Equipment hire can be a powerful way to deliver projects without the large capital outlay of purchasing machinery.
In this easy to digest guide, we compare the options of buying and renting equipment.
Know when to Rent vs. Buy
Many contractors assume that they must purchase equipment to run profitably. However, there are circumstances when hiring can be far better than purchasing.
Balancing your mix of owning and hiring heavy machinery provides you with opportunities to optimise profitability and minimise risk to your business.
Avoid Purchase Costs
Purchasing heavy construction equipment can have a huge impact on the contractor's balance sheet.
Buying heavy construction equipment is a long-term investment that ties you to certain machines. Few contractors have the luxury of having enough cash to buy machines outright, so they are often financed with a mixture of debt and equity. We typically see ratios of about 20% cash to 80% debt.
The equity portion of machinery purchases ties up cash which could otherwise be used for working capital to help you grow your workforce, take on bigger projects or handle issues with payment delays.
The debt portion of these purchases is what the contractor pays back to the lender.
If these machines are not required on a project (i.e., your 20T Excavator is parked up while you work on a project using a 5T excavator) you will still be left paying repayments on that machine.
Within larger contractors, it can often be difficult to get good data on how your construction fleet is being used. This can mean that heavy machines are purchased and then not used efficiently. For example, machines may get parked up on a project site for weeks at a time before they are used or reallocated to a different project site. These “stranded assets” can be a serious detriment to the company’s financial performance as they are costing money and not earning anything. As a result, hiring equipment can help avoid some of these pitfalls:
- The upfront costs associated with purchasing are not incurred. To get a machine onto a project there is no need to get long term financing or deplete your cash reserves. Instead, invoices for the hired plant are raised monthly to keep in line with your projects cash flows. This keeps capital reserves intact and allocates assets on a project by project basis.
- Switching between machines is straight forward. Your rental company can usually have a machine off-site and a different machine subbed in quickly. This means you are only paying for the correct machine for your project.
- Stranded assets are eliminated. Site managers can send machines directly back to the rental company as soon as they are done with them. This means machines are not sitting on site waiting to be reallocated to a new project.
Reduce Repair, Maintenance, and other Overheads
When you own equipment, there are many hidden costs associated with repair and maintenance(R&M).
Heavy machinery requires significant up-keep and maintenance to operate safely and at an optimal level.
We are often surprised by the amount of machinery we hire out to contractors to cover for when their machines are broken down. This is usually due to maintenance management not being executed properly or faults from previous jobs not being captured as a work order and then closed out.
With hired plant, repairs and maintenance are all taken care of by the rental company. R&M is a core competency for hire companies as they need to make sure that their plant is always ready to go as it is their primary revenue stream.
For a contractor, project delivery always takes precedence. This means that we often see that contractors sacrifice machinery R&M to make way for project deadlines and workforce requirements.
Machinery hire allows you to focus on project delivery rather than taking the time to plan out long-term maintenance, train administrative capacity and create the process workflows to manage heavy machinery.
Protect yourself from market fluctuations
The construction sector is highly dynamic, and the market can change quickly. The boom-bust nature of the market regularly leaves contractors in strife. Hiring equipment can cushion your company from any unpredictable economic conditions. Rather than committing to a piece of equipment, hiring allows for a flexible option that makes it easier to handle the rise and fall of market forces.