I’ve listened to several contractors who are re-considering their options for adding capacity to their fleet so they can decrease the time it takes to complete jobs. Today, we have more external factors to consider as we look to increase productivity
and maximize returns during the next 12-24 months.
After these conversations, I’ve found three market trends to watch to discern the right purchasing strategy for your next job and budget. Check out these trends to understand if they favor buying, renting or leasing.
Trend #1: Margins are being squeezed, so consider a multi-pronged approach.
With high-interest rates and rising operating costs, many contractors seek new ways to maximize margins. Interest rates remain high when compared to pre-pandemic levels. Input costs and labor wages are up, which means more constraints on cash flow. The
decision to invest more capital may cause contractors to spend more time analyzing the balance sheet as new projects begin. To help decrease project planning time with tight margins, review what owning, leasing and renting equipment means for contractors.
Owning is a way to build equity in your business while having paid-for assets available to generate revenue. You also consistently have the piece of equipment you need when you need it.
Renting is a way to only pay when you need the equipment while having a fixed cost of use.
Leasing helps manage cash flow with an option to own at the end of the term.
Every company has its unique strategy and should discuss these options more thoroughly with a trusted advisor.
Trend #2: Specialized equipment is still in high demand, so buy when possible.
Here’s an example that’s common when it comes to specialized equipment. Currently, Vermeer trenchers are hard to locate and finding an experienced operator to run the machine can be even harder to find. According to three major survey results released this summer, 39% of contractors site inexperienced labor causing project delays. When you cannot locate skilled labor, you may be motivated to invest in machine technology to aid recently hired operators as a way to maximize daily productivity.
In cases like this, owning or leasing is the way to go. A new Vermeer trencher could cost over a million dollars, and it’s worth every penny, I would add. But something specialized and expensive needs a skilled operator and a quality maintenance program. And it looks like they will continue to compete for quality people for the foreseeable future. Leasing is a solid strategy if you have a long enough job and know you will not need it once it is complete.
Trend #3: Different industry sectors’ growth drive equipment inventory, so rent to weather the market.
Single-family housing projects have stalled and will need some help to move at a desired pace. According to Goldman Sachs, 99% of mortgages are under 6% interest, and as I write this, the 30-year fixed is at 7.6%.
Infrastructure jobs like roadbuilding will grow as government agencies approve more renewable energy projects like solar and electrification. We should also see more infrastructure dollars finding their way to your businesses.
During the next 12 months, a new story on supply and demand will unfold, affecting equipment availability and rental rates. Supply chains are better, and that will help. Labor availability has increased, but it is far from what we need. Manufacturers are optimistic but cautious as they plan for growth. As a result, rental fleets will grow, and fleet managers will sell older equipment. Rental companies will start experiencing the same price increases and will be forced to raise rates. Contractors do have the advantage of cost-averaging on large fleets, giving them a different cost profile than a small fleet.
Keep an eye on basic supply and demand and remember Economics 101: Demand will change and affect the cost of equipment. Safeguard your bottom line and integrate rental or leasing options to help your fleet to be flexible to keep your job sites up and running.
I'll cover this and more in a video series. Follow The Track, a web series focused on helping all of us improve our bottom line and get jobs done.
This article originally published on Green Industry Pros' website, here.
Dennis Howard
Dennis Howard has spent more than two decades with RDO Equipment Co.’s construction equipment division. As a Senior Vice President of Roadbuilding and Minerals, he leads RDO's WIRTGEN GROUP business throughout RDO's footprint. He’s a member of the Association of Equipment Management Professionals (AEMP), a regular contributor to ForConstructionPros.com, and host of The Track – Construction Equipment from RDO web series. Subscribe to The Track on YouTube, or connect with Dennis personally on LinkedIn.
