Equipment Type

Rentals Add Up to Dollars and Sense

Utilization will help determine whether or not a rental strategy is an alternative to owning equipment

October 01, 2011

Many large-fleet equipment managers are proud of the fact that they own most or all of their fleet. But, to quote a friend, “Profits accrue through the successful use of equipment; not its ownership.” With a shaky economy and uncertain construction future, rentals make more sense than ever.

A company that owns all of its equipment has an increased exposure to risk in today’s economy. This is particularly true for a new company, or for an existing company that enters into a new type of work.

The ongoing costs of ownership, particularly operating costs—maintenance, repairs, inspections, transportation and storage—escalate over the life of the equipment and compound the cost of using the equipment.

Rental companies tend to replace their core construction equipment every five to six years, and generally do not retain equipment past two models, whereas companies that own their equipment will likely retain their equipment for as long as it is economically feasible. Where most rental companies generate an average of 800 hours annually on core equipment, contractors typically average around 1,500 hours. Higher hours of utilization results in increased maintenance costs and ultimately more downtime.

Thus, renting equipment reduces the amount of capital tied up in fleet, reduces the amount of start-up capital required for a new venture, and reduces maintenance costs, repairs, inspections, transportation and storage.

Here are some factors to consider:

Equipment Utilization. Future utilization should be a primary factor in calculating ownership costs. Unless your company has secure, fixed-term contracts, future utilization is an educated guess. Holidays, equipment repairs and maintenance, and nonuse between projects decrease the amount of time that the unit is utilized.

One way to determine the expected rate of utilization is to look at past operational history. There are many ways to calculate utilization, but a simplified approach is to use the industry-standard calculation of operating equipment: 22 days at eight hours per day equals 176 hours per month. Thus, equipment operated for 112 hours a month has a utilization rate of 64 percent.

A practical guide for common construction equipment is: If it is to be utilized more than 60 percent of the time, owning is usually more cost effective than renting; 60 to 40 percent, owning is probably more expensive than renting; less than 40 percent, renting is frequently the lowest-cost option.

Fleet Maintenance, Repairs, and Downtime. Renting reduces the need for shop and repair facilities, as all of the repair and maintenance services are included in the rental. If the equipment breaks down, the rental company sends someone to repair it. In most cases, if the equipment cannot be repaired on site, the rental company will replace an inoperable piece so your project can avoid costly delays. Most companies also maintain equipment to manufacturer standards and perform prescribed maintenance to keep units rent-ready. Relying on rental companies’ maintenance services enables greater focus on your core business.

Environmental Compliance. Emissions compliance has not only increased the cost of new equipment, but has also increased the administrative overhead with required registrations and certifications. Equipment rental companies remain current with new rules and ensure that equipment and disposal processes are in compliance with new regulations.

Latest Equipment. Rental companies rotate fleet, replacing aging equipment with newer models. Using late-model equipment on projects provides the opportunity to gain productivity through recent technology advances, as well as use highly reliable equipment. It also provides the opportunity to test and evaluate different technologies and different brands. Some companies that are also considering unit purchases may want to operate late-model rental equipment several times before owning.

Rentals make more sense than ever. Think about it.

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