Equipment Cost Allocation: The Expense Nobody Tracks Well

The Most Misunderstood Cost in Construction

Equipment is the second-largest cost on most construction projects — after labor. But unlike labor, equipment costs are often poorly tracked and misallocated.

Many contractors treat equipment as a fixed cost — just another overhead expense. But equipment should be treated as a variable cost, allocated to the jobs that actually use it. When equipment costs are misallocated, job profitability is distorted — and you make decisions based on bad data.

The True Cost of Equipment

The true cost of equipment includes more than just the purchase price. The full cost includes:

• Depreciation: The gradual loss of value over time.
• Fuel: The cost of fuel to operate the equipment.
• Maintenance and repairs: Regular maintenance and unexpected repairs.
• Insurance: The cost to insure the equipment.
• Financing costs: Interest on equipment loans.
• Transportation: Cost to move equipment between jobs.
• Operator costs: If the equipment requires an operator.

The Equipment Cost Allocation Problem

Many contractors allocate equipment costs by total hours used — but that doesn't account for differences in the cost of different pieces of equipment.

Consider:

• An excavator costs $500,000 and costs $150/hour to operate.
• A skid steer costs $50,000 and costs $50/hour to operate.

If you allocate by hours alone, you may undercharge the excavator on a job — or overcharge the skid steer. The correct approach is to allocate by equipment-specific cost per hour.

The Cost of Misallocation: A Numerical Example

Suppose you have two excavators and two jobs:

• Job A: Uses the large excavator for 100 hours at $150/hour = $15,000.
• Job B: Uses the small excavator for 100 hours at $75/hour = $7,500.

If you allocate by hours alone, you'd allocate $11,250 to each job — charging Job A less than it should be and Job B more. Job A's margin looks better than it is; Job B's margin looks worse. And you're making decisions based on distorted data.

How to Allocate Equipment Costs Correctly

• Calculate equipment-specific cost per hour: Include depreciation, fuel, maintenance, insurance, and financing.
• Track equipment hours by job: Use equipment tracking software or log sheets to track hours per job.
• Allocate costs based on hours: Multiply hours used by the equipment-specific cost per hour.
• Review allocation regularly: Update cost per hour as equipment ages and costs change.
• Incorporate allocation into job costing: Equipment costs should flow into your job costing system just like labor and materials.

The Impact of Equipment Cost Allocation on Bonding

When a surety reviews your job profitability, they look at your equipment costs — and whether they're allocated correctly. Inconsistent equipment allocation suggests weak cost controls — which affects your bonding capacity.

Frequently Asked Questions

What's the best way to track equipment hours?

Equipment tracking software — like GPS-based systems — is the most accurate. For smaller contractors, manual logs can work.

Should I include operator costs in equipment cost?

Yes — if the operator is dedicated to the equipment. If the operator is shared, allocate labor separately.

How often should I update equipment cost per hour?

At least annually, or whenever there's a significant change in fuel costs, maintenance, or depreciation.

Does equipment cost allocation affect taxes?

Yes — equipment costs allocated to jobs reduce job profitability, which affects taxable income.