Gone are the days when renting equipment was a small part of our business. Gone are the days when we did it as an exception and only when absolutely necessary.
Two things have happened to bring rental equipment into the mainstream. First, the rental-equipment industry has grown and matured to the stage where it is possible to form beneficial partnerships with rental companies as reliable, steady and cost-effective providers of certain equipment types. Second, the recent business cycle has shown us that what goes up can go up or down. We can, frankly, no longer afford to own a fleet capable of performing all the work we can secure in the best of times. We need partners to help us with the peaks and valleys and ensure that our own core fleet works at full capacity for the vast majority of the time.
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Many companies still see rental as an inconvenient reality and do not have a coherent, well-thought-out policy for integrating the equipment-rental process into the fleet-management process. I frequently hear statements like, “The sites do it and we try to help” or “It is a site cost, we just pass it through.” Companies that see it this way miss out on the opportunity to think strategically and use rental equipment to their best advantage.
Let’s see what we can do to create a strategic framework that helps to integrate rental equipment into the business. We will do this by dividing rental equipment into three main groups and discussing each under five important headings. We will summarize everything in the table below where the three groups form the columns and the five headings form the rows.
|How is it handled in the estimate||Built into the crew costs or the indirect costs for the job.||No distinction between owned or rented equipment.
Estimate based on internal rates.
|Individual units are identified.
Availability and price are confirmed.
|Role of equipment group||Establish partnership agreements. Manage the business relationship.||Establish partnership agreements. Manage the business relationship and the whole rental process within the fleet and standard rate structure.||Advise on and source equipment. Participate in negotiations. Maintain for an hourly rate if necessary.|
|Job site responsibility||Arrange rental on and off dates. Use as needed.||No difference between owned or rented equipment.||Specify rental on and off dates.
Use as needed.
|How the money works||Invoices approved and paid by job sites. A direct job cost.||Internal cost recovery system recovers costs as with owned equipment. Rental invoices handled by equipment group.||Invoices approved and paid by job sites. A direct job cost.|
|Principal risk||Management and control of schedule and indirect cost.||Utilization and fixed-cost recovery. Lost utilization is a hard cost.||Schedule performance dictates final rental cost.|
This is equipment that goes onto the job site and stays there to support the work and not really do the work. Variable message boards, pumps, plate compactors, aerial lift platforms and other utility items fall into this group. We frequently decide to rent rather than own these classes and, when we do own them, we frequently make them available to sites on a weekly or monthly internal rate. Estimators normally build the cost of these units into the crew costs or the job indirect costs. There is no reason why our internal and the external rental rates should not be similar. Indeed, if the rental market can provide utility equipment at competitive rates, then we should not be in this business.
We must, from an equipment-management point of view, establish partnership agreements with selected rental companies and establish standard terms and conditions so that individual rentals can be made quickly and efficiently. We can manage these agreements through the equipment group, but it is up to the sites to order and return units as needed. They will approve and pay invoices, and they will manage all the risks associated with managing and controlling the cost of the utility equipment on rent.
Utility equipment is a site responsibility and risk. Business is done in terms of the partnership agreements, terms and conditions established by the company at a strategic level.
Here we are talking about the specialized lifting, drilling or temporary works equipment that is not in your fleet or, perhaps, we only own one or two units. Machines in this group form an essential part of the plan developed at estimate time, and the company will know which individual unit will be used. The estimators will have confirmed availability and price before submitting the bid. From an equipment management point of view, these are very specialized, clearly identified units. We can advise on sourcing the required rental units and assist in the negotiations. We can also, if necessary, maintain relationships with the rental company and provide mobilization and maintenance services at an agreed rate.
The sites will specify rental on and off dates and approve and pay all invoices as a direct job cost. Rental cost will, of course, depend on schedule performance and on the actual final on and off dates. These risks properly lie with the sites.
This is equipment where we own a substantial number of machines in similar classes and categories and where we have established in-house rates, policies and procedures. We rent equipment in this group to handle peak demand, and the estimators do not make any distinction between rented or owned equipment. From an equipment-management point of view, there is—or should be—no difference between the way we look after and manage peak-load rental equipment and the way we look after and manage our core fleet. We establish the partnership agreements with suppliers, we manage the rental process, and charge the sites as if they were our own machines. Rental invoices are approved and paid through the equipment account. Gains or losses remain in the equipment account.
It all sounds pretty straightforward. Utility and specialized equipment are direct job costs for their own set of reasons. Standard equipment is managed as if it were our own. We rent it to maximize the utilization of our core fleet, and we manage rental on and off dates to maximize the utilization and minimize hourly cost arising from the fixed daily, weekly or monthly rate.
There is, however, one important difference. It lies at the heart of many issues that surround the management and use of rental equipment and has to do with the fact that we pay hard cash for rental equipment on a daily, weekly or monthly basis regardless of whether it utilized or not. There is no doubt that rental equipment puts a sharp edge on all the procedures we use to measure and manage equipment utilization across our company. Paying hard cash for lost utilization is different than the situation that arises when you believe that unused hours remain in the fleet for use at some future point in the life of the machine.
If the company is relatively relaxed about utilization, and if the sites only pay for equipment when it is reported or used, then the losses that come from paying hard cash for unutilized rental equipment remain in the equipment account. The sites will not be committed to improving utilization, and the situation could become disastrous. The culture of under-reporting or underutilizing equipment will, however, not be limited to rental equipment; unrecovered fixed equipment costs, whether from licenses and insurances, depreciation charges, lease costs, or rental costs will become a real problem.
If the company has and implements procedures whereby sites pay a minimum number of hours per week for the equipment they use, then the risk of low utilization remains on site and the equipment account is protected from these losses. Make-up time charged to sites to cover low utilization is a real bone of contention. Sites do not like to be back charged for make-up time, and the emphasis soon moves to gaming the system: underreporting hours and pushing back on every possible occasion.
Perhaps it is time to bite the bullet and address two important issues. First, we need to integrate rental equipment into our fleet-management processes and use it efficiently to reduce costs and lower capital investment. Second, if this puts a sharp edge on the problem of low utilization and unrecovered fixed cost, then so be it. Low utilization and unrecovered fixed costs increase hourly rates and cannot be ignored. We need to insist on minimum utilizations and let the risk fall where it can be managed: on the sites.