Renting Vs. Buying: Factors to Consider When Sourcing Equipment and Machinery

Construction-EquipmentAs originally published in Construction Executive’s Managing Your Business

As the economy bounces back from the recession, construction activity has picked up again and more construction firms have entered the market. Thanks to this increased activity, demand and prices for construction equipment have been rising, increasing contractors’ operating costs. Because contractors incorporate labor, machinery and building materials costs into their contract bids, strategizing when to rent or buy construction equipment can help them cut operating costs—allowing contractors to submit lower bids and win more business.

There are many pros and cons of renting versus buying various types of construction equipment. Many factors come into play, including a buyer’s financial situation, the length of the construction project, total cost of ownership and the project’s level of specialization.

RENT CONSTRUCTION EQUIPMENT

PROS

When performing short-term or one-time jobs, it is more cost efficient for contractors to rent construction equipment, especially if there is no foreseeable use for the equipment in the future. Purchasing equipment results in high upfront costs and additional related expenses that are included in the total cost of ownership. For example, contractors that decide to purchase construction equipment must factor in costs associated with financing, maintenance and repairs, insurance, transportation, storage and energy (e.g., fuel and electricity), which can exceed 100 percent of the average initial purchase price.

Rental Prices

When renting construction equipment, contractors are only responsible for the rental rate, energy costs and the chosen rental protection plan. These savings allow contractors to lower their project costs considerably, enabling them to bid competitively and increasing their likelihood of being awarded contracts.

Furthermore, sourcing construction equipment rentals is a relatively straightforward process. Contractors determine the type of equipment needed for their project (e.g., aerial lift, earthmoving machinery or forklift), identify suppliers and then contact leasing firms to ensure availability and obtain associated rental rates.

CONS

However, rental rates can be volatile—changing based on demand and the available inventory of equipment. Because contractors rent equipment in line with project dates and have little control over timing, they are often at the whim of these price changes. However, if contractors have any flexibility, researching recent and forecast pricing trends for rental equipment can help determine the best time to enter a rental agreement. For example, rental prices for aerial lifts, earthmoving equipment and forklifts have been rising at annualized rates of 3.1 percent, 0.9 percent and 1.1 percent from 2012 to 2015, respectively. Because these prices are expected to continue rising during the next three years, contractors are advised to enter rental agreements now to avoid higher project costs. Additionally, when possible, contractors should rent for longer periods to obtain discounts.

PURCHASE CONSTRUCTION EQUIPMENT

PROS

Contractors working on long-term projects or those with recurring needs will benefit from purchasing construction equipment and machinery. Most costs associated with construction equipment and machinery ownership are one-time costs that can be spread across multiple projects. For example, according to IBISWorld, the average purchase price for an excavator is $256,160 per machine and ownership costs can push this figure up to twice the purchase cost over the course of the machine’s 25-year lifespan.

Purchasing Prices

However, the price to rent earthmoving machinery is $1,040 per machine, per week. Thus, the cumulative cost of renting this machine for 25 years totals about $1,352,000, all factors remaining constant. Therefore, contractors that will use their equipment over its specified lifespan and perform repeat jobs are advised to purchase equipment.

Purchasing equipment outright also can make sense for contractors working on unique construction projects (e.g., structures with heights greater than the reach of a standard aerial lift require specialized equipment). Construction machinery manufacturers can customize equipment options, features and capabilities if requested by the supplier and are likely to have the latest, most versatile construction machinery readily available.

While rental firms may offer new products, there is no guarantee that these items will be available in their inventory because newer items are in high demand and rental equipment cannot be customized to meet the unique needs of the contractor. Likewise, buying is a wise option for equipment that does not change frequently in terms of its technology or functionality. Contractors that choose to purchase equipment of this nature will not be stuck with outdated equipment and can fully realize the benefits of their investment over many years.

CONS

IBISWorld data shows that, in the three years leading up to 2015, the prices for purchasing aerial lifts, excavators and forklifts have been rising at average annual rates of 3.1 percent, 3.9 percent and 3.1 percent, respectively, and are expected to continue rising over the next three years. With purchase prices rising even faster than rental rates on average, contractors looking to purchase should consider doing so now, if possible.

LOOKING FORWARD

Many trends that have helped the construction industry return to growth in the past few years are expected to continue driving increases in the market in the next three years. Unfortunately, for construction firms and contractors, this growth means higher prices for the purchase and rental of construction equipment and machinery. Contractors will likely have to absorb the increasing costs of equipment to stay competitive. Therefore, contractors should do their research and be more strategic when sourcing equipment and machinery. Doing so will allow them to protect their margins and strategically bid for construction projects.