Contractors explain how they decide whether to rent a particular machine or make the newcomer a full-fledged part of their fleet.

By Joseph Lynn Tilton

There are times when, no matter how carefully an excavation company plans out a project, there just isn't enough equipment in the fleet to handle the requirements of the contract without running out of time. The choices (besides subbing to an owner/operator) are clear: rent the necessary machine or go ahead and add it to the fleet. But it's not easy to make those decisions, thanks to a multitude of factors that contractors have to consider. Nevertheless, here's what some successful operators have to say regarding the rent-versus-own dilemma, including how they get the most out of rental terms.

Rental Pricing Strategy

With more than $450 million a year in projects stretching from Michigan to Louisiana, Angelo Iafrate Construction Company reports that it's doing more and more renting. "Many times it's less expensive to rent the specific machine for the specific job rather than to warehouse equipment," relates Jim Patterson, vice president of equipment for the company in Warren, MI. He adds, "We like to keep the inventory of our fleet as small as possible, and we avoid financing assets used only four to five months out of the year."

Angelo Iafrate also is a believer in taking on jobs of all sizes in its marketing area, which principally is the Midwest and Southeast. "We do a lot of site work for commercial, industrial, and residential markets, but 10% to 15% of our work in the north is highway construction, while in the south, highway work makes up 45%. No job is really too small, and projects will range from $100,000 to $20 million to $30 million." The diversity of excavation calls for a diversity of equipment - and a greater need for Patterson and his people to pay close attention to their fleet.

How do they decide when to rent? Patterson explains, "We look at the purpose of the work, what we need to do to accomplish the job. And to get that piece of equipment, we do just as we would if we were buying: We negotiate the best deal we can get. Sometimes we may need a backhoe for just a couple of days for a specific job, but if we know we're going get a lot of hours out of it, then we'll negotiate a 12-month rental. At the end of that period we'll send it back and get another new one if we still need it."

When asked how many hours they expect to keep purchased machines before buying a new one, he responds, "In most cases we rent a new machine just to avoid the possibility of downtime. Rental also eliminates the need to maintain the machine because maintenance is part of the negotiated deal."

When Angelo Iafrate Construction takes on a new job, the estimating group on the operations side of the organization determines how they're going to execute the project. "Those people know their equipment and their needs. Then my staff and I get them the tools they need and take care of the equipment for them," Patterson explains.

A veteran of 25 years in construction, he points out aids to help other contractors get the best possible deals when negotiating rentals. "Length of term and payment terms are the two biggest things. Shortening the payment end helps you get the best deal. On a recent rental we saved 35% to 40% over the published rate because we agreed to rent the machine for a full 12 months and guaranteed payment within 15 days after we received the machine. In another, by agreeing to a long-term rental combined with fast payment, we were able to rent a midsize grader for $7,500 a month instead of the published price of $10,000 a month." That 25% savings, along with the others Patterson and his people negotiate, certainly gives the company a substantial sum to apply elsewhere in the organization.

He points out that part of any negotiation is determining who pays for repairs, with the vendor typically paying for normal repairs and handling standard maintenance needs. "Any abuse or damage is our responsibility," Patterson continues. "For example, we had just unloaded an excavator from our truck, when another truck going down the highway with its bed still raised caught the power line and broke the pole." The pole fell atop the excavator, causing nearly $10,000 damage.

The vendor immediately replaced the damaged excavator with another machine so the contractor could get on with the job, but the contractor returned the favor by promptly writing out a check when the repairs were completed two weeks later. "We ultimately were able to recover the money from the company that broke the pole, but we paid up-front because that was part of the rental agreement," Patterson explains.

Although this company is looking more and more to rentals, hourly utilization is still a major factor in making any newcomer a part of the fleet. "For us, it's better to own than rent smaller dozers, smaller tractors, and smaller loaders. Those get very high utilization with us. The more hours you use a machine, the more it pays to own it."

What About Technology Upgrades?

Although rental seems to be one way to help tame up-front costs for heavy metal, nonmotorized equipment that supplies the latest grading technology, such as automatic photo stations or global positioning systems (GPS), are not usually found on the rental list. "That's because machine display and grade-control products cost from less than $1,000 to about $20,000, so the payback period for making the grader or excavator more efficient is much shorter," points out Brent Swearingen, Trimble Machine Control sales manager for the Americas.

He continues, "The more impressive paybacks for the contractor come from grade-control systems, such as GPS, yet most rental centers do not want an additional $10,000 machine cost. Also, the learning curve for these systems is such that rental operations tend not to offer the equipment. And for the contractor it typically makes sense to purchase and receive the training that is offered as part of the sale."

That training, though, can be relatively short. "With our system, users need just two to three days' experience to get the benefits. By then they're able to get to grade much quicker. Instead of going over a section two to three times, they can knock it down by a turn, increasing productivity with a quicker grade because the technology helps the operator get better thickness control," Swearingen explains.

But what about renting higher-end systems, those that can cost upward of $100,000? Again, Swearingen emphasizes that ownership is preferred. "With 3D systems, there are significant paybacks to the contractor. However, there are also significant investments for the contractor to get up and running with these solutions. Contractors need to invest in integrating the solution to the overall construction processes." That can include a half day in the classroom and another two to three weeks becoming familiar with the technology - yet this effort halves the project time usually employed in the staking process from then on.

Swearingen adds, "The most significant productivity increases come from a complete technology integration into all phases of construction - bidding, survey, layout, earthmoving, finished grade work. That's why the entire organization needs to know how to use it, how to get the benefits offered by the technology."

He concludes that another factor that keeps these systems from becoming a more popular rental item is that each brand is substantially different from the competition. "So contractors should find a brand that appeals to them and own it," Swearingen avows. "Then they'll get comfortable with the buttons involved and become even more efficient and effective."

Local Rental Strategy

In San Jose, CA, Frank A. Parker, owner of All Terrain Backhoe Services Inc., sees rental as helping his company grow. He points out that, at $700,000 a year, with his marketing area limited to the Silicon Valley, this former national sales manager for Kubota Tractor Corporation considers himself a small operator. "It seems like every couple weeks I'm renting something. We tend to focus on contracts within 50 miles of the yard, so I've established good relations with United Rentals in San Jose, and I have come to appreciate their attitudes toward customer service. When I need a particular piece of equipment, such as a vibratory compactor, I'll call the rental company and tell them where to deliver it. When we're done, I call them again and they'll pick it up." Parker enjoys the freedom of working with the rental agency on a 30-day term agreement, which he reports makes day-to-day operation easier.

He comments that with the bulk of his work consisting of utility trenching and footings, primarily for schools and other public works, he's usually not after renting heavy metal. "We're more into tight-access work where big machines can't fit. We're after the market where the guy with one backhoe is too small to handle it and those with the big machines are too big to afford it. We'll run six employees in the summer and three to four in the winter."

He says occasionally he'll rent a 5-ton roller. "And we have rented a 44,000-pound excavator, both standard machines in stock at the rental yard. If they don't have it, they get it for me. They are really helpful. I can call on a Friday and have a specialized piece delivered on-site by 7 a.m. Monday. My crew has never had to wait on delivery of a rental piece - to me an important and decisive factor." He plans on adding a 17,000-lb. excavator and a 3-ton articulated roller to the fleet in the next couple of years. "When I'm ready, I'll find the best price for the item I want and buy it. When we rent, we rent used, but when we buy, we buy new. If someone else got rid of the machine, they did it for a reason, and we're not buying somebody else's problem."

When he does decide to take on a new piece, Parker discusses it with the crew. "I get my people involved. I have long-term employees, and their opinions mean a great deal. The four key areas I look at are net cost, operator safety and comfort, whether it's operator-friendly, and its reliability and productivity."

After pointing out that the machines he buys tend to cost less than $100,000, Parker notes that All Terrain Backhoe gives a healthy down payment to keep the monthly payments low. "That way the monthly payments are less than weekly rental payments for the same machine." Knowing the difference in cost of ownership versus rental certainly has helped keep All Terrain Backhoe Services on the grow.

How Renting Keeps Costs Down for Larger Firms

When BRB Contractors Inc. took on a fiber-optic plowing job last year, laying underground telephone fiber cable from Phoenix, AZ, some 110 mi. west to the California border, the company rented a Caterpillar D9 from one of the local dealers rather than use one of its own machines out of its $10 million fleet inventory. That's because BRB is based in Topeka, KS, and renting a machine for the 60-day job was more economical than trucking out one of its own machines. "We handled the routine maintenance, but when we were done, Empire Rental in Phoenix simply took it back," reports Mike Welch, company president. The deal proved a winner for both parties.

BRB Contractors came to life in 1959, first specializing in water and wastewater treatment plants, water lines, sewer lines, and storm drains. In early 1990 it moved into bridge construction and outside plant facilities for the telecommunications industry, and now it also deals with natural gas/petroleum pipeline construction. This highly diverse menu, which comprises about $50 million a year in projects, makes for a lot of decisions about whether to buy or to rent.

Welch explains, "We bid another cable telephone job close to home in Missouri and needed another D85 cable plow so we could handle 150 miles plowing 3 to 3.5 feet deep. But the cable portion of the business is so unstable that we decided to rent the machine for four or five months. So we called up a vendor we'd used before." Negotiation with the vendor helped make renting even more attractive than buying a machine that might not be utilized enough after this job is completed.

BRB Contractors also rents when it takes on unusual jobs. "For instance, we had a 66-inch pipe job in Wichita, which is not a size we install all the time, so we don't have that size of excavator. In that case, we rented a 60-metric-ton Komatsu excavator, which we opted not to buy when we finished the project. Again, we found it more economical in the long term just to rent."

Welch reports that machine rental periods for smaller machines have run as short as a week, with some larger ones rented for more than a year. This company prefers to pay its month-to-month rental fees up-front, paying a month ahead. "When we know we're going to be renting for a substantial length of time we also try to go ahead and get a purchase option. Generally when we find we're using a rental machine over 1,000 hours a year, then we'll decide to add it to the fleet."

They too use considerable care in deciding exactly which machine to rent. "When there are several brands to choose from, we choose a machine that the operator will find comfortable and easy to adapt to. We also choose a brand we feel comfortable with for reliability, but price is one of the big factors and service is another."

Speaking from 30 years' experience with this employee-owned company, Welch adds that when rentals have joined the fleet permanently, 80-100% of rental fees often have been applied to the purchase price. "I think we get a better deal sometimes because they know if they can get it on-site, they'll have an opportunity later on to sell it if we take the purchase option." But the firm also saves money by negotiating the published rental terms on machines it doesn't plan adding to its fleet. "The other day we got a really good deal because it was a specialty piece of equipment that had been sitting in the vendor's rental fleet for a long time.

"Typically, though, contractors can get a 15% discount if a longer time period is involved and if the agency or dealer knows the contractor. They need to know that you have good operators on the machines and that you have a reputation and culture for taking care of machines. Most of that is trust. When they trust you, you get a better deal."

The company finds rental a great way to check out a different brand or a new model that it hasn't used. Welch points out, "Dealers sometimes will give contractors a really special deal to try out with hopes of building up a relationship. After all, they're looking to sell you not just that machine but others."

Contractor Reveals Another Short-Term Source

Rick Penney, owner of LRS Excavation Inc. in Lansing, NY, says he strives to minimize rentals and tries to maximize utilization of the fleet. "Still, about 90% of our motorized equipment is owned, while the other 10% is rented during the height of the midstate New York building season." Rentals typically are for 30-60 days, again to maximize fleet utilization. Since the company keeps close to home, longer days are possible because his people don't have to spend more time on the road than they do on the job.

"But we'll go where the work is, focusing on the region between Syracuse and Binghamton. This generally keeps us within 90 minutes of headquarters." Pointing out that his firm's earthmoving specialties include utilities, landscaping, and restoration work, Penney reports that rentals usually occur when there are two similar projects going on simultaneously. "We have two apartment complex projects, totaling 27 acres. One will last 18 months and the other will take a year. We're the subcontractors for both, and we are doing all the ground-level work, including clearing, road building, curbs, sidewalks, and underground utilities, and we needed a big roller at the same time for both jobs."

So what did Penney do when he found he needed another roller early on? "I called the rental places in the area, compared the models they could supply and the terms." Although the published terms were close to $3,000 per month, he was able to get his Cat CS563 roller for $2,400 a month and kept it two months.

As noted by other contractors, Penney emphasizes that getting price breaks depends on developing long-term, trusting relationships with the vendors. "They've rented to us in the past and know our reputation for paying on time and for taking care of the daily maintenance. Sometimes we'll sign a rental agreement because the agency has included maintenance in their deal. Then their mechanics can service the machine when we're not using it.

"We've not had much in the way of abuse problems, although we've rented some machines that were older and needed field service, such as securing failing door latches, which we've fixed ourselves." He adds that if the repair likely will take just a couple of hours, he prefers to get his mechanic on it right away rather than wait for a service call from the vendor. "With the schedules we have, we're time-sensitive. We don't always have good weather conditions year-round, so when we get a break in the weather, we're going to move earth."

LRS also rents nonmotorized equipment. "We've rented smaller attachments, such as a tool carrier, for four to five months, then ended up buying it. When we buy a rented piece, some vendors have given us 90% credit toward the purchase, although 80% is standard around here." Since it is a smaller firm, Penney also does all the negotiating for the company. He confesses that now and then he'll consult his father, Richard, who founded the firm 30 years ago, but generally he makes decisions on his own.

Another route he uses for temporary ownership is to get a moderately used piece at auction. "There are times when I need a machine for six months, such as another skid-steer, so I'll buy it wholesale at an auction. One I got recently cost just $13,000 and had 1,000 hours on it, yet a new one at the dealer would have been twice the price. As the time passes I try to find other jobs where I can use that machine. If I can't get more work for it, then I'll sell it back at the auction.

"A contractor has to maximize utilization. We have more equipment than we have operators, but once it's paid for, it's better to have it sitting and ready to go than to rent something for a month." While the various contractors have different reasons for determining whether they should rent, they all agree that renting is a great option for ensuring that projects get finished economically - and on time.

Journalist Joseph Lynn Tilton specializes in land and building issues.

GEC - May/June 2003

About | Subscribe | Current Issue | News | Events | Services
Register | Discussion  | Advertise | Contact Us | Search | Jobs

Erosion Control Magazine | MSW Management Magazine
Stormwater Magazine | Forester Communications

© 2001-2003 Forester Communications, Inc.