Total Cost of Ownership

Total cost of ownership

Purchase price is only the first line. A commercial model should include:

Purchase price
- residual value
+ finance cost
+ insurance
+ fuel
+ operator
+ service
+ repairs
+ tyres/tracks
+ attachments
+ teeth/chains/knives
+ transport
+ telematics
+ downtime
+ administration

Downtime belongs in that list and is almost always omitted. It is a real cost with a real dollar value: lost contribution margin per productive day, multiplied by days lost.

Fixed cost per hour

Suppose an illustrative machine costs:

Purchase: $800,000
Expected resale after 5 years: $300,000

Depreciation:

($800,000 - $300,000) ÷ 5
= $100,000/year

If the machine performs 2,500 productive hours:

$100,000 ÷ 2,500
= $40/hour depreciation

At only 1,250 productive hours:

$100,000 ÷ 1,250
= $80/hour depreciation

Same machine. Same purchase price. Double the depreciation cost per productive hour.

Depreciation per productive hour against annual utilisation

A machine depreciating $100,000 a year. Same machine, same purchase price — the hours decide the cost.

That is why utilisation is central to forestry profitability, and why an honest annual-hours estimate is worth more than a hard-won discount on the purchase price.

Cost per cubic metre

Assume total machine operating cost of $280/hour.

At production of 25 m³/hour, machine cost is:

$280 ÷ 25 = $11.20/m³

If productivity falls to 18 m³/hour, cost becomes:

$280 ÷ 18 = $15.56/m³

That is a 39% increase in machine cost per cubic metre without changing the hourly cost at all.

Production matters enormously — which is why production data, not specification sheets, should drive the purchase.

Cost per hectare for mulching

Assume machine cost of $350/hour and production of 0.75 ha/hour:

$350 ÷ 0.75 = $466.67/ha

If difficult vegetation reduces production to 0.35 ha/hour:

$350 ÷ 0.35 = $1,000/ha

That is why contractors should avoid quoting forestry mulching purely from satellite imagery or total hectares. Vegetation density can completely change cost, and the rate was fixed before anyone walked the site.

Productive machine hour versus clock hour

Forestry businesses should distinguish:

Scheduled machine hour — the machine was scheduled to work.

Engine hour — engine running.

Productive machine hour — machine actually producing.

Delay hour — waiting because of truck, breakdown, fuel, operator, weather, road or a processing bottleneck.

Commercial costing should not assume every engine hour is productive. Machines routinely record 15-30% more engine hours than productive hours, and a cost model built on engine hours will understate cost per unit accordingly.

Machine availability

A useful metric:

Mechanical Availability
=
Available Scheduled Hours
÷
Total Scheduled Hours
× 100

Example:

Scheduled: 200 hours
Breakdown: 20 hours

Availability: 180 ÷ 200 × 100 = 90%

Increasing availability from 85% to 95% can be more valuable than increasing theoretical production by 5% — and it is usually cheaper to buy, because availability is purchased through dealer support, parts stock and maintenance discipline rather than through capital.

The costs that do not appear on an invoice

Three of the largest costs in forestry machine ownership never arrive as a bill, which is why cash-based costing is so consistently optimistic.

Depreciation is the largest single cost on most forestry machines and appears nowhere in the monthly accounts. The worked example above puts it at $100,000 a year before fuel, wages or maintenance. A contractor pricing from cash costs alone can run profitably for years and still be unable to fund a replacement machine — which is the point at which the business discovers what it has actually been earning.

Downtime costs contribution margin, not repair dollars. If a machine generates $1,200 a day in contribution after variable costs, a three-day breakdown costs $3,600 in lost margin on top of whatever the repair invoice says. In an interdependent chain the figure multiplies, because a stopped processor idles the feller buncher, the skidders and the loader with it.

Capital tied behind a constraint is the least visible of the three. A fleet with 20% more felling capacity than it can extract is paying depreciation, finance and insurance on capacity that produces nothing. It looks like a well-equipped operation and costs like an over-equipped one.

Where cost models usually go wrong

Most cost models in this industry are not wrong in structure. They are wrong in three specific inputs.

Engine hours substituted for productive hours. A model that divides fixed costs by engine hours rather than productive hours produces an hourly rate the machine cannot deliver production at, and that error flows directly into every quoted rate afterwards.

Residual value assumed rather than verified. Residual is the difference between depreciation being the largest cost and being merely a large one, and it is the input buyers are most inclined to flatter. The market for purpose-built forestry machines is thin, so condition, hours and service history move price more than age does, and an unusual specification narrows the buyer pool further. A phone call to a dealer about a recent comparable sale is worth more than any depreciation curve.

Production modelled from a good day. A rate quoted from peak production has no margin in it. Sustained average output across weeks — including weather, difficult ground, minor stoppages and the days nothing goes right — is what the machine will actually deliver, and it is usually well below the figure a demonstration suggests.

Consumables scale with production, not time

Fuel, chains, bars, teeth, knives, hammers and tyres are consumed per unit of output rather than per hour, which has a practical consequence: they should be tracked per cubic metre, per tonne or per hectare rather than per hour.

The reason is diagnostic as much as financial. Consumable cost per hour rises and falls with how hard the machine is working, which tells you very little. Consumable cost per cubic metre should be stable, so when it moves, something has changed — cutting technique, chain speed, soil contact, material type or a component approaching failure. Tracked per hour, that signal is invisible.

This matters most where the cost base differs from the one a model was built on. Abrasive Australian hardwood consumes chains, bars, knives and rollers faster than plantation softwood; rocky ground consumes mulching teeth and tiller tool-holders at rates that can exceed fuel cost. A model carried across from softwood or from benign soils will be optimistic in a way that only becomes visible after several months of operation.

Finance is a separate cost from depreciation

Depreciation is the loss of the asset's value. Finance interest is what the money costs. They are different things and both belong in the model — a calculation that captures only depreciation understates the machine's annual burden, and the gap is largest in the early years of a term when interest is highest.

The structure of the finance also matters commercially. A balloon payment lowers the monthly obligation and raises the exposure at the end of the term, at exactly the point when the machine's condition and the resale market determine whether the balloon can be cleared. A term longer than the contract supporting the machine does not remove that exposure; it defers it.

Putting the model to work

The useful output of a cost model is not a number but a comparison.

Total the annual fixed costs — depreciation, finance, insurance, registration, storage, standing compliance.
Divide by the productive hours you can genuinely contract, not the hours you hope for.
Add the variable costs per hour — fuel, operator fully loaded, service, consumables.
Divide by sustained production per productive hour to reach cost per cubic metre, tonne, hectare or stump.
Compare that against your contract rate. If the gap does not cover overheads and margin, either the rate is wrong or the production assumption is.

Run these figures in the machine cost calculator, or see the cost guides by type of work for what drives the cost of mulching, harvesting, clearing and stump removal specifically.

A model end to end

Every component so far, assembled into one calculation. The figures are illustrative — substitute your own — but the structure is the one to use.

A machine bought for $800,000, expected to be worth $300,000 after five years, financed over that term, working 2,000 productive hours a year and producing 22 m³ per productive hour.

Step 1 — annual fixed costs

Depreciation   ($800,000 - $300,000) ÷ 5   = $100,000
Finance interest              (illustrative) =  $28,000
Insurance, registration, storage             =  $12,000
                                              ---------
Annual fixed cost                            = $140,000

Step 2 — fixed cost per productive hour

$140,000 ÷ 2,000 = $70.00/hour

Step 3 — variable cost per productive hour

Fuel          28 L/h × $2.00/L   = $56.00
Operator (fully loaded)          = $65.00
Service and repairs              = $22.00
Consumables (chains, bars, etc.) = $18.00
                                   -------
Variable cost per hour           = $161.00

Step 4 — total cost per productive hour

$70.00 + $161.00 = $231.00/hour

Step 5 — cost per unit sold

$231.00 ÷ 22 m³ = $10.50/m³

That last number is the one to compare against your contract rate. If the rate is $16/m³, the machine contributes $5.50/m³ toward overheads and margin — about $121,000 a year at these hours and production.

Now run it again, pessimistically

The point of building the model is not the number. It is the sensitivity.

Take the same machine and move only the two inputs buyers most often get wrong — utilisation and production — to the pessimistic end:

Scenario	Hours	m³/h	Fixed $/h	Total $/h	Cost per m³
Planned	2,000	22	$70.00	$231.00	$10.50
Production short	2,000	18	$70.00	$231.00	$12.83
Hours short	1,400	22	$100.00	$261.00	$11.86
Both short	1,400	18	$100.00	$261.00	$14.50

Nothing about the machine changed in any row. Against a $16/m³ rate, contribution falls from $5.50/m³ to $1.50/m³ — a drop of roughly 73% — and the annual contribution at those hours collapses from about $121,000 to about $38,000.

Overheads, margin and the number you actually quote

The model above produces machine cost, not a rate. Between the two sit two things it does not contain:

Business overheads — management, administration, insurance not attached to a specific machine, compliance, vehicles, yard, systems. These are recovered across all machines and all jobs, and a business recovering them from only its busiest machine is mispricing everything else.

Margin — the return for carrying the risk. A rate that covers machine cost and overheads exactly is a rate that works only if nothing goes wrong, which is not a plan.

The practical approach is to establish machine cost per unit first, because it is the part that can be calculated rather than judged. Then add an overhead recovery per unit derived from total overheads divided by total expected production across the fleet, and then a margin. Quoting a rate without knowing which of the three is being squeezed is how contractors discover, late, that they have been subsidising a client with their own depreciation.

Common questions

What is the biggest hidden cost in owning a forestry machine?

Depreciation, because nothing ever bills you for it. Worked through on the guide's example — $800,000 down to a $300,000 residual over five years — it is $100,000 a year before a litre of fuel is burned. The reason it does real damage is the delay in the feedback: a business pricing from cash costs alone looks profitable month to month and only discovers the shortfall when the machine needs replacing and the money to do it was never in the rate.

What counts as a productive hour?

An hour in which the machine produces saleable output. It excludes travel, setup, refuelling, breakdowns, waiting on trucks or other machines, and operator breaks. Machines routinely record 15-30 per cent more engine hours than productive hours, so a cost model built on engine hours produces an hourly rate the machine cannot deliver production at.

Should finance interest be included separately from depreciation?

Yes. Depreciation is the asset losing value; interest is the price of the money used to buy it, and a machine bought outright incurs the first and not the second. Counting only depreciation therefore understates what a financed machine costs to run, and understates it most in the early years of a term when the interest component is largest — which is exactly when a new contractor is most likely to be building a rate card from the figures.

How do I turn machine cost into a rate I can quote?

A quoted rate has three layers, and only the first can be calculated rather than judged. Machine cost per unit comes out of the model. Overhead recovery has to be spread across everything the business produces, not loaded onto whichever machine is busiest. Margin is the return for carrying the risk, and a rate that covers the first two exactly is a rate that works only if nothing goes wrong. The failure mode is not knowing which of the three a discount is coming out of.