SOURCE: ConnExpo-Con/Agg 365 | October 31, 2024
Inflation and rising equipment costs continue to impact the construction industry, making decisions around purchasing versus renting more challenging than ever. Construction business owners are feeling the pressure of higher prices, driven by material cost increases and supply chain disruptions. Knowing when to buy or rent equipment is essential to manage cash flow, maintain profitability and ensure long-term growth.
The construction sector has faced significant inflation over the past few years as the price of construction equipment has increased 27% since the pandemic. This puts pressure on contractors to make careful decisions about when to invest in equipment.
THE CASE FOR BUYING EQUIPMENT
Long-Term Use
Buying equipment is often the better choice when it will be used frequently over an extended period. Equipment that is crucial for daily operations, such as excavators or bulldozers, can provide significant long-term value. If the cost of renting the equipment over time exceeds the purchase price, buying becomes the clear financial choice.
Depreciation and Tax Benefits
Owning equipment offers certain tax advantages. Depreciation deductions can offset the purchase cost, while Section 179 of the IRS tax code allows businesses to write off the full cost of certain assets in the year of purchase. Additionally, owning equipment provides collateral, which can improve a company’s financial standing for future investments.
Increased Control and Availability
When equipment is owned, contractors have full control over its maintenance and availability. This can prevent costly project delays due to unavailable rentals during peak periods. Businesses can customize equipment according to their needs, which is not an option with rentals.
THE CASE FOR RENTING EQUIPMENT
Short-Term Projects
Renting is generally a better choice for short-term projects or one-off jobs where specific equipment is only needed for a brief period. Renting allows businesses to avoid the upfront costs of purchasing while still meeting project needs.
Reduced Maintenance Costs
Rental agreements typically include maintenance services, meaning construction companies can avoid unexpected repair costs. This can be a major advantage, especially when working with complex machinery that requires specialized care.
Flexibility in Fleet Management
Renting offers greater flexibility, enabling businesses to scale their equipment needs based on the project. Companies can rent different machines depending on the specific tasks without worrying about storage or maintenance costs in the off-season.
Market Uncertainty and Inflation
In times of high inflation and economic uncertainty, renting can provide financial flexibility. The initial capital outlay for buying equipment can strain cash flow, especially when interest rates are high. Renting equipment allows businesses to avoid large expenditures, keeping financial resources available for other operational needs.
WHEN TO RENT VS BUY
- Frequency of use
If a machine is needed for more than 60-70% of the year, buying typically makes more sense. For infrequent use, renting remains the more cost-effective choice. - Cost of ownership
Consider the long-term costs of ownership, including maintenance, storage, insurance, potential upgrades and eventual repairs. When these costs outweigh the benefits of ownership, renting may be the better option. - Cash flow and capital
If your business needs to preserve cash for other expenses like payroll, purchasing new equipment may not be ideal. Renting allows for predictable expenses without draining capital upfront. - Technology changes
Equipment technology evolves rapidly. If you need cutting-edge machines with the latest features, renting ensures access to the most up-to-date models without being stuck with outdated equipment. - Availability
In high-demand markets or during peak construction seasons, it may be challenging to find the right equipment for rent. In such cases, owning equipment guarantees availability and can prevent project delays.
In today’s inflationary environment, managing equipment costs through strategic renting and buying decisions is critical for construction businesses. While buying equipment offers control and long-term value, renting can provide flexibility and conserve capital for short-term needs. By carefully evaluating project timelines, equipment usage and overall financial health, construction companies can make decisions that align with both immediate and long-term goals.
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