Managing Equipment: Rent or Buy?
By Thomas A. Westerkamp - April 2008 - Equipment Rental & Tools
From spot-cooling equipment and personnel lifts to specialized grounds equipment and generators, maintenance and engineering departments often rely on rental equipment to meet unplanned or infrequent needs. But what happens when rental needs become more frequent and require more planning?
How can managers decide the time is right to stop renting and purchase a particular piece of equipment? By carefully considering the key components of each option, managers will be more successful in building a cost-effective case that supports the department’s mission.
The Rent-or-Buy Scenario
When the time comes to plan major projects or repairs or to perform cyclical work, such as cleaning windows or high-voltage insulators, two issues figure prominently in the equipment rent-or-buy decision: How frequently will crews need this particular equipment capability? How versatile should the equipment be?
The second question is related to the first. High-frequency use, of course, is related to payback. If crews need the equipment regularly enough over its estimated useful life to pay back the cost of not owning it, the case to purchase probably is strong. If renting the piece of equipment will cost as much or more than owning it, then it makes sense to buy it, get the benefit and save the incremental cost. Since this equation involves predictions of future events, it is important to plan carefully and thoroughly. Important information includes past use patterns and an estimate of future use.
Versatility can significantly affect the first issue — frequency — because if managers can use the equipment on various types of jobs, that will increase the frequency of use, justifying the purchase of the unit.
If either frequency of use or versatility is low, then the case for rent generally will be stronger. An exception is equipment that is not used often but is needed immediately in an emergency. Two examples of this situation are emergency generators for backup in power outages and portable coolers to prevent data-center equipment outages.
While managers might not be able to justify these purchases using a straight cost comparison, they should consider the potential for other losses, such as danger to health and safety or lost-opportunity costs that would occur if the equipment was not available.
So where is the dividing line between the two options?
In short, purchasing tends to be the best option for general-purpose equipment used regularly for maintenance. Examples include fork lifts used daily for loading and unloading trucks and moving material, and aerial work platforms used for tasks at high elevations, including changing lamps in high-bay lighting fixtures, cleaning windows, washing walls and ceilings, servicing electrical distribution systems, and painting.
Maintenance and engineering managers make rent-or-buy decisions using either a risk-assessment or a cost-comparison approach. They look at the risk approach first and discard it if not applicable. Then they determine the most financially sound approach by cost comparison.
Whenever the decision involves health and safety or major business losses, the risk-assessment method is the best strategy. This situation usually calls for a purchase because the urgent nature of the situations means cost is secondary to protecting life and property.
Top managers establish company policy based on a risk-management assessment, and they allocate funds to buy the equipment even though the case does not justify the purchase from a purely financial standpoint. For example, a power outage in a hospital operating room is an unacceptable risk, so a clear case exists for purchasing an emergency generator with automatic switching to make power continuity seamless, should a power failure occur in the power company’s transmission and distribution system.
A cost comparison might be the deciding factor if other issues seem to be an even tradeoff. To determine the most economical option, managers can compare the cost to rent a specific equipment to the cost of purchasing.
What follows are steps managers can take in comparing the costs of purchasing and renting an aerial work platform.
Step 1: Get basic cost information:
• Scissor-lift manufacturer, model number, capacity, reach, drive type, etc.
• Purchase cost: $15,000
• Expected life: 5 years
• Expected use in hours per year: 1,500
• Monthly rentals per year: 8
• Monthly rental rate: $600
• Pickup/delivery per rental: $100.
Step 2: Determine cost to own:
• Depreciation: $10,000
• Capital cost: $4,000
• Overhead: $2,500
• Overhaul parts and labor: $5,900
• Subtotal $22,400
• Less resale value: $4,500
• Total cost to own: $17,900.
Step 3: Cost to operate:
• Labor: $12,000
• Parts: $3,000
• Lube: $800
• Tires: $500
• Total $16,300.
Step 4: Cost to rent:
• Rental fees: $24,000
• Pickup and delivery charges: $4,000
• Total to rent: $28,000.
Step 5: Compare costs to buy or rent:
• Total cost to own: $17,900
• Total cost to operate: $16,300
• Subtotal cost to buy: $34,200
• Total cost to rent: $28,000.
This hypothetical comparison shows the cost to rent is $6,200 less than the cost to purchase.
When purchasing equipment, it tends to be a general-purpose item, such as a crane or personnel lift crews use often, so managers can prorate the cost over many projects performed in a year. Another situation in which a purchase makes sense involves equipment that might not be used often but must be available instantly, such as a standby generator set to automatically switch on in a storm-prone area where power outages would be very costly or might damage other expensive equipment.
With the purchase option, managers don’t have to pay for pickup and return. The equipment is always available on no or little advance notice. The transaction is a single purchase, and managers can set up a depreciation schedule to write off the cost over the life of the item. If a trained operator and mechanic are available onsite and can inventory the required spare parts, they can perform any inspections and repairs onsite between uses.
Between uses, managers can trade the equipment with other departments or businesses in exchange for their equipment the department does not have.
A Third Option
Another purchase option for managers is quality used equipment, which certainly will make the purchase option more competitive with the rental option. Regardless of the final decision, managers need to be sure all safety equipment is included and operational and the equipment comes with the seller’s guarantee, all operating and maintenance manuals, accessories, and batteries, if applicable.
Managers also need to know whether their accounting departments have cost factors to help accurately assess rent-or-buy decisions. If the accounting department does not have specific policies and cost factors for rent-or-buy decisions, managers can obtain the data and factors necessary to do the calculations from equipment vendors.
Manufacturers also might be able to provide calculators in a spreadsheet managers can apply to specific equipment. Their listings include a description of the generic equipment name — forklift, backhoe, compressor, or scissor lift — as well as the manufacturer, model number, and other descriptive information, such as reach and drive type, including electric, gas, or diesel. Based on the equipment description, the calculator shows a comparison of the costs to rent or buy.
Whatever option a manager chooses, it pays to keep very good records about each experience, both for cost and operating purposes. This information is invaluable in making future decisions on whether to rent or buy equipment and how to do both efficiently and safely.
Renting? Buying? Here’s What To Ask
Managers need to weigh the answers to a series of questions before deciding to rent or buy a piece of equipment. Among the questions:
•How well did past rent-or-buy decisions work? Were they profitable?
•Were safety issues covered well? Did manuals include comprehensive safety instructions?
•Can the dealer provide references and demonstrate the equipment at the job site?
•Is ongoing support part of the deal? Will the supplier provide training for operators? Are replacement units available if the equipment fails? How long will it take the supplier to replace the failed unit?
•Should I use a distributor of several equipment lines or deal directly with the single-line supplier?
•What are the initial and ongoing costs?
•What if crews’ use of the equipment ends early? What are the buyout options and costs? What exit strategies are available?
•What if the equipment does not fit crews’ needs? Are exchanges or terminations available at a reasonable cost?
•What agreements or contracts are part of the decision? Has the manager read and understood all the terms before signing?
•Can the department share the equipment with another department to make it a more efficient use of funds?
•Would used equipment offer a more efficient solution?
— Thomas A. Westerkamp