Managing Rising Equipment Costs

Few events in history have had as devastating, far-reaching and long-lasting effects as the COVID-19 pandemic which began in early 2020. Nearly five years later, those effects are still being felt in virtually every facet of human society. Like most industries, construction was hard hit, driving already high prices of equipment even higher. While costs have moderated somewhat over the last few years, they still have not come down to pre-pandemic levels.

Although this has put most small-to-medium businesses (SMBs) in the uncomfortable position of having to pass the higher costs on to their customers, it’s good to keep two things in mind.

First, everyone faces similar challenges. Therefore, nearly everyone can relate.  As someone once said, “We’re all in the same boat. Sometimes we row, sometimes we rest. Just don’t try to walk on water.” In other words, maintain a balanced view of the industry and don’t make things harder on yourself than necessary.

Second, there are ways that contractors can mitigate heavy equipment costs and expenses by integrating a few simple tips into their business model. This will help them to stay competitive even in this market. We will be discussing those things in this article, as well as addressing the question of whether to buy, rent or lease machinery.

In addition, we will get some insights from an expert in the field of purchasing revenue-generating equipment. But first, let’s look at what factors contribute to the high cost of equipment for SMBs. These costs have always existed, but they are more evident now due to the economy. However, they don’t create a reason to be overly concerned. Just being aware and familiar with them helps to keep everything in perspective.

Key Reasons for High Cost

Initial purchase price: Even small models of heavy equipment can have a high upfront cost due to complex engineering, advanced technology and robust construction materials.

Maintenance and repair: They are inevitable but necessary.

Technological advancements: While offering undeniable benefits for larger projects, the advanced features on newer equipment does increase the price tag.

Depreciation: Like almost any product these days, construction equipment loses some value over time.

“Hidden” costs: Though not actually hidden, there are many costs that contribute to the overall purchase and ownership of equipment. These include taxes, delivery fees, insurance, extended warranties and improvements made to the machinery.

Operating costs: Among these costs are operator wages and benefits, fuel costs and routine maintenance.

Rent, Lease or Buy?

As with anything, there are pros and cons to all three methods.

Purchasing a piece of heavy equipment has some definite advantages, the most obvious being that, if you buy it, you own it. Although buying has a higher initial cost, it usually results in lower costs in the long run. You have greater flexibility in how the machinery can be used, compared to leasing or renting, and you have more customizing options. However, in addition to higher initial costs, you are entirely responsible for maintenance and repairs. You also have to factor depreciation as well as transportation and storage into overall cost. And you may have limited flexibility regarding the scope of projects you are able to take on when owning a single piece of specialized equipment.

Renting has a lower upfront investment, tax advantages, a smaller overall commitment and lower overhead costs. However, renting also has higher long-term costs, usage restrictions and limited control over the equipment. At times you can be at the mercy of the rental companies regarding availability of pieces of machinery and their maintenance and service schedules. And there are usually very few options for customization.

Many companies have found that leasing is an acceptable middle-ground solution between purchasing and renting. Unlike rentals, leases often last for extended periods of time, sometimes years. Leasing usually includes maintenance plans and may also offer you the option of purchasing the equipment at the end of the term. This flexibility allows companies to keep their options open without a large initial investment and may give them time to consider purchasing in the future.

One factor to consider when deciding whether to rent, lease or buy is projected frequency of use. If you only need a piece of equipment for a short-term project, or perhaps for a long-term project but not on a regular basis, renting may be the best option. Conversely, even if you will not use that piece of equipment frequently, you can rent it out yourself and make money off it while it would otherwise just be sitting.

Financing for SMBs

Many small to medium-sized business owners would like to opt for purchasing equipment but are concerned with the viability — or even feasibility — of obtaining a loan for such equipment. In that regard, we got some insights in an interview with Ben Johnston, the chief operating officer with Kapitus, a well-respected business lending corporation, about what contractors need to know about securing financing for revenue-generating equipment.

Steve Sniff: Ben, we heard that many contractors are expressing some trepidation about trying to get a business loan for equipment after COVID. Do you have any thoughts on that?

Ben Johnston: The market for obtaining equipment financing is tighter today than it was coming out of the pandemic as many banks have scaled back their exposure to the industry due to lack of liquidity and rising defaults. In addition, interest rates are higher today than in years past, making it a more challenging market to obtain equipment.

Sniff: So, it sounds like their concerns are justified. Is there a silver lining anywhere?

Johnston: Yes. Fortunately, businesses with strong credit profiles and a history of financing essential use equipment have quality options both with banks and non-bank lenders.

Sniff: That is good news.

Johnston: However, business owners should expect a higher cost of capital than in years past and therefore should calculate the cost of the equipment relative to expected revenue that the equipment will generate to determine if the equipment will generate a positive return on investment.

Sniff: Good to keep in mind. Does this only apply to new equipment purchases, or can used machinery also find a place in the equation?

Johnston: New equipment should be easier to finance. However, in some cases, used equipment is also available to be financed and can offer a superior return on investment.

Cost Reduction Tips

Regardless of how the equipment is obtained, leveraging a few cost-cutting strategies in your business model can pay off handsomely in the long term.

Minimize downtime: One way is to install GPS tracking devices on each piece of equipment to be able to keep track of active hours. Make adjustments to the work schedule if it is found that any machinery is being unused for extended periods of time.

Proactive maintenance: An even more important way to cut down on downtime is by keeping your equipment in good repair. Don’t wait for a breakdown to get something fixed. Have a regular maintenance schedule in place and stick to it.

Keep it clean: Routine cleaning can prevent premature wear and tear, which can save money on repairs and replacements. A machine that has been kept clean will also retain its value over time.

Use an equipment management system: These systems give insights into the true cost of maintaining heavy equipment through continuous tracking, logging and monitoring. Though it adds to your initial investment and ongoing costs, an equipment management system could pay for itself in prevention alone. The cost of one emergency repair is roughly the annual cost of a management solution. If you can eliminate even one emergency repair a year, your management system will have paid for itself.

Remember, as a small-to-medium business, you are not alone in trying to cope with the rising costs of purchasing and maintaining heavy equipment for your company. All other things being equal, you are on a level playing field, but two things can be used to give you an advantage over the competition: education and application. Take advantage of all the resources out there to educate yourself about the options available to you and choose one that you can customize to fit your business. Then apply this advice and the many other sources of information available to you to keep your equipment — and your business — in top running condition.