Deciding Whether to Buy Construction Equipment or Rent

Use these guidelines the next time you acquire construction equipment and feel confident in your decision.

Determining whether to purchase a new piece of construction equipment is a decision that should be considered carefully, and the overall bottom line must be taken into consideration. Let’s look at factors to weigh when deciding whether to buy or rent new equipment.

Analyze Your Construction Equipment Needs

In the construction industry, a general rule of thumb is that if you don’t use a piece of equipment more than 60 to 70 percent of the time, you should consider renting. However, if your operation rate exceeds that threshold, consider purchasing or leasing the equipment. Take the long view and think of future needs-if renting a machine costs as much or more than owning it, then it’s time to buy.

Another consideration that weighs in favor of the purchase option is whether there are significant cost consequences if you don’t have the right equipment immediately available. For example, would your service trucks be unable to perform a field repair without welding or generator power, thus idling a critical piece of equipment and disrupting the job schedule? How versatile is the piece of equipment? If the machine is used throughout your company on numerous types of jobs, odds are it makes sense to buy.

Conversely, working with an up-to-date rental house or distributor allows you to gain experience with new equipment and make head-to-head comparisons before purchase. Upgrading to new technology might enable you to bid a job more competitively (such as increasing productivity, reducing fuel costs, improving quality, etc.). Renting offers a cost-effective way to test it and calculate payback and jobsite efficiencies that will make it easier to justify an equipment purchase.

If the value of the equipment rental compared to the total project is low, then the “lost” profits due to renting are almost immaterial. Conversely, if the equipment costs comprise a large portion of the job’s budget, then a contractor who owns his or her equipment operates at a competitive advantage.

Consider Tax Incentives/Capital Expenditures

There are also financial and bookkeeping factors to consider. Rental expenses can be billed back to the customer or deducted annually as a business expense. Buying a piece of equipment, however, is a capital expense that must be treated as such at tax time. You can’t deduct the purchased equipment’s entire expense during the year in which it was purchased. The capital costs are then amortized or depreciated over the useful life of the piece of equipment.

Examine Interest Rates

Equipment manufacturers and dealers are working to provide business owners with low financing to make it more attractive to buy equipment. Many dealers/manufacturers are even offering zero percent financing over specific time periods and on purchases of certain sizes.

Factor in Depreciation/Resale Value

If you make the decision to purchase a piece of equipment, do your research comparing different brands and models. Certain machines hold their value much better than other machines in the same product category and will be worth more when you sell it later. Especially if you like to cycle in new equipment over a set time period, selecting the right machine based on annual depreciation and performance might be the financial difference in the rent/buy decision. Similarly, used equipment available on the market is typically of a higher quality than it was in the past, especially with dealers and manufacturers offering certified used equipment.

Weigh Transportation Costs

When considering financial decisions, many contractors overlook the total cost of equipment management. For example, if you’re based in Chicago and successfully bid on a job in St. Louis, you have to think about the cost of transporting equipment 300 miles. The costs of the truck, the driver, loading and unloading time and diesel fuel should be included. Once on the jobsite, you’ll need to hire someone to maintain and fuel the equipment. Take into account geography-it may make more sense to rent equipment at a destination than to transport it.

Focus on Fleet Management

Ask yourself if your core competencies include fleet management. If you excel at transportation, storage, logistics, and equipment service and maintenance, purchase your own fleet. Otherwise, consider outsourcing equipment management. Another trend in the construction industry is to create a separate division (or even a separate corporation) for equipment management. By focusing solely on this task, these divisions or entities can excel at controlling costs while meeting the needs of their “internal client” or sister company. If your company does not excel in these areas, rentingmay make more sense.

Legislative Issues

Keep an eye on legislative issues surrounding depreciation.

• The Economic Stimulus Act includs a provision known as “bonus depreciation” that allows business owners to deduct 50 percent of the cost of a new piece of equipment the year it was put into service. This was effective in 2008 and 2009, but was not extended into 2010. The Association of Equipment Manufacturers (AEM), however, is pushing congress to reinstate the provision for the remainder of 2010.
• The Hiring Incentives to Restore Employment Act (HIRE Act of 2010) also allows businesses a Section 179 write-off up to $250,000 of qualified equipment during the 2010 tax year, subject to a phase-out if a business has capital expenditures exceeding $800,000. The previous Section 179 maximum write-off was $134,000 and will fall back to that level in 2011 if it is not extended.

This benefit also includes equipment that is leased or financed. According to Section179.org, “The obvious advantage to leasing or financing equipment and then taking the Section 179 deduction is that you can deduct the full amount of the equipment, without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a bottom-line friendly deduction.”

Renting equipment also adds a tax incentive since there are no associated property taxes or licensing. Furthermore, if you own a large fleet of welders, you’ll need storage space, which in turn adds to the costs of building ownership. With a rental house, all the equipment is off your hands once you’re done with it.

If You Choose Renting Construction Equipment

If renting is the best way to go, you  need to decide whether to rent from a distributor or a rental house. There are considerations for both: Rental houses tend to focus on core construction equipment. Their staff is knowledgeable about a wide range of equipment and may serve a greater geographical area (if your work is taking you out-of-state or across country). Distributors tend to have all of the newest releases and specialize in certain types of equipment, but service may be limited to a specific geographical area. Do your homework, and you’ll find the right fleet of equipment whether you work locally or nationally.

Construction Business Owner, September 2010