March 27, 2003
The equipment dilemma: buy or rent?
By AARON TAYLOR
Rental Service Corp.
Although the government is providing incentives in the form of tax credits to revive the economy, it’s still tough to part with hard-earned cash — even if new or different equipment is needed to actually make money.
There are many options out there when it comes to equipment acquisition: buy new, buy used, trade-in, lease or rent. Most often, as contractors or businesses map out the cost of buying and ownership over time versus the fees associated with rental, they’ll find that rental emerges as the smartest choice. But even if it does not in a particular case, the time spent investigating was well worth it.
So pretend for a moment that you’re approaching the buy versus rent dilemma. Now, let’s walk though the considerations step-by-step:
First, many contractors overlook the total cost of owning equipment. These are the costs that you commit to by purchasing equipment — regardless of how much it is used — otherwise known as depreciation, or the value lost as the piece ages. In addition, there are costs incurred if items are purchased with financing.
While some contractors say they want to build up equity in equipment, that claim is seldom financially justified. Unlike other major purchases, such as a home, contractors cannot predict with any certainty the value of their equipment in five to eight years. Renting eliminates this risk and also saves customers money that they can spend on other equity-building purchases.
Other expenses associated with ownership are overhead costs such as insurance, tax and overhaul. One of the most expensive factors to look at is staffing. How many mechanics do you keep on staff for larger repairs and overhaul? Or do you outsource repairs to a third party? These salary costs should be added to the other costs associated with owning equipment.
Next, look at the support equipment you must acquire. You might have a service shop, small or big, and you may have warehousing or storage costs. Renting eliminates the need for all of these associated expenses.
Operating costs are also significant. When you own equipment you must take care of all field repairs, transportation and accessory costs. How many truck drivers do you employ to haul the equipment from job to job? Then there are the costs of owning the trucks, in addition to expenses such as: fuel, taxes, licenses, registration fees, insurance costs and other over-the-road fees.
In addition, as an owner, you have to pay for tires, lube and other items — just to keep the machine running. You must have tools for the mechanics to use to service the equipment and the basic parts inventory for them to fix it.
Then there’s the rental option. One obvious advantage of renting equipment is that contractors only pay for it when they use it. Another is that, when you rent, you only have to pay for usage costs — rent, fuel and operator costs.
In many cases, the additional charges associated with ownership begin to outweigh the costs of rental the moment you write out the check. It doesn’t matter whether you are a small or large construction company. When you own equipment, the factors and costs associated with ownership mentioned before are costs that you must incur.
Usually, ownership is only justified when the equipment is used to its maximum capacity. While equipment can be highly utilized during peak times, it is very hard to maintain that usage level every day, week and month. At the same time, you need to keep your trucks moving equipment and your mechanics busy in order to justify the costs associated with them. This task can be next to impossible to achieve because of factors beyond a contractor’s control. The larger a company’s equipment fleet, the easier it is to accomplish this — which is the advantage a rental company has over a contractor.
Lastly, one of the biggest benefits of renting is that it eliminates the uncertainty of the future. If you rent, you can always turn the equipment back in if business slows down or if a project falls through. If you own it, you’re stuck with it.
Sometimes, buying new or used might be best for your particular situation. The most important thing is that you take time to fully investigate the options. You may be surprised at what you find out, especially if you’ve never fully explored rental options before.
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