Construction Equipment Fleet Health Declines

Rod Sutton, Editorial Director | January 18, 2011

A year after the recovery officially began, managers of contractor fleets are still waiting to see improvement in their businesses. The same issues continue to dampen construction recovery: lack of infrastructure funding, a weak residential housing sector, tight credit, state and municipal budget shortfalls. Backlogged work has been completed, and the pipeline doesn’t look promising.

Contractors responded to the stagnant scenario by rating 2010 “poor,” in line with their expectations recorded at the end of 2009. This rating held across each contractor vocation: highway/heavy, building and generalists who do both. Reflecting the current slowing in the nonresidential market, building contractors hold the same outlook for 2011 as they reported for 2010. Highway/ heavy and generalists hold a slightly better outlook.

Overall, though, contractors do not expect 2011 to be better than 2010 has been. The forecast for 2011 mirrors 2010: “poor.” The frustration for most fleets: governmental delay in infrastructure investment coupled with unbalanced budgets across nearly every state in the union.

Work in contractor pipelines was completed in 2010, with nearly half of respondents saying volume decreased compared to 2009. When taking the percentage reporting increased volume and subtracting those reporting decreases, contractor fleets reported 2010 contract volume at a net of -35 percent, far below the 2009 forecast of net -7 percent. For 2011, contractors forecast a mixed bag with a net of 8 percent. Although 33 percent say volume will increase (minus 25 per- cent decreasing), 42 percent say volume will stay at 2010 levels.

Regional pockets exist. Mid-Atlantic contractors expect a net of 23 percent for 2011 (44 percent increasing volume minus 21 percent decreasing), and Northern Plains reports a net of 15 percent (39 percent increasing minus 24 percent decreasing). Slower-growth Great Lakes region expects a net of 1 percent for this year (32 percent increasing minus 31 percent decreasing).

Competition for the jobs that are out there remains tough, tougher even than in 2009 when three of four contractor fleet managers reported “intensely” or “very” competitive markets. For 2010, 87 percent reported the same level of intensity in construction markets. Only 2 percent said competition was “not very” or “not at all” competitive.

Company health, as rated by those who manage the equipment fleets, continued to weaken. Whereas 17 percent reported “weak” or “very weak” firms in 2009, one of five contractor operations is in that position as 2011 opens. Less than half of contractor firms, 44 percent, are reported to be in “very good” or “good” health.

Fleet trends
For fleet managers, company health and competitive markets will put even more pressure on them to contain costs while maintaining the ability to field efficient fleets in a timely manner. Machines are either sitting idle or have found their way to the used-equipment market.
Effective asset management has rarely been as critical as it is entering 2011.

As far as the number of machines in fleets, 53 percent of contractors say fleet size remained the same in 2010 and 64 percent say it will stay the same in 2011. One in three reported additional fleet reductions in 2010, and 17 percent say they will continue to reduce the number of machines in their fleets. As a net, fleet size appears to be leveling. The 2010 net of -15 percent (16 percent increasing minus 31 percent decreasing) moves to a positive net of 2 percent for this year (19 percent increasing minus 17 percent decreasing).

Managers want to replace tired iron; in fact, the longer the delay the greater the risk that maintenance and repair costs will rise to a level that endangers fleet owning and operating costs, which in turn puts pressure on competitive estimating. Last year, managers expected to replace fleet at a 5.4-percent rate but were only able to replace at a 4.3-percent pace. In hopes of catching up, managers forecast a replacement rate of 6.1 percent for 2011, still far below the 9-percent rate recorded for most of the previous decade. No surprise then that fleet condition is weakening. One in five fleet managers say their fleet is in “fair” or “poor” condition, up from 14 percent in 2009. Only one in three fleets is in “excellent” or “very good” condition.

Rental use increased in 2010 compared to 2009, when 58 percent of contractor fleet managers reported using short-term rental as an acquisition strategy. Last year, 69 percent of managers reported using short-term rentals.

Because of the economic conditions described above, fleet managers have had to reduce workforce in 2010. Total workforce levels changed at a net of -39 percent (15 percent increasing minus 54 percent decreasing). Service and maintenance personnel were reported at a net of -33 percent (7 percent increasing minus 40 percent decreasing).