Intermediate Equipment Handbook
Intech Associates
1.3.1 Ownership Costs
There are two important, and potentially large, components in the ownership
costs of a piece of equipment, these are:-
□ Depreciation/replacement/amortisation, and
□ Finance or Opportunity Cost
In the past, public authorities with force account operations have tended to
ignore these important cost components (with very unfortunate consequences).
Many contractors have also not evaluated these costs realistically.
Some reasons for this can be cited as:
equipment being provided by international agencies with (low interest)
loans or as gifts, (sometimes offered in the interests of the donor’s
national industries and NOT in the overall interests of the recipient’s
interests and sustainable operations),
equipment inherited from other organisations,
no capital or interest charges to the user,
equipment procurement, management and user organisations being
separate,
very low inflation,
equipment considered as ‘written off’ and therefore ‘free of charge’.
Furthermore by ignoring these costs it has not been possible to make fair
comparisons between force account (internal) and contractor operations options,
and indeed between different technology options.
However in a future sustainable system, this approach will not be possible and
commercial and responsible asset management practices will have to be
adopted by contractors, public fleet owners and users alike, taking account of all
costs.
There are different ways of viewing and treating these ownership costs. The
author recommends the following approach.
Depreciation/replacement/amortisation
Depreciation/replacement/amortisation: these terms are used in different
cultures or sectors to describe the same concept. Hereinafter the word
‘depreciation’ will be used for simplicity.
A piece of equipment is a substantial capital investment and should be viewed
as an asset (although invariably declining in real value or depreciating).
Depreciation is the charge which should be made for using up the life of the
equipment. For example when new, a piece of equipment may have an expected
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