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Buy or Rent? New or Used?

ECONOMY REQUIRES CAREFUL PLANNING FOR HEAVY EQUIPMENT ACQUISITION
BY SHERYL JACKSON

Construction industry officials were pleased with trends as early 2012 reports showed nine consecutive months of growth, with more people working in construction than at any point in more than three years. This recovery, however, is fragile according to analysis of government data by the AGC of America.1

With a tenuous recovery that may or may not continue to improve, how do contractors who are awarded new work make decisions regarding investment in equipment needed for those jobs?

When contractors consider options including purchase of new equipment, buying used equipment at auction or from resellers, leasing to purchase, or renting, the decision is based on a variety of factors, says Chris Frey, senior analyst at EquipmentWatch®, a research firm specializing in the heavy construction industry.

“The final decision to buy new versus used equipment is usually related to interest rates, depreciation rates, useful life of the equipment and resale value at the end of life,” he explains. Versatility of equipment is also part of any decision, he points out.

“If a piece of equipment can be used on multiple projects that are scheduled over a period of time, the contractor may decide to buy used rather than rent.”

EquipmentWatch does not receive sales and pricing information from manufacturers for new equipment but the company’s database includes trends for both used and rental equipment. “Recent data show overall auction prices for used equipment growing faster than rental rates,” says Frey. The most recent auction report focused on commonly used equipment such as skid steer loaders, tractor loader backhoes and crawler-mounted hydraulic excavators.

Purchase of equipment indicates an increase in work for contractors, points out Steve Bonner, account representative for Tom Growney Equipment in Albuquerque, NM, a member of several AGC chapters. “Even though there is work, the fear is that government work will take a hit with federal budget cuts,” he says. “For that reason, many contractors are diversifying.” Not only are contractors in his area submitting bids for smaller projects than they normally handle, but they are handling more of the work themselves. For example, a highway contractor who used to subcontract the dirt work, now takes on dirt moving, which may require equipment not previously owned.

A key challenge for all contractors is the constantly changing market, points out Mason J. Ford, director of equipment services for Skanska USA Civil, an AGC member in several states. Although most contractors’ financial models for owned equipment are long-term models, many of today’s projects are shorter term, he says. “It’s difficult to own and shape your fleet when facing projects that will last two to five years,” he explains.

NEW MAY BE REQUIRED TO MEET REGULATIONS
“Another challenge is making sure your equipment meets environmental requirements for different regions,” says Ford. Contractors who work throughout several regions may find rental more cost-effective if they won’t be working long-term in a region with environmental requirements that differ from regions in which most of the company’s work occurs, he suggests.

Stricter Environmental Protection Agency (EPA) regulations make purchase of new equipment the best route for some contractors. “Manufacturers are not just making minor changes to new equipment to meet EPA regulations; they are re-developing machines to create new efficiencies,” says Ford. These new efficiencies make new equipment a better investment in some situations than retrofitting old equipment to meet regulations.

Equipment manufacturers often offer buying programs that provide discounts or low-interest financing rates and longer payment terms to increase the value of purchasing new equipment, points out Bonner. “We are not seeing a lot of contractors lease in our area but we do see smaller contractors rent in specific situations.” For example, a small construction company that owns utility-sized loaders but needs a production-sized loader for one job might rent the larger piece of equipment, he explains. “Rentals usually occur when a contractor has no expectation of using the equipment consistently on future projects.”

Long-term planning and looking at the big picture enables Cold Spring Construction to maximize use of equipment owned by the company. “We try to schedule work to first utilize equipment we own,” says John Clancy, information systems manager for Cold Spring Construction in Akron, NY, an AGC of New York State member. “We’ll supplement with rental of available equipment if needed.” Even when renting, Clancy keeps his options open for purchasing by entering rental-purchase agreements. If the equipment can be used for a longer period of time, either on the original job or a new job, the company can take price discounts that are locked in with the agreement.

EQUIPMENT IN USE LONGER
Most contractors are stretching equipment budgets by extending the life of their equipment, says Bonner. “I have customers who used to release a loader at 14,000 to 15,000 hours but they are now holding on to equipment up to 18,000 or 20,000 hours before selling to buy new.”

EquipmentWatch data show the average age of resold equipment between four and eight years, with most equipment sold after five to seven years of use, says Frey. These figures might be related to depreciation value as much as useful life, he points out. “For some equipment, it makes sense to sell if there are no accounting or tax benefits to keeping it.”

The key to extending the life of equipment is maintenance, and many contractors are handling regular maintenance on their own. “A real issue for contractors who perform their own maintenance and repair is a lack of mechanics and technicians,” says Ford. “There were predictions of a shortage of tradesmen who work on heavy equipment 15 years ago and most of us just laughed and said we had plenty of mechanics.”

Unfortunately, the prediction came true and Ford points out that the youngest skilled mechanic in their company is 36 years old. “Most experienced mechanics are in their 40s and 50s and there are not many younger people who are choosing this field of work, he adds. “There are people who are interested in the computer technology in construction equipment but not as many who want to get their hands dirty repairing equipment.”

Even when contractors have staff to perform routine maintenance and repairs, it pays to have a program to carefully monitor maintenance activities, recommends Clancy. His company has mechanics at jobsites to perform equipment preventive maintenance and repairs but had no way to keep service records up to date and accessible to everyone. “We partnered with a manufacturer and software company at the beginning of 2012 to test a product that uses GPS technology and automated maintenance system to see if we could improve the costs of maintenance.”

With jobs spread throughout a wide area and equipment moving from site to site as needed, it was not uncommon for a maintenance task such as changing oil to be performed at one site, then again when it arrived at a new site. With no easy method of accessing maintenance records, the mechanic at the new site would just assume the oil change was necessary.

“Now, 643 pieces of equipment, including 120 pieces of heavy equipment, have GPS tracking technology onboard so I know where everything is,” says Clancy. “Maintenance staff at all jobsites can access the equipment’s maintenance records using laptops and wireless technology for realtime information about service needed.” Clancy’s tracking system not only displays location but also transmits information about utilization, fuel status and error codes. “The error codes enable us to identify problems before they become serious issues.”

Guidelines that ensure, for example, oil and fluids are changed at regular, recommended timeframes as opposed to when equipment arrives at a new site, and the technology to track service records has resulted in savings for the company. “We’ve seen a 40 percent savings on the price of oil we’ve had to buy,” Clancy says. The system sends alerts to the appropriate people if an error code is detected or preventive maintenance is overdue.

Clancy’s program to enhance maintenance to extend the life of equipment also applies to fleet vehicles. “We do provide vehicles to our supervisors and we usually have them drive a truck no more than five or six years,” he says. “They drive a lot of miles and we want to make sure they have a reliable vehicle.” The vehicle stays with Cold Spring Construction as project trucks used onsite during jobs. “We generally run our fleet vehicles until they stop running,” he says.

VARIETY OF FACTORS INFLUENCE PURCHASE
A decision related to the purchase of new or used equipment or rental varies with each contractor and sometimes, with each job. The key to making a good decision is to evaluate a variety of factors:

• Availability of the machine
The more common the equipment, the easier to find rental equipment at good prices, points out Ford. “If, however, the job calls for a specialized piece of equipment, ask if there are alternatives,” he suggests. Compare costs carefully because using two smaller pieces of equipment may require you approach the job differently and may add more cost than buying the larger piece of equipment.
• Projected future work
When determining the likelihood of using specific equipment in the future, don’t just look at your company’s plan, warns Ford. Take into account trends throughout your region as well as nationally. For example, purchase of equipment you may not use in the future is not a bad investment if it saves you money on the current job and you know there will be a market for it when you are finished.
• Used versus new equipment
“Overall cost is an important factor to consider but don’t forget about emissions standards and other environmental issues,” says Ford. Worker safety is another issue to evaluate. “Manufacturers are building new equipment with better visibility, easier access for repairs and maintenance and improved operator-friendly designs.”

With today’s need to maximize investment in equipment, it pays to monitor the costs of equipment maintenance throughout its lifetime, suggests Clancy. “I base decisions on whether or not it is time to replace equipment not only on manufacturer’s recommendations for service life but also on data I have on the repair records and maintenance expense for the machine,” he says. “The goal of all contractors is to get the most utilization out of equipment for the best price.”

Reference:
1. Associated General Contractors of America, “Construction employment level hits three-year high as firms add 48,000 jobs in February and industry unemployment rate drops to 15.7 percent,” March 8, 2013 press release: http://www.agc.org/cs/news_media/press_room/press_release?pressrelease.id=1267. Accessed March 17, 2013.