Contractors Are Renting Rather Than Buying More Equipment During Slow Recovery
The appeal of renting equipment and renting for longer terms is increasing among contractors because of "the uncertainty created by the economic downturn of the last few years and an unwillingness to commit to purchases, given the work situation," says Sidney Sexson, senior vice president at Wells Fargo Equipment Finance, Tempe, Ariz.
Scarce new development activity amid tight lending conditions has ratcheted up the rivalry among job-hungry contractors, leaving more firms vying for fewer projects. The increased competition has narrowed already slim bidding margins, forcing contractors to eke out a financial edge wherever possible. For some firms, that has meant renting rather than buying. Equipment rentals allow contractors to shift downtime risk while trimming expenses, including licensing, insurance, taxes and debt, among others.
The U.S. rental business grew an estimated 18.6% in 2011, according to the Associated Equipment Manufacturers, a Milwaukee-based industry trade group. This year, North American equipment rentals are expected to generate $33.5 billion in revenue, an increase of 6.9% and more than three times the expected growth rate of the U.S. economy, says the Moline, Ill.-based American Rental Association. Rentals offer a flexible, safe solution as the economy makes a jagged recovery.
"We are a big proponent of renting due to depreciation, storage, transportation, maintenance and upkeep costs," says Paul Dudzinski, project director for McCarthy Building Cos.' Southwest region. "We own only about 15% of our own equipment and rent the rest as needed."
The recession prompted many contractors to thin their fleets in order to lower overhead and generate cash. Strong foreign demand has also spurred divestitures, creating rich auction paydays for late model equipment.
"We sold $10 million of equipment in the last six months due to low utilization and the expense of ownership," says Paddy Murphy, general manager for construction at Aggregate Industries' Southwest region. "It's important to get maximum use out of a piece of equipment in order to effectively manage costs."
Maintenance Blues
While rentals account for only 1% to 3% of total project costs, experts say, a non-functioning machine can bring a jobsite to a standstill. An idle crew waiting for a replacement machine or repairs can add unexpected costs that skew project profitability. "Margins are so tight that we can't afford to prorate our productivity. It wouldn't make us competitive," Dudzinski says. "Maintenance is a big part of our decision. I don't always go with bottom dollar on a piece of equipment."
Machine reliability is crucial for steady work progress; speedy service and repairs often weigh heavily in deciding whether to rent or own. Remote jobsites can add a tricky twist, however.
"We have a project in North Dakota where it can take two to three weeks to get a dealer to work on something," says Rick Ewing, equipment coordinator for Las Vegas Paving Corp., a 54-year-old privately owned, $300-million-a-year heavy civil contractor. "As a result, we send out our newest equipment because we don't want something that breaks down."
Some rental companies will go to great lengths to keep clients. Ahern Rentals, for instance, the nation's largest independent rental company, opened a satellite maintenance shop in the high Nevada desert. It services a remote $900-million solar project under construction on federal land along the Crescent Dunes, about 226 miles northwest of Las Vegas. Setting up the shop provided service certainty and helped clinch a rental deal.
But rentals aren't always an option, especially for some specialty equipment.
"An asphalt paver is very difficult to rent. It's something that rental companies don't typically carry," says Mike Wills, a construction manager for Watsonville, Calif.-based Granite Construction Co., ranked the 242nd-largest private U.S. fleet owner for 2011 by Fleet Owner magazine. "You pretty much have to make a commitment to buy."
Granite can shuttle equipment between multiple offices across nine states as work arises, thereby avoiding low utilization time. Kiewit Corp.—Fleet Owner's 19th-largest private equipment owner last year—employs a similar strategy, moving machines where needed. For the Omaha, Neb.-based contractor, ownership allows greater control over availability.
Yet, purchasing a piece of machinery is a big decision. McCarthy, for example, looks at equipment use over a 10-year span with an expected 70% annual utilization rate before buying a piece of machinery. Other contractors take advantage of dealer rent-to-own programs, which offer the best of both worlds and help skirt sales commissions. But such programs aren't commonplace among rental companies, say industry observers, and dealers typically offer rent-to-own only for their best customers.
"If we do rent something, it's typically on a rental-purchase agreement that gives us a chance to try it out first," says Ewing, who believes fleet ownership offers his firm a competitive advantage. "Each piece of equipment has a cost to it when bidding a job. You begin to know those costs over the years."
Some of the costs include meeting new Tier IV federal emissions standards that add "10% to 15% in costs over earlier model year counterparts," says Sexson. And the expense is more acute in California, which has stringent off-road diesel-emissions standards.
"Everyone is working at a whole different level here," says Frank Scaduto, regional manager for ECCO Equipment's central and northern California branches. "Contractors are bidding with rental equipment because they sold their machines during the downturn."
In 2010, the California Air Resources Board required reduced nitrogen oxide and particulate matter emissions from existing off–road diesel equipment. The agency additionally required the retirement, retrofit, re-power or replacement of noncompliant equipment. CARB put that cost at $3.4 billion. The Associated General Contractors of America—which has twice appealed the ruling—pegs the cost at around $13 billion.
"We spent millions meeting the deadline, and there hasn't been any enforcement," Scaduto says. "We could lose a job to someone with a 20-year-old machine bellowing black [smoke] as a result. Everyone is battling over price. It's still a tough, fragile market."
