Make an Educated Choice
By Clay Allen
For thousands of years, mason contractors practiced their trade without the benefit of modern machinery. But now, who doesn't regularly rely on equipment and vehicles to get the job done? For many projects, a mortar mixer or scaffolding is obviously valuable to have around. However, putting a cost value on the benefits of having certain equipment available can often prove to be a tricky task.
Consider Your Options
Various reports and studies have been produced to help business owners weigh the costs of owning versus renting. Standard industry guidelines and accepted computation formulas include the "Rental Rate Blue Book" and the "Custom Cost Evaluator," along with the Cost of Facilities Capital, a government-created statistical formula that factors in the cost of money invested in machinery.
When you first do the math and evaluate the various expenses and processes involved with obtaining a certain piece of equipment, the comparison can help you choose the option that offers the best potential economic advantages for your company.
When buying any new equipment, the purchase price is just the beginning. Consider all of the tangible out-of-pocket expenses, such as taxes and insurance for that equipment, plus any interest you pay if the money is borrowed. Next, factor in maintenance (parts and labor), plus bigger repairs later on. You also have to include storage and transportation costs. Keep in mind that the operating costs of owning a machine will often keep growing. You also need to ask yourself what your business could do with that capital if the money were being used effectively elsewhere.
Of course, if you use a piece of equipment at or near maximum capacity and maintain that level of usage for a period of time, buying may be your most logical choice. Buying allows you to begin building equity in the equipment. Unlike other major purchases, such as commercial real estate, it is difficult to predict with any certainty the value of the equipment in five to eight years.
"In many cases, you would have to be utilizing a piece of equipment about three weeks out of a month to make it a worthwhile purchase," explains Larry Pearce, regional fleet manager for the Northeast Region of RSC Equipment Rental. "Otherwise you have it sitting around and doing nothing, and then you're still paying for it. If you don't use it that much, buying the machine is simply money thrown away."
If you intend to use a piece of equipment often enough to own it, but you don't want the big upfront capital outlay of buying it, leasing may offer a good financial alternative.
To begin with, leasing allows you to avoid the initial purchase expense, which frees up your bank line or cash flow. The monthly payments are then considered operating expenses, rather than capital expenditures ? on most balance sheets, leased equipment are treated as rentals. Leasing can also offer tax advantages.
"If you're planning to use the equipment for an extended period of time, leasing might make sense, depending on the circumstances," says Pearce, "but you have to know what you're doing. A lot of people get confused or intimidated about leasing, and it can be hard to understand what they're getting into and whether they're really getting a good deal or not."
Unlike equipment rentals, it's also important to remember that your business is responsible for maintaining and repairing leased machinery. Also, unlike rentals, your business must carry insurance coverage on leased equipment and the premium amount can often run much higher than insurance on owned equipment.
When dealing with a reputable provider, renting can give you all of the advantages of having a premium piece of equipment, without the costs or responsibilities of ownership. When a machine needs service or repairs, somebody else does it. You'll never have to worry about how to dispose of the unit at the end of its usable life. Also, a wide assortment of reliable rental equipment can be delivered to the job site quickly, giving you convenient access to the right equipment for almost any task.
Working with rented equipment can even simplify bidding and billing processes. It can be tricky to gauge the true cost of operating and maintaining owned equipment, but the price of a rental is clear from the very beginning. There's just one accountable cost figure: the rental invoice.
A good example of a rent-versus-buy comparison is a standard 185 CFM air compressor unit. Based on a purchase price of $12,000 and an annual usage rate of 500 hours, this compressor would cost about $5,420 a year when you include other operating and ownership expenses (except fuel). Yet with three month-long rentals per year, that same machine would have an operating cost of only about $1,800, for an annual savings of $3,600.
Of course, renting has its disadvantages as well. Although renting frees up capital to be used in other ways, your business does not build equity on the equipment. Also, some argue that, unlike owned equipment, rental equipment is not configured and ready for your crew's use at a moment's notice.
Crunching the Numbers
To better illustrate the various factors and advantages of renting or buying, it helps to look at the numbers.
For example, in the case of a new skid steer, let's figure the average purchase price to be $19,500. Then add taxes, insurance and interest on any loans necessary for the purchase. Next, consider ongoing regular maintenance ? for a skid steer, this can include drive chains, pivot points, other moving parts, brake oil, filters, tires and more. Many manufacturers recommend maintenance every 40-50 hours of operation. Finally, include storage, a truck and trailer, a driver and other travel expenditures.
Assuming a conservative equipment usage life of five years, the cost comes to about $10,000 a year for owning that skid steer.
Now compare these figures to some typical renting scenarios. For most jobs that require a skid steer, most users do need it at the project site for more than seven to 10 days.
Based on standard rental rates, you can order the exact skidsteer you need and have it delivered right to your site for about $500 a week. Even if you need the machine longer and it ends up costing $1,000, renting is still more economical if the equipment isn't needed very often.
"It's just not cost-effective [for us] to own," says Barry Reeck, general superintendent of Weis Builders Construction Company of Minneapolis, Minn., whose company has been renting equipment for 20 years. "Our rental company provides us with the equipment we need, when we need it ? near-new, well-serviced equipment."
Reeck adds, "It's a big benefit to us."
Finally, the decision to buy, lease or rent carries many variables. One type of equipment and the variables that exist may lead you to choose one option, while another piece of equipment and its variables may lead you to choose another ? even within the same company, same timeframe and for the same job.
So the next time you need equipment, make some phone calls and evaluate the available options. It could make a big difference on your bottom line.
About the Author
Clay Allen is director of communications for RSC Equipment Rental, headquartered in Scottsdale, Ariz.