Transcription
How do you accurately calculate the cost of the plant required for your construction project? In this video, we're going to show you a step-by-step process you can use as an estimator, project manager, or project engineer to accurately determine the costs of the plant required for your construction project.
Now, so often you see people stuff up plant costs because plant costs are so driven by the specific methodology, how you build the job, and a range of other factors. In this video, we're going to walk you through the entire process and show you everything you need to accurately calculating the cost of construction plant. This video is part of a series of videos we've done on how to accurately calculate different components of the costs of the construction project. So, in this one, we're going to be focusing specifically on plant and equipment.
This video is for a range of professionals within the industry, including construction project managers, business owners, project engineers, and even estimators. Why is estimating plant costs particularly difficult, and what do you have to pay attention to while you're preparing your estimate? Well, the first reason is the plant costs fall in such a broad range of different costs. They fall under subcontract costs, they fall in indirect costs, and they also fall in plant costs. So, we have to be mindful of all the different ways plant costs can crop up in our estimates.
Additionally, if we're estimating plant cost for any self-perform work, we'll have to accurately know the production rate and the production risk, and that's going to be dependent on the type of plant we're using as well. So, there's a bit of a feedback loop there. We've got to discuss. The next one is, you can own plant, you can hire plant, you can dry hire plant, you can wet hire plant. So, there's all these different ways we can engage resources on our project, and if we're factoring the wrong way into our estimate, then the budget we have for our plant allocation is going to be wrong.
Plant costs are very methodology driven and task specific. So, we could use for trenching, we could use a six-ton excavator, we could use a 15-ton excavator, or we could use a 1 and a half ton excavator. Now, each of these different bits of plant will have different rates, but also different production rates. So, we need to understand the methodology behind the task and allocate the correct plant to it. The next one is that tasks often share plants. So, because of this sharing plant between different tasks, we've got to make sure that overall, when we're building up our estimate, there's a sufficient allowance in the budget.
We need to factor in site conditions, so the specific ground conditions, the access, the mobility of the plant. All these things are going to impact the specific choice of plant we make, the duration we need it for. And then finally, as always, and this is more of a general comment about construction estimating, but we work in this industry where the lowest cost bidder is the one who always wins the job. So, the industry tends to favor people who incorrectly estimate costs. So, we always got to worry about that issue that there's this commoditization force in the construction industry, and it's always going to favor people who are underestimating costs. So, that's why this additional challenge with estimating anything that if we're too high, we don't win the job, and if we're too low, we lose money on it.
To make this whole thing a little bit more real, I'm going to go through the biggest stuff-up I've seen in my career of accurately estimating plant costs. Now, this happened when I was working on the construction of a new train station. We were installing lots of different light pole foundations, and when the estimators built up the budget in the pre-contracts phase, they'd factored in installing all these light poles with an excavator. Now, when it came to delivery, because there were services everywhere on the ground, we had to hand dig each of these, so non-destructively dig. That cost us tens of thousands of dollars more than we budgeted for. We originally planned to be able to drill 10 a day, we went to having to use a sucker truck that cost $300 an hour, and we were doing two or three of them. So, you can imagine none of these costs were budgeted for.
And I think this example is good because I'm going to walk through when preparing the estimate, how when the estimators were looking at the job, they could have picked up this discrepancy. So, hopefully, the example reinforces it a little bit more. There's a ton of different plant costs on construction projects. There's plant that we own, so these are more like capital expenditures. Say we own an excavator, what allocation of the upfront purchase, the depreciation costs go to the projects? So, those all fall under owned plant.
We can dry hire plant. So, we could go to an equipment supplier and we could hire a telehandler. We pay a rate per week for the telehandler with no operator, and servicing and everything could be included in that rate. We could wet hire a piece of plant. So, that would be where we go to a subcontractor like an earthwork subcontractor and we hire an excavator with an operator, and assuming within that rate would be fuel, servicing, everything.
We might cover plant in our direct cost, so activity costs, or we might cover plant in our overhead. So, for example, if we know we're going to need a telehandler for the duration of the job, we could cover that cost in our overhead and not allocate it to a specific task. And there's always going to be some non-recurring overhead cost also allocated with plant, for example, getting the plant delivered to site, they set up non-recurring indirect costs. So, we've also got to factor in and think about some specific examples of these types of costs would be an excavator, telehandler, wet hiring a crane from a crane company, floating plant onto the site, and even just having to pay for the fuel for all the plant. So, all these costs form part of our plant cost. So, we need to consider them differently in our estimate, and again, that's why I keep saying estimating plant costs is difficult because there's such a broad range of different costs we have to consider compared to something like estimating labor.
We've got a labor rate, we've got a production rate, and we've got a quantum of work. Although there's different labor rates, you could have electricians, laborers, operators, it's relatively straightforward. When we're talking about plant, there's so many different variables we have to consider. We could dry hire plant, but we could have a different rate depending on the duration we hire it. If we own plant, we have to work out what rate we want to charge the project so we're recovering the upfront capital cost, and all of this has to be factored into our estimate to make sure we're correctly covering our costs, but also not overestimating them.
So, where are our plant costs covered in our estimate structure? So, we've even seen this before. This is the framework I use to think about all the components of an estimate that form part of the total project cost. So, plant, we've obviously got in our direct cost in our plant cost, but if we're wet hiring a plant, that might be covered in our subcontract cost. For example, if we're wet hiring a crane through a subcontractor, we could have plant covered in our indirect costs, so our recurring overheads, which might cover the Utes we need to move people around site, might cover a telehandler for moving materials. And we're also going to have some allocation of plant costs in our non-recurring indirect cost, so mobilizing to site, setting up servicing facilities, these sorts of things. There'll be no non-recurring overhead costs.
Just quickly, my name is Tim. I run a website called Construct IQ, where we've helped over 20,000 students master the fundamentals of construction project management, and we've got a ton of free courses. One specifically I think you might like on construction estimating. So, I put a link to it in the description of the video. So, if you want to learn more about estimating, definitely check that course out.
So, what is the process we follow to accurately calculate our plant cost? Well, the first thing we need to do is we need to determine what plant we require for the project. Then we need to optimize our plant usage, calculate our plant rate, calculate our total plant costs, and then calculate any plant overheads we need. So, again, the way you apply this process is going to be different for every single project you estimate, and I've already spoken about how many different ways and how many different factors you can have impact plant cost. But using this basic outline, this basic process will cover off all the key points you need to accurately calculate the plant costs for your project.
The first step you need to do is you need to determine the plant requirements for the project. So, basically, you want to answer the question, what plant do we need for the project? That's going to fall into one or two categories. You're going to have your direct costs, so the direct activities, pouring concrete, excavating, basic sorts of things, and you're really going to have to go task by task through this list and look at each individual specific activity and allocate the appropriate bit of plant. So, if you go back to my example of what happened with the train station, they didn't follow that step properly. They didn't look at the specific methodology behind how we were going to have to excavate the light pole foundation. So, that's what got messed up there, and it's why it's really important when you're going through and looking at your direct cost task by task, you actually understand the methodology behind the job and what piece of plant's appropriate.
You're thinking about stuff like trenching, structural steel installation, you're going to need to know where you have to set up, how far the reach of the boom is going to be, and then you can work out the specific bit of plant or the specific crane you're going to need for that task. But then you've also got your indirect costs. So, these are the ongoing repetitive tasks that aren't allocated to any specific construction activity. So, these are things like when we're talking about plant, that'll be something like a telehandler that you're using to offload deliveries and move materials around site. So, there'll be some plant required in your indirects, and you're also going to need a comprehensive way of checking you've got everything allowed for them, both your direct costs and your indirect costs.
As an example, say we need to install an electrical switch room, and we know we're going to need a crane to do this. We can't just pick any old crane. We have to pick the correct crane for the job. So, as an example, for cranage, we'd create a lift plan. So, a lift plan is basically a study or an analysis we do to determine what sort of crane we need for a specific construction activity, and we do this by looking at the weight of the object we have to move and the distance we have to be away from where we installed. So, if we say we need to pick up something that weighs 10 tons at a radius of 20 meters, we might need a 130-ton crane. So, we go through, we do a lift analysis, and then for that task, we determine we need a 130-ton crane.
Now, this is a complicated example. For most of the typical construction activities, you'd be able to work this out by just going to subject matter experts. For example, if you're clearing and grubbing 2,000 square meters, to use a simple grader, now that information you'd be able to get from a subject matter expert, someone who really understands the methodology and what the task requires.
Once we've gone task by task through the project and we've worked out the specific plant we require for every activity, the next thing we need to do is we need to do some plant balancing. So, what plant balancing is, is where we look at all the individual resources, in all the individual plant resources we need for each task, and then we basically want to simplify and group them together and identify efficiencies. This is going to help us determine the overall hire duration we need for plant. We can find any efficiencies so we're not mobilizing plant multiple times and paying lots of mobilization costs, and we're also working out our utilization rate.
Now, this is important because when we pay for plant, we're paying for it per week, per month, per day, whatever the rate is. If we've got 100 tasks that we can group together, it's going to be more productive, and if we can group those tasks together, we might be able to do them in a single mobilization. So, it's going to help us save money by looking at and optimizing the usage of the plant. The simplest way to do a plant balancing is you basically list out all the different items of plant you're going to need along the x-axis, and then along the y-axis, you get the dates all these tasks are going to happen from the schedule. So, obviously, to do this properly, you need a schedule, so that's another important bit of information.
But what you're going to do is for each of these bits of plant, you simply highlight the date and time you need it. And so looking at this as an example, you can see we need a 20-ton frer in January and February, April and May, and July. So, when you look at this, the sorts of questions you want to ask is, can we move those activities for the frer from April or May? Can we shift them to March? Or could we shift, or more likely, could we shift the activities required in January and February into the March period? And what that's going to do, it's going to help us optimize our usage of plant, so we're not going to have to pay for multiple mobilizations, and we're going to get better productivity out of the piece of equipment.
The other sort of things we could do is for the crane lifts planned with the frer in February, could we use the 130-ton crane? Same with May, could we use the 130-ton crane to do the crane lifts with a 25-ton frer? So, these are all the sorts of questions we want to ask, and basically, what we want to work out when we optimize our plant usage is, what is the minimum duration we can have the plant on site, and what is the minimum number of mobilizations we could do with it? And it's just really going to take some looking at the schedule, looking at the resources, and having a broad, holistic understanding of the project is all.
What we would have done so far is we've worked out task by task the piece of plant required for each task, and then we've optimized the usage. So, we've looked at the project schedule, we've looked at all when all these tasks are going to occur, and we've worked out a duration we're going to need each bit of plant. This sort of analysis then can help us work out the rate we're going to have to pay for that plant. So, you remember at the beginning when I was saying there are specific challenges with how we estimate plant rates because they're impacted by how long we can hire something. So, for example, if we hire something for six months, we're going to get a way better rate than if we hire it for one day.
The way we want to do this, based on the items of plant we've determined and the duration we need them, we're now going to work out hourly, weekly, and monthly rates. And we need to look at also the specific inclusions and exclusions from these rates. For example, if you dry hire a bit of plant from a supplier, they might include servicing in that, or they might include servicing as an extra. So, all these things you want to be very mindful of when you're looking at what goes into their plant rate, and it's going to depend also on whether you own the plant. You're going to need some rate that you charge the project to cover the capital cost of the plant versus whether you hired it, where it's much easier to calculate the rate.
You're also good to consider whether it's wet or whether it's dry hire. So, when we're calculating the plant rate, doing so for a bit of plant we own is going to be more challenging for a piece of plant we hire. If we hire a bit of plant, we just get a rate from a supplier and check what's included in. But if we own a bit of plant, we're going to have to make some sort of more complicated analysis to work out what rate we're going to charge the project.
The way we do this is we need to work out an annual rate for the bit of plant. So, if we own a piece of equipment, say a Ute, and we paid $100,000 for it, and it's getting depreciated at 15% per annum, as just an example, that annual rate for the bit of plant would be $15,000. Now, this almost becomes more of an accounting question or a capital expenditure question. For the purpose of this, we'll just assume you can come up with some annual rate for the capital expenditure. Then you have to factor in fuel, servicing, tools, and any extra costs, and you'll be able to build up an annual total cost of that bit of plant. So, for example, the Ute we're setting, the total annual cost of owning that bit of plant is $26,000.
And as I was saying, if we've hired the bit of plant, we just simply need to know the rate we're getting for it, which is, as I said, is going to be dependent on how long we hire it for. So, if we want to hire something for a day, it's going to be much more expensive than hiring something for a year. So, that's why it's important that we determine our usage before we start to calculate our rates.
When we're building plant into our direct cost, so if we're doing a direct cost buildup for trenching and we've got a production rate of how much we can trench per hour, we need to allocate a cost per hour for that bit of plant to the activity. That's going to depend on its utilization factor. Now, its utilization factor could be thought of as a percentage of time that you're working on the project that that plant is doing productive work. So, for example, if we've got an excavator on site for 24 weeks, and we're paying a weekly rate of $1,000 a week for it, the plant rate we're going to charge our direct cost activity will be the total cost, so $24,000, divided by the productive hours.
So, if it's only allocated to, so in that 24 weeks, this is pushing the math so I can do in my head, but if it's allocated to 240 hours of work, so 10 hours per week, then that useful rate is going to be about $100 an hour because we've paid for it for 24 weeks, which is a total cost of $24,000, but we're only allocating it to 240 productive hours. So, the rate we're going to get is going to be $24,000 divided by 240 hours, which gives us the rate we should be charging out direct costs. Hope I've done a good job of explaining that because it's a little bit of a confusing concept, but basically, you just want to make sure you're factoring in what percentage of the time the plant's being utilized on site when you're calculating the rate.
So, if you just take the hire duration of $1,000 a week and divide it by 40 hours a week, you'll have underestimated the rate to charge the activity. So, you need to consider how long the plant's going to be on site and then how many hours of productive work it's doing. So, then you get the total cost of having the plant for that period of time, and then you divide it by the productive hours of work it's doing.
Then, when we're including that in our direct cost, we just apply that plant rate we've calculated to the hours in each activity. So, if it's being used 100 hours for trenching, then it's the plant rate times 100 hours. We're including our indirects. For example, if we need a telehandler for 24 weeks, then we're just including the total hire costs in our indirect costs.
So, up to this point, we've factored in the hire costs into our direct cost and our indirect costs. The last thing we need to consider is any plant overhead. So, these are any mobilization, non-recurring costs that we need to factor into the estimate. So, these are things like paying to mobilize the plant to site. So, in some instances, if you have to get a semi-trailer, you're working on a remote job, it might cost you thousands of dollars to get a specific bit of plant to site. Might have to factor in any inspections or requirements to inspect the plant to meet that certain bit. So, for example, some sites have requirements that if you're reversing, you have to have a spotter. So, all that has to be considered into your non-recurring, your non-recurring indirect cost.
So, having to up-spec plant, having to fit certain things to it so it can meet the safety requirements working on site, you might have to factor in any servicing or repair works that's not covered in your original hourly rate. So, we already spoke about building servicing costs into the annualized rate for the plant, but you might also have to factor in additional servicing costs or any repairs for damage on site. And also fuel. So, fuel depends whether you've built it into your rate previously or not, but some projects prefer to just have a bulk fuel purchase and have a fuel tank on site. You just have to make sure all these items are covered so you're not missing anything.
I know I flew through that, but as you can see, there's so many different factors that influence how we calculate plant cost. So, you really need to go through and look at a specific example for your project to do it properly. These are all the things you have to consider. You have to consider whether you own it, whether you hire it, how long you're hiring it for, where you're covering fuel costs, where you're covering mobilization, the productive hours, how long it's going to be useful. All these factors come together, and that's why, in my experience, plant costs are one of the hardest things to accurately calculate.
As I said, we've got a full course on construction estimating for completely free that I'll put a link to in the video description. So, if you're interested in checking it out, please do so. And thank you very much for watching the video. Love to hear any feedback you've got in the comments. [Music]