Construction Business Owner, September 2007

In the construction industry, equipment and machinery are essentially your business.  Without the proper equipment, it would be nearly impossible to get jobs done with efficiency, craft and care.

For all types of construction, the goal is to complete projects in accordance with plans and specifications, on time, within budget and at the lowest possible cost. When starting a construction business, it is crucial to have the appropriate equipment to execute all types of construction projects. As in all businesses, it is important that the equipment pay for itself to earn a significant profit. In other words, the cost to own and operate the equipment should be less than what the contractor charges for its use.

The cost of construction equipment, unfortunately, is one of the single largest investments for a contractor. Costs can run from $15,000 to more than $100,000 depending on the type and amount of equipment needed. Each time the company acquires a new piece of equipment, the cost is being financed even if paid for in cash. But there is a solution to reduce equipment costs and minimize overhead through equipment leasing.

When Louie Ramirez started his construction company, HDM Construction in Commerce City, CO, he had very little money and minimal equipment. When HDM found itself in need of purchasing new machinery, instead of shopping around and shelling out a major portion of the company's profits, Ramirez dialed a number off a flier he received in the mail from an equipment leasing firm.

"That little phone call ended up saving me about $100,000 a year," Ramirez said. "There aren't many ways to conserve expenses in this industry, especially being as small as we are. Leasing my equipment and machinery allows me to free up more capital for operational expenses, which I wasn't able to do as much before."

Through certain equipment leasing plans, a contractor may select from leasing options that allow the company to trade in equipment for the latest upgrades. This is ideal in the construction business where there are frequent advancements made to equipment requiring contractors to constantly update.

"Short term leases accommodate what we need as trends change," Ramirez commented.  "We are able to swap our lease and get updated equipment right away through the lease purchase programs."

How It Works

The business owner and leasing company form an agreement to finance equipment the business needs. The leasing company (the lessor) allows the construction company  (the lessee) to lease the equipment and pay for it monthly over a fixed time period of typically two to five years. Construction business owners and business owners of all kinds can be a lessee. The lessee determines the type of lease that best suits their needs, which usually depends on whether they want to own the equipment at the end of the lease term or if they want the flexibility of being able to "return" the equipment to obtain a more up-to-date replacement.

Leasing companies secure the funds to pay for the equipment from a funding source, such as a bank. It is the job of the leasing company to ensure that all necessary paperwork is completed, coordinate with the equipment vendor to ensure that payment and delivery are in sync with the schedule of the construction company, and follow up on any issues that may arise during the process.

The lease contract can be for a single piece of equipment, or it may be written as a master lease that covers all equipment leased by the lessee. The business owner has a non-cancelable obligation to pay the lease fees and maintenance costs relating to the equipment during the lease term. The lessee also bears the risk of equipment loss or damage, and insurance is therefore required of the lessee.

 

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