When it comes to scaling your business and becoming more efficient in the field, equipment plays a major role. Especially as the labor shortage worsens, equipment holds a very important place in any construction business. There are pieces of equipment that should be on every single project, but it can be difficult to accomplish that when you are just starting out in business. Where would you possibly come up with a significant amount of money especially if you are debt adverse or do not have the ability to take on debt.
Well, an important aspect of beginning a business is being able to use what is available to you. Renting is the answer there and comes with an amazing advantage for a business owner. When the time comes that you are able to own, then you will have a significant amount of experience with various types of equipment to make a decision on what exact model you will purchase.
So, how do you know when the time is right to purchase a piece of equipment? It is all in the numbers. To know what to look for in your business, it is important that we discuss the advantages and disadvantages of owning and renting in your business. From there, we can look at your position to decide whether or not to purchase a piece of equipment.
Owning Construction Equipment
When it comes to purchasing a piece of equipment, here in Ontario anything over $500 is classified as a depreciating asset and therefore not 100% deductible on that first year. That means any piece of equipment under $500 is an easy purchase for us in terms of equipment. This is a very limited number of pieces of equipment that fall into that category, mostly these are just power tools. But it is important to separate why we make the decisions in our business. For this reason, we have a budget for tools under $500 each year that is based on our previous year’s tool expenses. This helps ensure that we are recouping those costs year in and year out in our estimating process.
When purchasing a piece of equipment, it becomes an Overhead Expense. This means that no matter whether or not it is being used on a job site, whether or not you are operating that work day, that machine is costing your money. How much does it cost you exactly? Much more than that price tag on the machine.
Total Cost of Ownership
For the machine itself:
((Cost of the Machine- Resale Value) / Estimated Years of Use) / (Weeks per Season x Working Days per Week) = Machine Cost per Day
This cost should be included into each day of a quote whether or not that machine is going to be used on that project. Otherwise this money is coming out of your pocket each and every day. This is why as your business scales up, you price yourself out of smaller projects that may have helped you get started. This is why you need to have conviction that you are ready as a business to take on larger scale projects as you purchase more equipment.
Now you need to factor in other costs that come with owning a piece of equipment. These are the hidden costs that often get overlooked when it comes to purchasing your first piece of equipment. These include:
Owning and Operating Cost of Construction Equipment
- Maintenance
- Transportation
- Down Time
- Labor
- Storage
- Insurance
- Fuel
Maintenance is going to have to happen on an ongoing basis and before purchasing your machine you should have a good idea of what you are going to need to maintain on an ongoing basis and to be able to calculate that as a yearly cost. This includes that materials required to maintain and possibly repair the equipment from greasing to replacing tracks or pumping up wheels.
Transportation is one that will vary as you purchase more equipment. For your first piece of equipment, it may mean an added upfront cost of purchasing a trailer to be able to transport it. If a trailer is already owned by the business and there is no upfront investment into a new one because the new piece of equipment can be added on to the trailer, then this will save that trailer investment. However, there should be an added cost included for breakdowns in transportation, flat tires, and maintenance on the trailer.
Down time is any time that machine breaks down and needs to be repaired either on site or off site. If it is on site and can be repaired by any of your crew members, then this will save you the cost of transportation but will cost you a loss of time by those crew members involved in the repair on that project. If the machine needs to be transported off site for repairs, you are out the cost of the transportation as well as the added cost of renting a machine to replace it or added time in labor on the project to complete more labor intensive work.
Labor came up a lot when discussing down time, and it is most definitely an added cost of the equipment when it goes down. It is also an added cost in transporting that machine from job site to job site or picking it up at the shop in the morning and taking it to the job site. It is most definitely an added cost in maintaining that piece of equipment as well and should not be missed when calculating the cost of ownership. Never discount your own time. For example, do not say that you as the owner are going to maintain the machine yourself on the weekend and that will save you the cost of labor. By doing this, you are working for free and discounting your own value. Rather factor in the cost of somebody on your crew that can be taught how to maintain the machine and what their hourly rate is.
Storage much like transportation depends on whether or not you already own or rent space to store the equipment. Regardless, that space that the machine takes up should be calculated into the cost of ownership. Does it take up 5% of the yard space that you have available whether you store it at your house or off-site, then that should be calculated against the rent that you are paying to factor into the cost of ownership of the machine. Are you having to rent out a small storage space just for the machine itself? Then that is the full cost of that storage space.
Insurance is a costly expense that should not be forgotten when calculating the cost of ownership. Contact your insurance company and ask them how much it would cost to insure the piece of equipment prior to purchasing in order to get this number to add it to your calculation. This will differ from region to region and company to company. Potential theft is something that should be considered as well and should be considered under the insurance category of ownership as this will likely impact your insurance and is a real possibility.
Fuel is that final expense you should calculate in regards to how much that machine is going to be used and how much fuel usage it will cost in terms of the full year or season of use.
If you add all of these expenses up, you now have your full cost of ownership for that machine which can be calculated on a yearly basis to be able to decide if owning a piece of equipment is worth it to you and your business at the current point in time in your business. It may not make sense to purchase a piece of equipment today in your business, but maybe next year it will. This comparison of cost should be done each year in your business, comparing the numbers from last year renting to the cost of ownership in order to decide whether it is a financially sound decision to purchase that machine. This takes all of the emotion out of purchasing the equipment. Its no longer you saying I want that, but you saying I need that because it is going to be cheaper for my business to own rather than rent.
Advantages of Owning Construction Equipment
There are obvious advantages in owning a piece of equipment in your business. For one, it is an asset to your business. Something that you own that is something you can resell at any point given there is a demand for the machine. It is also convenient to own equipment as you are no longer having to go pick up equipment from the rental shop or having to worry about whether or not it is going to be delivered. And if you are still working by hand, the convenience of having a machine is the improvement in efficiency and professionalism that it will add to your business with the ownership that comes with that machine.
Disadvantages of Owning Construction Equipment
The disadvantages is that it is a depreciating asset. Each year, that asset is losing value. It is not like purchasing land for a shop that will appreciate in value. It is a tool that will slowly lose its value year after year. Additionally, the cost of ownership outlined above is a definite disadvantage. Something that needs to be considered before you purchase a piece of equipment to decide whether or not ownership is financially viable. And these costs should be added as overhead expenses for every project, otherwise you are paying out of pocked for these ownership costs. Not knowing how to price projects properly will kill your business if you purchase a piece of equipment. Additionally, not all of these costs of ownership are 100% deductible against your tax bill. A machine allowed to depreciate against your tax bill, but the fuel your machine uses is 100% deductible (consult your accountant to confirm these deductions).
Finally, not having a use for every job is one problem with purchasing a specific piece of equipment. For example, if you only have the cash, space, or ability to purchase one piece of equipment, but your business does not have a use for that equipment for every project that you take on, you will price yourself out of projects that it does not have a use on. As you scale your business and become more specialized, your work will have to follow suit. So make sure that you are purchasing the right piece of equipment compared to the projects you are taking on or want to take on to grow your business.
Renting Construction Equipment
Renting is an excellent alternative to owning a piece of equipment and should not be discounted when considering how to grow your business. This alternative provides numerous advantages and the numbers speak for themselves if you compare the cost of ownership to renting. If renting comes out less costly year after year, then it is more financially viable for your business at that point in time to continue to rent.
Calculating the cost of renting is quite easy and begins with contacting a local renter and getting prices on the piece of equipment, delivery, and whether that includes insurance and what that insurance covers. Then, you will need to contact your insurance company to see whether or not they cover rental equipment to fill in where the rental company does not. This is the cost of your rental and can be priced in on a project to project basis with the addition of fuel. There is a risk of down time, but it is not your machine and the rental company will typically take care of that with minimal down time to you.
Advantages of Renting Construction Equipment
The first major advantage to renting equipment is that it is 100% deductible. This is because it is part of a cost of goods sold / material cost on each project that you are pricing it into. This includes the cost of rental and delivery (consult your accountant). This is a major advantage to being a depreciating asset on your books year in and out with ownership. Because you are pricing it into each project, it allows you to be flexible with the piece of equipment you are renting for each project. For example, some projects with tight access require small equipment which means less productivity, but if you have excellent access it makes sense to rent a larger machine to be more productive. This cannot be achieved with owning, unless you are purchasing numerous pieces of equipment. It also allows you to be flexible with the projects that you can take on. From the small projects to the large projects, you do not have the ownership costs of a machine on your books that you need to include in the overhead expenses of every project. There are less costs, less risk when it comes to getting it delivered and picked up, and allows you to get the right tool for the job on every project. You also get to try out a bunch of different models and brands to then choose the exact model that fits your business model and brand that you like when it comes to purchasing.
Disadvantages of Renting Construction Equipment
The disadvantages with renting equipment is that there is no ownership on your part of the business. You do not have that asset in your business, so there is no resale value to that machine. Also, there is an inconvenience aspect that comes with renting. Perhaps a certain piece of equipment is in high demand at your local dealer and you need to contact several companies to secure one. There may be an added logistical headache to ensuring that machine is going to be on site when you want it to be much like the delivery of materials. It would be worthwhile when creating a relationship with a local renter to ask them what machines experience high demand at what times in the season and how much time in advance they need to know when you are renting it. This will allow you to plan in advance when renting to ensure you are going to get the machine you want.
Rent vs Buy Equipment Analysis
To be able to compare renting to ownership, it is a matter of calculating the cost of ownership and comparing that to the cost of renting. This is going to differ from region to region, state to state, province to province as all of these costs will vary depending on where you live. For our example below, we are using made up numbers based on what was pulled from our local area and some that are estimates. However, the best way to do this is to use your data from the year prior in order to pull how much money you spent on rentals to compare it what your estimates are on the cost of ownership and to weigh the differences.
Example Analysis:
(($50,000 Cost of Machine – $15,000 Resale Value) / 5 Years of Use) / (36 Weeks per Season x 5 Working Days per Week) =
= $7,000 Cost per Year / 180 Working Days per Season
= $38.89 per Day
This is the cost ONLY for the price tag on the machine itself for this business that does 36 weeks per season. It is important to not overestimate the numbers of use you will get out of the machine or even the number of weeks and days per week you will work a season otherwise you will undercut yourself and not make the money back no the machine that you should.
If you compare this to the cost of rent of the same machine, ownership would make absolute sense as the same machine would likely rent out at a rate of $250 per day. However, this is where the additional costs of ownership come into play as well as being able to calculate how often you would need that machine. If you know you will need that machine every day, likely the numbers make sense to own. If you do not think you will be using it every day, then you are likely still in the renting category.
Maintenance = $1,500 per Season based on an estimated amount for the first 5 seasons of use.
Transportation = Cost of Trailer if not already owning and calculating the actual cost of the trailer per season similar to the formula above.
Down Time = $1,000 per Season based on an estimated amount for the first 5 seasons of use.
Labor = $2,700 per Season based on 90 hours or 30 minutes of maintenance per working day x hourly pay and labor burden rate.
Storage = $1,200 per Year based on an inexpensive storage option.
Insurance = $1,000 per Year based on 2% of the full cost of machine.
Fuel = $1,500 per Season as an estimated amount.
Total Cost of Ownership per Season
= $15,900
= $88.33 per Day + cost of a trailer if not already owned
Still in comparison to the daily rental rate, owning makes more sense. You can see how without this calculation of the true cost of ownership is necessary to really see how much that machine will cost you in a season. The cost of the machine actually more than doubled. Without including these costs in your Overhead Expenses, you are bleeding money and losing money on that machine.
Now, where renting makes more sense in the case of this machine is if you do not use that machine every day. At a cost of $88.33 per day, if you do not use that machine for three days straight it would have made more sense to just rent that machine. To simplify that, if you are not using a machine at least 2 out of 5 working days a week or more than 40% of the time on site then it makes more sense to rent that machine instead of owning it. Not to mention the added tax benefits with renting as opposed to owning. And if you do not include all of these calculations and include them into your budget, then renting is definitely the way you should go because you know exactly how much that machine is costing you and how much to include in the quote.
One major hidden cost of ownership is the cost of growing your business. Purchasing a machine means that your business is growing and will require more work, more projects, and larger scale projects. This comes with an added expense of marketing if you do not necessarily have the word of mouth leads at the rate to which you can service. It also comes with the added cost of training employees on the machine which will add to your labor burden. These small costs are not calculated into the cost of ownership necessarily, but are costs that will sneak up on you if you do not consider all aspects of purchasing that new piece of equipment.
Additionally there may be a personal interest involved in owning a piece of equipment that should be considered. Some people may have always wanted to own a particular piece of equipment. There is no dollar value that can be attached to something like this and may make up the difference between renting and owning. There is nothing wrong with that, but it is still worth doing the rent and owning analysis described above. Alternatively, some people may be adverse to spending time maintaining machines or spending their employees hours to do so and renting is just too convenient to them to for this reason to purchase.
It is also important to understand the space in the market to which your business occupies and where you want to grow your business. If you specialize in small projects or repairs, you likely do not have the use for a piece of equipment to where it makes financial sense for your business to own it. If you do purchase one, you are likely pricing yourself out of those smaller projects with the added expense of it. However, if you are currently servicing these smaller projects and want to grow towards the larger scale projects and you know that you can land those projects because you have already completed a couple and have built up a small portfolio to show future clients, perhaps it is beginning to make more sense for your to purchase a piece of equipment based on your rentals from the previous year.
If you want to learn more about these topics, you can click here to learn more about knowing your numbers and how to price projects. These links will take you to all of our articles on the financials of your business and a free pricing projects course where you will learn all about overhead expenses, labor costs, material costs, and profit margins. Additionally, you can learn more about our Budget and Estimate Spreadsheet. This spreadsheet will allow you to take into consideration all of these expenses discussed above and to ensure that you are making up those costs with every project that you estimate or quote.
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