Renting vs. Buying Heavy Equipment
It’s a common occurrence for utilities and contractors: A piece of heavy equipment is needed, but it’s not immediately available in the fleet, so the project manager rents what’s required. But that may not always be the right strategy – especially when the rental is done outside the fleet manager’s purview.
“I have seen cases where equipment was rented for lengths up to 27 months and turned back in to the rental store,” said Daniel Fitzpatrick, fleet manager for NorthWestern Energy, which provides electricity and natural gas to more than 700,000 customers in Montana, South Dakota and Nebraska. “When this happens, you lose any rental credit and the equipment.”
Paul Lauria, president of fleet management consulting firm Mercury Associates (http://mercury-assoc.com/), has seen it too. “One of the problems we see, particularly in utility companies, is they allow business units to rent equipment to fill a temporary need,” he said. “Two years later, the rental unit is still in the fleet and no one has been paying attention. It would have been cheaper to purchase and then dispose of it.”
Granted, haggling over a purchase or evaluating the merits of rental versus ownership may not make sense when thousands of customers are without service. So, while there likely are no hard and fast rules that utilities can develop to address this issue, following some broad principles can help.
“It makes financial sense to own your equipment,” Fitzpatrick said. He tries to purchase any rental equipment at a reduced price when the rental ends, or when money has become available. “Where a buyout is not an option, focus on the interest rate and controlling costs in the short term.”
Fitzpatrick also tries to avoid rentals by moving equipment around as needed, something that may go against an operator’s wishes for “the brand new rental piece when compared to an older, owned unit.” Still, he said, “decisions to rent should always be made on what is in the best interest of the company and customers.”
And that means evaluating costs beyond the equipment’s rental or purchase price, Lauria said. “If it has an annual fixed cost of $10,000 per year and you use it five days per year, the cost per day is $2,000. You may be able to rent it for much less as needed.”
It’s Not All About Cost
Lauria recommends that the rent-versus-purchase conversation evaluate not just costs, but also “your waiting tolerance. If you’re a water utility, you can’t say, ‘We’ll get to that in six hours because we don’t have a loader available.’ That would be unacceptable, obviously. It’s part science, part art and part common sense.”
He recommends that utilities use a chargeback system to “make costs visible. If the fleet is an order-taker and the business unit says, ‘I’d like this bucket truck’ and the fleet orders it, they’ll not be able to make informed decisions.”
And making an informed decision includes factoring in residual value. A purchase and depreciation may still outweigh rental costs, if the item could be sold when it’s no longer needed. “In my experience, a lot of organizations that purchase outright don’t do a good job in managing residual value,” Lauria said. “It doesn’t occur to them to buy it, use it for six months and sell it. Yes, there are depreciation and transactional costs, but it may still be cheaper.”
Another consideration is whether the rental is for a temporary project or an intermittent need. “It’s more common for organizations to rent fleet assets for a temporary need, like a project that is time-limited,” Lauria said. “There’s just one problem: Everyone has the same need for the same equipment in the same season.”
That ties into the most important question to consider: Is the piece of equipment even available? Ultimately, that may be the deciding factor when determining whether to rent or buy. But setting parameters on when and how to make the decision can prevent costly mistakes.
About the Author: Sandy Smith is a freelance writer and editor based in Nashville, Tenn.
Making the Most of Rentals
Daniel Fitzpatrick, fleet manager for NorthWestern Energy, has learned to make the most of rentals, often acquiring them when a project is complete. Whenever a piece of equipment is turned in, “the rental store/dealer provides me the make, model, hours, rents paid and buyout price of the equipment,” he said. “This gives me the opportunity to purchase lightly used equipment for our company while maximizing the rents we have already paid.”
But before making a purchase, any rental must meet certain qualifications:
• Is this a model that fits spec?
• Does the utility receive credit toward purchase? The rental payments should reduce purchase price, Fitzpatrick said.
• What interest rate is being charged?
• Is service available and nearby? Fitzpatrick notes this is a “short-term and long-term question. We will need service after we purchase the piece of equipment.”
When rentals meet the fleet’s criteria, it often makes financial sense to purchase the used piece of equipment.