Rent or own?

Published 15/11, 2013

Report by Dust Control Technology chief executive officer Edwin Peterson is sharing his thoughts about renting or owning your dust suppression equipment.

Demolition contractors across the globe are constantly faced with the question: when is it more cost-effective to rent equipment, rather than buy? The answer is a moving target, calculated according to the needs and finances of each individual company. In Europe, contractors use rental equipment heavily, more than 70% of the time by some estimates. Their theory is to get the job, rent the specific equipment needed to get it done efficiently and then return the equipment when finished. No maintenance, no repairs. As a result, the contractors know the exact costs for equipment utilization for each project and for similar projects in the future.

40% in renting
It is estimated that US contractors rent equipment for about 40% of their projects, but that figure has been trending steadily upward. This is especially true in times when jobs are harder to come by and tend to be smaller in scope, and when equipment needs can be more specialized. Capital equipment budgets are often strained during these periods, and financing can be difficult to obtain. For most contractors, there just is not enough steady work to justify ownership unless the utilization rate is somewhere around 65% or higher. Otherwise, that equipment is costing money. Any contractor not currently using a plan to track daily equipment activity should start doing so immediately. While it’s beneficial to project those costs for the coming months, the more valuable data would be to chart the utilization over the past 12 months. If a contractor charges projects for the costs of owning and operating equipment, and consistently recovers them, ownership can make financial sense. But if the expenses of owning, operating and maintaining those units approach the level of income derived, then it may be time to rethink strategy.
Capital expenditures for equipment are seen as a major financial risk during periods of uncertain growth. When the market crashed, many contractors had to auction off equipment. Some had to raise capital. Others had older equipment that did not meet current regulations or cost more than they produced. But as markets begin to build up again, contractors are looking for ways to access additional equipment to bid new jobs or find specialized equipment that will position them for entering new markets.

Renting brings many advantages
For years the only way a contractor could obtain dust suppression equipment was to buy it. But the advantages of renting can include maintaining cash reserves, controlling budgets, containing costs and adding flexibility. Renting also allows contractors to test equipment under actual job site conditions before investing in a specific brand or model.
When contractors buy their own equipment, they’re either paying finance charges or tying up capital that might otherwise go toward core business activities. As equipment costs and finance charges rise, renting can be a more attractive alternative. It may also provide tax benefits. Investing cash for capital equipment can hamper a company’s growth potential and limit the flexibility needed to meet cash flow demands during slow business cycles. Companies with sufficient cash reserves can better withstand economic downturns. Renting typically requires only a deposit and first-period payment, while even financed purchases often require a large down payment. With access to capital a challenge, renting can free up resources for other needs. In some cases, it may be the only practical option, and it can help manage capital risks. Renting can allow contractors to bid on jobs outside of their normal service area, with dust suppression equipment delivered directly to the job site. Rented equipment can also help meet short-term equipment needs. In some demolitions, for example, dust management is a strict requirement, subject to verification. Renting can help contractors quickly gear up for those jobs, without the lead times that often accompany a new equipment purchase. Rental payments are also fixed and predictable.
What contractors buy when they rent is uptime, performance and reliability. Most equipment is of recent vintage, and rented equipment tends to have low hours. When combined with maintenance schedules and trained technicians, rentals can help contractors avoid breakdowns that require transportation, shop time and/or downtime. The result is stable, managed cost and improved ability to keep projects on track.
Unless a company has secure, fixed-term contracts, future equipment utilization is at best an educated guess. By some estimates, equipment used more than 60-65% of the time is probably more economical to own than rent. Less than 60% utilization can be a financial risk, unless there is sufficient volume and profit margins to cover all costs and maintenance. Anything less than 40% utilization and it is almost always more cost-effective to rent.

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