Do you own all of your assets? Does your lending and bonding company expect you to provide substantial collateral to buffer the risk of doing business with you? In a world where service businesses have overtaken manufacturers and retailers, things have changed. It is no longer necessary-and perhaps not even wise-to own everything you need.
How do you decide?Start with the basics. How much does each asset cost you? Vehicles depreciate almost immediately. Communication technology changes with blinding speed, so your telephones and computers hardly seem worth owning. If your building is paid for, you sell or lease it to your business and create an income stream for retirement.
Tools and equipment are a little tougher. You are accustomed to having what you need, ready to do the job, without relying on a supplier. Traditionally, rental suppliers weren't reliable or cost effective. Can you rent what you need, when you need it and expect it to function productively?
As you replace your equipment, weigh the risks and benefits of buying versus renting. The benefits of owning include availability, depreciation, cash flow realized from payment, and potential investment tax credits. Owning is a bidding prequalification requirement for some clients, and there are no-cost promotional benefits attached to having your name prominently displayed on equipment.
Renting offers flexibility. If you rent equipment when you need it, your rental cost matches the revenue generated by its use on a particular project. You avoid the initial cash outlay and the burden of debt, as well as the cost of maintenance, storage, insurance and security. As technology changes, you are able to obtain the most up-to-date equipment with ease instead of owning something obsolete.
But how do you make these decisions? You could use a rule of thumb that says anything you use more than 20 to 24 working days in a year should be owned. A more accurate approach is to chart your potential costs, based on projected hours of use. Start by using historical costs for similar assets as a starting point.
Take, for example, a piece of equipment costing $100,000, with a useful life of 10,000 hours. Construction equipment is seldom used more than 800 to 1,000 hours per year, so we'll use the latter for ease of calculation.
Depreciation reduces the paper value of an asset and indicates a future replacement expense. Prices rise, so an inflation cost should also be figured into the equation, based on an annual percentage (4 percent of the price in this example). Ordinary maintenance and operating costs include fuel, oil and routinely replaced parts. Repair costs are occasional and less predictable.
Insurance will be related to your loss history as well as the value of the equipment. Each predicted lump sum cost per year is divided by 1,000 hours of use to arrive at the cost per hour.
If you can rent from a convenient supplier, when you need the item, for approximately the same cost, it might be wise to consider this option. In some cases, you may schedule your rentals using a broad window, so that an item needed for two weeks is actually rented for four weeks or even longer. The ability to obtain the item and have it ready might be worth the extra cost. Equipment costs are a function of time or use. Time costs are fixed and incurred regardless of operation schedules. Use costs are related to keeping operating equipment functioning. Use the cost of idle equipment in negotiating changes and claims, especially when schedules change abruptly and the customer is under time pressure. The customer might pay idle time equipment charges (covering financing, depreciation, insurance and replacement) to guarantee that you don't send it to another project.
These decisions are complicated. Assess how often you use the equipment, whether you can maintain it and whether a vendor can use volume to provide a rental rate more attractive than the cost of ownership.
Don't decide to sell all of your assets at once. Take one step at a time. As with all financial decisions, cost, convenience and quality are the critical factors. EC
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.