Buying vs. Renting Construction Equipment

It’s one of the most impactful financial decisions for all construction companies, regardless whether you’re a small, medium, or large company. Do you rent or buy the required construction equipment?

There are many important considerations when making such a strategic decision.

1. Financial Impact

The most relevant and thus the first question to be asked when making the rent vs. buy decision is “Does the business have enough capital to buy the necessary equipment?”. Heavy construction machinery is an extremely expensive investment.  If the company currently lacks the necessary financial capital for a large cash outlay, renting may be the only other alternative. If the company does have the financial flexibility necessary for the equipment, other considerations such as the amount of equipment utilization or job frequency come into play.

2. Equipment Utilization

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For companies with excess financial capital, the most important factor in the rent vs. buy decision is estimated equipment utilization.  Few contractors or businesses will have equipment that is utilized 100% of the time.  In order to predict the rate of utilization, a common industry calculation is to divide the days utilized in a month by 22 days.  (An alternative metric for added accuracy is hours utilized divided by 176 hours)

For example, a piece of equipment that is utilized for 10 days in a month has a utilization rate of 45% (10/22 = 45%). A useful metric amongst industry insiders, companies should only think about purchasing equipment if they expect utilization to be above 60%.¹  Alternatively, if the equipment has a utilization of less than 40%, renting becomes the preferable acquisition method. From 60%-40%, other factors such as available capital and job frequency become the primary decision factors.

3. Job frequency/Project Length

The rule of thumb in this category is the shorter the job, or the more specialized the equipment, the better renting is for the business.  Given a project with a very long timeline or if multiple projects are in the pipeline, owning the equipment may be the most cost effective method.  This also supports the idea of purchasing multi-use equipment (scissor lifts, excavators, loaders) if purchasing seems to be the best method. In addition if jobs are relatively infrequent, renting when additional equipment is needed would be a more cost effective solution than purchasing extra equipment.

4. Administration and Handling of Equipment

Are you interested in managing a large fleet of construction equipment?  Buying can be cost-effective in the long-term, but adds a large amount of administrative tasks and overhead costs along the way.

In the event of an equipment breakdown, a company will either need to have able mechanics on staff or hire external mechanics and repairmen. Both options can be very cost restrictive. Internal mechanics can run up a lot of overhead costs. On top of their compensation, they will likely need tools, computing equipment, and a shop to work out of. External mechanics generally charge a high hourly or project-based rate.

If the equipment is rented however, the company only needs to inform the entity whom they rented from. If they’ve rented from a reputable company, they should be confident that the situation will be rectified. By leaving administrative and maintenance tasks to the renting service, a construction company is able to maintain focus on its core functions.

A final deterrent from purchasing equipment is the presence of increasing regulation regarding construction equipment emissions. Due to stricter emission requirements from the EPA equipment purchasers must ensure their equipment does not violate industry standards.² If the equipment violates the guidelines, the company could be subject to significant governmental

5. Trends

Over the past few years there has been a clear trend in the construction equipment field. The procurement decision is becoming more rental focused than outright buying the necessary equipment. Between 2013 to 2014 the frequency of rentals increased by nearly 75%³

A second noticeable trend is the greater emphasis on rental of multi use equipment over single use equipment.  This is reflected in increases of rentals of multi-use compact track loaders with simultaneous decreases of rentals of single use bulldozers.

Summary

There are many factors that should be considered in deciding whether to rent or buy construction equipment needed.  Depending on the size and nature of the individual construction business, one option may be superior than the other.⁴ While your own business might have additional factors to consider, these should provide a starting point in thinking about the rent vs. buy decision.

Looking too see how much it costs to rent the equipment you need? See pricing for all equipment online at Getable.com.

References

¹http://media.cygnus.com/files/base/FCP/document/2012/03/03192012_trendsinowningandrent_10658556.pdf

²http://www.aem.org/PDF/Manfredi-StudyBrochure.pdf

³http://enewsletters.constructionexec.com/managingyourbusiness/2014/11/heavy-equipment-trends-rentals-are-up-new-equipment-is-preferred-and-adaptability-is-key/

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