplied for the work itself is made up of two bonds, which are separate, but seldom if ever written separately. One is a performance bond, covering fulfillment of the contract, the other a labor and material payment bond, guaranteeing payment to personnel, suppliers, and subcontractors.
These last two are drawn separately so that no question of priority can arise when claims are presented by both the owner and those who have supplied services and materials. In the early days of bonding, the government had to be paid or satisfied first, and the others got what was left. This meant at least long delays, and in cases where the bond was too small, losses for the small claimants.
In order to obtain a bond, a contractor must convince the company that he or she is competent to do the job, and financially able to carry it. The contractor pays the premium, usually not over 1 percent of the contract price, figures it as part of the cost, and passes it on to the owner in the bid or estimate.
Performance and payment bonds traditionally were in the full amount of the contract. However, surety companies that provide the bonds have become concerned over the size of large contracts, running into the hundreds of millions of dollars, which may provide a bond for less than 100 percent of the contract price. Often a general contractor will require that subcontractors provide performance and payment bonds.
Substantial all-around benefits are sometimes obtained from writing of construction bonds. The owner can let the contract to the lowest bidder without having to inquire into the question of whether he can complete it, as the bonding company guarantees performance. The contractor may save money by driving hard bargains with subcontractors who cut their figures a little closer because they know they will be paid.
If a contractor fails to complete the job or to pay the subcontractors, the bonding company takes over, lets a new contract to finish, and pays up the bills. Quite often, the new contract will be let to the contractor who defaulted, as her or his equipment is on the job.
The contractor is legally obligated to repay to the surety company everything that it has spent to finish the work. The company makes a more cooperative and intelligent creditor than a combination of an enraged owner and starving subcontractors, and in most cases the contractor is able to work out the difficulties and avoid a failure that might have been inevitable without the protection of the bond.
Unfortunately, there is another side to the picture. Many contractors who are thoroughly competent and reliable and have adequate resources for a job cannot get a bond to cover it. Potential low bidders may thus be weeded out, and work concentrated in the hands of a favored clique.
Inability to get a bond may result from a poor background, lack of resources, too many jobs already in progress, or other reasonable causes.
