Just about any type of business no matter the industry, the need to be competitive and to remain relevant to their respective industries is a critical success factor. Although elements such as work quality, customer satisfaction, service quality and prices are important, there are other factors that are also critical to the business and among the most crucial is the financial statements such as the balance sheet which are assessed by investors and banks which is where the money needed to take on large projects is and hence making the financial statements of the company look is good is extremely important.
The fact that construction companies utilise a wide variety of equipment for projects is in essence an advantage if constructions companies view the equipment owned as a strategic element towards enhancing their financial statements. Such equipment when owned by companies are declared as fixed assets on the balance sheet and most would consider it a good thing, the more assets a company has, the more financial stability they have is the common perception, but is it?
Different industries view assets differently; the ownership costs of assets and the efficiency of a company towards generating revenue are critical elements. For example, if a Company A owns $1000 worth of assets and generates a revenue of $1000 per annum means that the company’s efficiency is 1 to 1 for return on assets (for every dollar of asset that the company owns the company generates one dollar). In contrast if Company B only owns $500 worth of assets and generates only $ 800, this means that Company B generates $1.60 for every dollar of asset that it owns. This renders Company B as a more efficient company compared to company A based on the fact that Company B is able to generate more revenue with lesser equipment and this does not end here.
The fact that Company B owns lesser equipment also means that the overhead costs associated with maintenance of equipment and storage costs are also lower comparative to Company A which appeals to banks and investors. The only difference between Company A & B is that Company A owns the equipment that they use for projects whereas Company B rents the construction equipment that they need and these include heavy machines that are expensive such as mini excavators, standard excavators, skid steers, hydraulic attachments, backhoes, mini dumpers, cement mixers and tractors. The fact is that by renting heavy construction equipment, Company B gain competitive advantages against Company A.
Equipment such as compact loaders, skid steers, excavators, trucks, tractors, cement mixers, lifts, cranes, generators, back hoes, uninterruptible power supply are just some of the equipment that are essential towards just about any given project and these types of equipment are expensive. Given the high price of such equipment, the ROI (Return on Investment) and the ROA (Return on Assets) must be justified by streamlining the use of these machines to achieve optimum returns for the company.
Generally, a cost-benefit analysis will present clear and present data that would allow the management of a construction company (especially the finance depart) to make informed decisions on purchasing or renting equipment. For example, the price of a standard excavator is approximately $100,000 and the price of renting a standard excavator is about $250/ day on average.
The elements that need to be taken into consideration within the two option is the amount of time that the excavator will be utilised for a project or even projects (in the event that the excavator is to be used for multiple at different project sites, transportation costs need to be added to the $100,000 if the company owns the excavator). However, if the excavator is taken for hire, transportation costs are not relevant as most construction equipment rental companies provide delivery and pick-up services. In addition to that, construction companies have to also bear ownership costs such as storage, maintenance and transporting heavy machines such as excavators which would tie up the construction company’s working capital.
The fact is, heavy equipment such as backhoes, excavators and dozers are only used during the initial stages of a project and are left idle for the rest of the project, which basically means that $100,000 is sitting in storage and it is not generating revenue (tied up assets). The upkeep, maintenance and training of personnel to maintain these machines added to transportation and storage costs could have negative financial implications.
The benefits of taking construction equipment excavators for hire cannot be overlooked starting from avoiding unnecessary logistics such as the hassle of moving heavy equipment around based on project locations which is a lengthy process and have the potential to delay or reduce productivity and efficiency of operations when things go slightly wrong.
When construction companies hire equipment directly from heavy equipment suppliers, all factors associated with asset management and maintenance are taken care of by suppliers which eliminated extra cost factors for the construction company.
Unseen and Unrealised Additional Benefits of Hiring High Priced Construction Equipment
The tax returns are another aspect of rentals that construction companies capitalise on as any rental expenses related to the business activities are deductible. The fact that expenses associated with rentals are from a financial perspective more flexible compared to capital expense purchases.
The improved borrowing power that may be derived from having higher cash flow and lower liabilities (rentals are not deemed as liabilities, but loans taken for purchasing equipment are factored as liabilities on the balance sheet). Last, but not least, a company that hires construction equipment such as excavators and such are not subject to depreciation expenses which can be significant.
General Considerations
Although in general, hiring heavy equipment may be the preferred option for construction companies, it is still necessary for construction companies to assess projects thoroughly as some projects such as mining operations that require excavators for long term use, purchasing the excavator would be more practical than hiring the excavator. If an excavator is needed for more than 100 days of operation for a project, then buying the excavator should be considered.
