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Machine Rates: Do You Know What Your Equipment Costs You?

Have you been tasked with bringing the owner a budget to expand or replace a piece of equipment, or are you getting quotes for a new piece of equipment for your facility? Then its time to get a good handle on the concept of “machine rates” so that in talking with CFOs, your boss, vendors or equipment sales personnel, you know exactly how much your equipment costs your business or organization by understanding machine rates.

The machine rate is the cost of owning or leasing and operating a particular piece of equipment. Why is it important? Because the machine rate, multiplied by hours of use in a budget year, gives the annual projected cost for that piece of equipment. You can base these rates on your best professional judgment or established rates elsewhere for start-up facilities. For a facility already in operation, you can use more specific data from your bookkeeping system and other data for each piece of operating equipment.

You get to that number by adding fixed costs, operating costs and labor costs. These costs are expressed in relation to a factor such as dollars per hour, but sometimes it may be dollars per cubic yard or ton of feedstock handled. To dig down into how to reach these costs, see the detail below.

Fixed Costs

These accumulate over time and stay the same, no matter how much material you handle or hours the machine is used. They could include:
  • Interest on funds used to purchase the equipment;
  • Leasing rates
  • Taxes
  • Insurance
  • Equipment depreciation (although this can become a variable cost depending on usage)
  • Storage costs (if any).

Operating Costs

These vary directly with the work done by the machine. Examples are:
  • Fuel
  • Lubricants
  • Maintenance
  • Tires
  • Repairs
  • Labor costs include direct wages, direct benefits (personal time off, vehicle compensation, etc.), employer taxes and social costs, including payments for health and retirement. The cost of supervision may also be spread over the labor costs.

It’s important to separate the costs to help explain the cost of operating the equipment.

For example, equipment depreciation is driven by the equipment salvage value and equipment life. For a computer, salvage value is tied to how quickly the technology/hardware is obsolete, so time is a key factor, not hours worked. But for a front-end loader, the actual hours of equipment use are an important determinant because high-hour loaders have less salvage value than low-hour loaders.

Depreciation

Depreciation is a way of recognizing the declining value of a machine over its working economic life (the period of time that a machine can operate at an acceptable operating cost and productivity). While this is not a cash expense in most organics processing facilities, it is a cost. Depreciation schedules vary from the simplest approach, which is a straight-line decline in value, to more sophisticated techniques which recognize the changing rate of value loss over time. The formula using the assumption of straight-line decline is D = (P’ – S)/N
where

  • D = annual depreciation charge in dollars per year
  • P’ = the purchase price less consumables like tires
  • S = salvage value, or price the machine can be sold for at the time of its disposal
  • N = number of years of economic life.

Economic life is specific to the way equipment is used. For example, a loader could have a life of 10,000 - 15,000 hours depending on how it is used; there comes a point where it costs too much to maintain. Calculate economic life by defining the number of working days per year and the number of working hours per day.

Economic Life Case In Point:
A horizontal grinder costs $350,000 and has an expected life of eight years. Assuming a salvage value of 10 percent ($35,000) and that five percent of the purchase price reflects consumables ($17,500), the annual depreciation charge is: D = ($332,500 – $35,000)/8 years = $37,187.50/year
If the grinder is used 4 hours/day, 5 days/week (1,040 hours/year), the hourly depreciation rate is $35.75.

Interest costs are the costs of using funds to buy equipment. For loans from investors or financial institutions, interest costs may be included in the loan documents, or can be calculated as the interest rate per year times the amount of the loan times the  number of years to repay the loan (another method is to multiply the loan rate by the average annual investment).

For equipment purchased with cash, the interest cost is the rate that would have been earned if that money were invested elsewhere times the equipment cost times the number of years of a typical equipment loan, usually 5 years. If equipment is leased, the monthly lease rate is used as the basis for the annual interest cost. Using the same horizontal grinder example as above, assuming a loan from a private investor at 10 percent for 5 years, the fixed-rate annual interest charge would be:

$350,000 x 10% /5 years = $7,000/year

and the hourly interest charge would be $7,000/1,040 hours = $6.73.

Taxes are usually imposed on your local jurisdiction. For example, in Virginia, where I am based, the Machinery and Tools tax in my County is $1.80 per $100 of value for 50 percent of the capital cost, or in the example of the horizontal grinder:

$350,000 x 50% = $175,000 taxable capital cost

$175,000/$100 = 1,750 taxable units

1,750 taxable units x $1.80/unit/year = $3,150/year

and the hourly taxes charge would be $3,150/1,040 hours/year = $3.03.

Insurance Costs Most private equipment owners will have one or more insurance policies against damage, fire and other destructive events; some, especially public owners, may be self-insured. Given the wide variety of insurance coverages available, a good rule of thumb for insurance cost is 0.5 percent of the capital cost per year, or:

$350,000 x 0.5%/year = $1,750/year

and the hourly insurance charge would be $1,750/1,040 hours = $1.68.

Hourly Fixed Cost:

Using the above examples, the total hourly fixed costs of owning and operating a horizontal grinder would be:

$35.75+$6.73+$3.03+$1.68 = $47.19/hour.

Operating Costs

Operating costs, unlike fixed costs, change in proportion to hours of operation or use. The actual operating costs can vary while a piece of equipment performs a single function. For example, the operating cost of a compost delivery truck is less while it is being loaded with the driver and engine idling than it would be while in transit, although tracking the data and refining the operating cost estimates to that level of detail is rarely worth the effort.

Maintenance and repair include everything from simple maintenance to the periodic overhaul of engine, transmission, clutch, brakes and other major equipment components, for which wear primarily occurs on a basis proportional to use. Operator use or abuse of equipment, the severity of the working conditions, maintenance and repair policies, and the basic equipment design and quality all affect maintenance and repair costs. All major equipment manufacturers who supply the organics recycling industry provide spreadsheet models that describe likely hourly costs of operation. For the horizontal grinder example used above, one manufacturer estimates repair and maintenance costs at $16.03/hour; another uses $20.60/hour. Using an average of those two estimates, the hourly cost of maintenance and repair would be $18.32.

The fuel consumption rate for a piece of equipment depends on the engine size, load factor, the

condition of the equipment, operator’s habit, environmental conditions, and the basic equipment design.

Most horizontal grinders consume between 22 and 28 gallons per hour, so if off-highway diesel fuel costs $2.55 per gallon, the hourly fuel cost of the horizontal grinder is about $63.75 (based on 25 gal/hr usage). Similarly, lubricants and filters maintenance costs vary due to many of the same factors that influence fuel costs. One manufacturer estimates hourly horizontal grinder grease, oil and filters costs of $4.16.

Tires are another component of operating costs. Tire life depends in part on the working surface and can vary from 750 to 4,500 hours depending on the operating conditions. One common tire size for a horizontal grinder is 385/65R22.5, which can cost from $400 to $600 each. Assuming two tires get replaced each year at $600 each, hourly tire costs could be $1.15.

Using the above examples, the total hourly operating cost for a horizontal grinder would be

$18.32+$63.75+$4.16+$1.15 = $87.38/hour.

Labor costs To calculate these you must make an assumption on work efficiency. Employees do not work for a straight eight hours of work per day due to bathroom breaks and other interruptions. Using an efficiency estimate of 85 percent, (6.8 actual work hours per day), if the horizontal grinder operator earns $10.00/hour ($20,800/year), and you add on Social Security and Medicare taxes, and federal and state unemployment insurance costs, the cost rises to $12.20/hour. Using 85 percent work efficiency means that the employee actually costs the business $14.34/hour.

Bringing it all together

In total, the machine rate for the grinder is $47.19/hour in fixed costs, $87.38/hour in operating costs and $14.34/hour in labor costs for a total of $148.91/hour. Based on an estimate of 1,040 operating hours per year, the annual budget for that machine is $154,866.

By repeating this type of analysis for every piece of equipment involved in making products from compostable/digestible feedstocks, facility managers can develop a clear understanding of their operating costs in order to support budget requests, financial reports, and purchasing decisions.

Craig is CEO of Coker Composting & Consulting near Roanoke VA, a Senior Editor of BioCycle magazine and a Bronze Soilbuilder member of the USCC. He has over four decades of experience in developing and operating composting facilities handling all types of organic wastes. He can be reached at ccoker@cokercompost.com.