Posted on: May 13, 2016 12:59 pm
When your productivity counts on the usage and availability of construction equipment, it’s good to know you have options for getting what you need to get the job done. If you’re thinking you may want to rent construction equipment, you’re part of a growing crowd. The heavy equipment rental industry has grown substantially over the past few years for a variety of reasons — the least of which is the flexibility offered by rental companies and dealer fleets.
Looking back to the beginning of the decade, an average of 51% of new construction equipment coming off the manufacturing line went straight to rental lots. With increasing demand for heavy equipment rentals, the industry has been accommodating the market with a wide array of equipment types and rental or leasing terms. In a survey conducted by Purchasing.com, there was a notable increase in equipment rentals between 2011 and 2014. For example:
- Forklift rentals increased by 90%.
- Wheel Loader rentals jumped by 273%.
- Compact Track Loader rentals rose by 925%.
This significant increase over the past few years tells us that equipment rental has its financial benefits to construction companies. However, renting isn’t always the most cost-effective strategy. Projecting your future needs will help you assess the best approach to acquiring equipment for your projects and maintain the financial health of your company.
There are a number of reasons to rent construction equipment where a purchase is not even a consideration. For instance, renting is ideal when you want to:
- Test out newer models before you make a purchase.
- Supplement your fleet temporarily.
- Use specialty equipment on an occasional basis.
- Break into a market that demands top-level equipment.
- Avoid productivity disruptions if equipment breaks down.
Even a company that manages a large fleet of equipment has a need for rental services. Renting equipment is a simple solution for some situations, but it can become a bit of a dilemma when you’re trying to figure out whether buying or renting is the way to go. Equip yourself with the knowledge that will help you determine the financial and logistical factors that come into play to properly assess your situation and know whether renting is the best choice or not.click to expand
Figure out Your Utilization Rate
Determining the amount of time a certain machine gets used is the first step to discovering whether you should rent or buy. Having a 70% to 80% utilization rate is ideal to support a purchase. Utilization rates as low as 60% may warrant a purchase with other factors considered, but for the most part, equipment with rates below 60% are considered good units for renting.
Here’s a fairly quick method to determine the utilization rate for a specific piece of heavy equipment:
- Find out the number of days the equipment has been or would be used in a three-month period. As an example, let’s say you see your business using an excavator for 52 full days in the next three months.
- Divide that number by the industry standard of full-time operating days of 66 (the sum of 22 days a month for three months) 52 ÷ 66 = 0.78
- Get the percentage by multiplying by 100, which would be 78% in this case.
The nature and frequency of projects will change over time and definitely over the life of a piece of equipment. The utilization rate just gives you a good starting point to take in all the factors that will influence your decision to rent or buy. It is one of many things you should contemplate before choosing whether renting or buying is best.
Sometimes renting equipment is the practical solution even when the utilization rate exceeds 70%. Our customers that rent Alban Cat equipment are doing it for various reasons. Some are renting bulldozers to add to their fleet for busy seasons that may last months. Some rent to replace a machine that is out of service as a temporary solution. Your utilization rate is good to know, but it’s not always an important factor.
Reduced Fleet Management
The more stuff you have, the more there is to manage and store. This concept works in every part of life, but it is a factor that comes up when the need for construction equipment arises. Do you have the people, space and other resources to have your own equipment?
Maintenance and operating costs (which we’ll get into more below), equipment storage and qualified people to perform the upkeep of the equipment all need to be assessed to discover just how well you’re set up, or could be set up, to manage a fleet of construction equipment. Construction companies can reap a number of benefits from incorporating a comprehensive rental strategy. By renting, you’ll be able to avoid a few things that would be required when you own equipment, such as:
- Securing storage space.
- Having additional employees to manage and maintain equipment.
- Paying for administrative costs and tasks associated with ordering parts and supplies for equipment service.
- Stocking common service parts and supplies.
- Keeping accurate records of the activity and history of equipment.
Minimal logistical requirements are appealing for certain business structures. This is especially true of construction companies that experience a seasonal influx of projects or are in the upswing of the growth of their business. To hire additional staff for short-term administrative functions or an uncertain growth period doesn’t work out to be the best option when construction equipment rental is so readily available.
Renting allows for less time and labor spent on managing and maintaining. With a dependable supplier for equipment rentals, there may be less advantages to buying than disadvantages to renting. As your fleet grows, so does your payroll, and you may find that owning is not the best strategy for the financial success of your company.
The Money Factor
It all comes down to the money. Is it going to be cost efficient to rent construction equipment?
Even though you may find one option cheaper than the other, it doesn’t automatically mean the obvious cheaper option is the way to go. Cheaper and less productive does not help your bottom line. Cheaper and low quality won’t get the job done as well as it could be. You’re in business to make a profit by providing value to your customers. Purchasing cheap, low-quality heavy equipment can be more financially harmful to your business than renting quality machinery on an on-going basis.
While there are some situations where it’s pretty clear a rental or a purchase is the way to go, there are just as many scenarios where you need to take a number of different factors into consideration to make your decision. Here are the main financial advantages to renting that will help you see all the angles of your situation:
- Better cash flow – A purchase will cover the costs associated with many projects and take a big chunk of your profits whether you are making money with it or not. Buying heavy equipment new or used is expensive and will likely have a noticeable impact on your cash flow. In comparison, the cost of renting can be easily allotted to each project with the exact costs being easily passed on in your billing. It will be a smaller expense that has a lower impact on cash flow.
- Newer equipment, newer technology – Caterpillar is regularly coming out with new technology and features that make your work more productive and safe. When you rent heavy equipment, you are getting models that are new and improved. When you purchase, your equipment will be behind in technology within a few years. While heavy equipment is made to last for many years, it is possible that government and industry regulations will make certain types of construction equipment obsolete. In a worst case scenario, safety regulations could be enacted to make certain features illegal or highly undesirable to use. This would make that piece of equipment have little or no resale value. This is a rarer occurrence, but it’s still a risk to be considered. If you’re renting equipment, the rental company assumes all the risk, and you have no need to even contemplate how well your equipment will sell.
- Tax deductions – Your construction equipment purchase is a capital expense that is amortized over the life of the equipment. The full purchase price can’t be deducted at the time of purchase, but it will be spanned over a number of years as the depreciation value. When you rent construction equipment, the rental fees are generally fully deductible as a business expense when fees are paid. This more immediate reduction in the business’ taxable revenue should be assessed to determine if this tax benefit may be more advantageous to the financial state of your business.
Matters of Maintenance and Operating Costs
When you’re renting equipment, you still need to perform daily inspections and take care of the basic maintenance work when you are renting for many weeks and months at a time. What you get to avoid is the insurance costs for each machine, government licensing associated with equipment ownership, repair costs and acquiring your own technician (or several technicians) to attend to all your machine work.
You’ll also still have some operating costs like fuel and perhaps scheduling the use of the equipment while you have it. However, you get to avoid much of the administrative work that should be done on a purchase like transportation, storage and calculations to determine the costs involved with an equipment purchase.
This great reduction in maintenance and operating activities levels the playing field for startups to get into some of the bigger jobs that could once only be done by large companies with their own fleet of construction equipment. When renting, you don’t need so much capital tied up in equipment, and you can better expand your services to reach a wider market.
Risks Associated With Buying Your Equipment
Aside from the need to have the capital to front the purchase for construction equipment, there are a few other drawbacks to purchasing equipment that every business owner needs to look at. Most construction businesses will have at least one or two units that can serve multiple uses like a Skid Steer or Backhoe Loader. Owning some equipment certainly makes sense to be able to properly serve your customers, but growing your equipment assets isn’t always the best way to go.
Rental companies offer additional service on their equipment concerning emergency repair, guidance in the operation of equipment and a wealth of knowledge about the features and advanced technology on new equipment. This can make those benefits to purchasing pale in comparison to the extras that come with renting —and the risks associated with a major purchase can also seem more significant.
Read through the risks of purchasing equipment below and consider how they may be relevant to your situation:
- Fleet management will be more important the more equipment you have. Large companies with an expansive fleet will have at least one full-time employee managing the care and control of all the equipment. There will also be a number of other people who devote part or all of their working hours to the administrative and servicing tasks associated with construction equipment. While renting equipment will take some organizing and management, it will take much less time for your employees since the rental companies will be taking care of the long-term equipment needs.
- A benefit to buying equipment is that you will likely be able to sell it. If it’s still operational, you’ll be able to find a buyer and get some money from your used equipment. However, you may find yourself eager to sell to a market that is in a slump, and you may not get what you expected when you factored in resale value five or ten years earlier when you purchased.
- There will also be a level of uncertainty as to how long your equipment will last or when your equipment will experience unplanned downtime. With stringent equipment management, you can eliminate much of the uncertainty, but there will always be the unexpected — whether it’s a machine breakdown or a jobsite issue affecting the operation of your equipment. Our Alban CAT Rental Equipment is periodically needed to replace our customers’ equipment that has experienced unexpected downtime.
The SWOT analysis that is helpful for the evaluation of your whole business operation is also useful in looking at all the aspects of how to acquire equipment. Look at the strengths (or advantages), weaknesses (or disadvantages), opportunities (or benefits) and threats (or risks) that are associated with both sides of the renting/buying equipment deliberation.
As you continually assess all the necessary factors so you can make the most informed decision for your business, you’ll find that some of those factors shift for you. The decision to rent equipment now may have quite different parameters a year from now when the decision to purchase looks much better.
The Benefits to Both Sides
Making the decision to rent or buy will be done by assessing a variety of factors concerning your workload and company resources. There’s no right answer for every business or every piece of equipment. Most construction companies will have some of their own equipment, especially the multi-purpose pieces of equipment that can be used for various types of jobs like excavators, loaders or skid steers. For other more specialized equipment or to sustain a busier time of the year, renting has become a viable consideration.
Here’s a recap on the main advantages to renting equipment and purchasing equipment.
The pros for renting include:
- Lower initial cost.
- Ideal for companies with irregular work load.
- Access to specialized equipment.
- Use of new models.
- No extra costs for insurance, repairs and transportation of equipment.
- Less business assets to manage.
- No need for the adequate capital that is required for a purchase.
- Rental fees are an immediate business expense.
The pros for purchasing include:
- Likely to be cheaper over time.
- An additional return on investment when sold.
- Flexibility to schedule work — equipment is ready and available to start new projects.
- Possible tax advantages.
- Equipment operators will be more competent on all the features of the equipment.
- With stringent equipment management, you could reduce equipment costs through direct employee management and Equipment Management Solutions offered by Alban CAT.
Take It All in and Choose the Best Option for You
Your decision to buy or rent construction equipment will be made by combining the various components that affect each option. Take into account the workload you have now, what you are planning for in the next year and even the next three to five years. Your overall business plan is a huge factor in the renting vs. buying decision. Are you planning for growth, or are you more interested in staying small to really hone-in on personalized service?
Projecting your future isn’t an easy task, but you likely have some idea of how you what your business structure to be a few years down the road. Having a big company with lots of employees isn’t the path for every business. Fortunately, the equipment rental industry is perfectly positioned to help businesses that aren’t looking for the huge growth needed to attain the capital for their own fleet.
You may have a utilization rate of 60% and below for every piece of equipment and don’t really see a need at all to make equipment purchases. That’s a viable way to run your business, especially when you have an equipment rental company as one of your key suppliers.
There’s a lot to consider to make the right decision about how you’ll obtain the heavy equipment that is vital to completing a project properly, effectively and on time. Your specific situation will not be the same as another construction or landscaping business, so it’s difficult to just listen to how a fellow business owner deals with their equipment use. Instead, taking into account the various aspects of equipment rental and purchase for your business will be the ideal way to make the right choice for the vitality and management of your company.
Consulting with your managerial staff and contacting rental companies about their rental terms and even their experiences with other business owners will give you even more knowledge about the best avenue for acquiring equipment. While you’re mulling over your options and deciding on long-term solutions, you can always rent to get a feel for the availability, scheduling and financial impact of equipment rental.
Check Us out for Your Construction Equipment Needs
When you’re looking for construction equipment for rent, Alban CAT has a large selection to meet your job site needs. We have several locations in the Maryland, Delaware and Virginia area that offer newer model equipment and power systems for daily, weekly and monthly terms. Our low-hour and well-maintained machines provide you with the dependability you need for the jobsite.
To complement our full line of Cat construction equipment, we also offer quality rental Allied Equipment . Whether you need light towers for nighttime construction, trenching products for landscaping, pumps, generators, compressors or concrete tools, we have a vast selection to be your one-stop shop. Learn more about our rental service at Alban CAT Rents and see what we have in store for you.
We’re building on four generations of success with 18 locations in the Mid-Atlantic region. We are a Cat dealer with a full line of equipment for purchase and rent. You can also depend on us for generators, marine and industrial engines along with the full support of parts and service. We work hard in our business to help you be successful in yours.