Carl Bowker, Houston's assistant director of public works and engineering, had a nightmare on his hands.
He'd rented a backhoe that was being hauled to a worksite. Another driver struck the trailer, which flipped and dumped the backhoe, damaging its dipper stick and tearing the bucket off. The offending driver was an illegal immigrant, had no insurance and no driver's license, and soon departed to his country of origin.
“I had to explain to our lawyers why this is so expensive,” Bowker says. “The vendor had an asset with earning power, and at first wanted to charge us for all the repairs—right down to the decals. In the end, they billed us for the residual value of the machine before it was damaged, and we paid it.”
Liability for damages is just one reason fleet managers recommend buying over leasing. You should only lease when the capital to replace aging machines is scarce. Here are four more reasons to own:
- At the end of the lease, you may owe money if the market value of the equipment is less than the residual value you agreed to. In other words, if the equipment depreciates faster than expected in the terms of the lease, you must make up the difference between the higher residual value and the lower market price—and that can be significant.
- Unless you do a lease-purchase option, you lose the ability to extend the life of a piece of equipment. Well-maintained equipment you own can last considerably longer—and cost less—than leased equipment.
- For most city governments, the cost of capital is less than what leasing companies charge.
- You may pay more for maintenance than it would cost to use your own shop and technicians. Some lease vendors require you to let them maintain the equipment, and they use that as a profit center.
For example, a typical open-ended lease might go either way, says John Brewington, president of Brewington & Co., a Mount Airy, N.C., fleet consultant.
Suppose you lease a backhoe for 36 months at $900 a month and agree upon a residual value of $30,000. At the end of the lease you turn the backhoe in to the leasing company, but it only sells for $24,000. You must pay the $6000 difference. But if the backhoe sells for $30,000, you break even and did well.
Over the past decade, manufacturers of virtually all equipment and vehicles have made great strides in improving longevity of their product. “They're making equipment better, stronger, and more efficient,” says Bill DeRousse, fleet superintendent for Everett, Wash. “And as fleet managers, we must capitalize on those efficiencies.”
Everett has seven single-axle dump trucks in one class of equipment. In 2001, the average life of that class was 6.55 years. By 2005, the average age of those trucks had risen to 8.5 years. Maintenance costs per mile ranged from 69 cents in 2001, up to 75 cents in 2004, and back down to 41 cents in 2005. So the cost of maintaining the trucks actually dropped as their average age rose.
DeRousse says that the 75-cent spike probably resulted from an accident or body work. Such cost spikes prompt him to run a report on individual machines to hunt down the cause.
The city uses such cost reports to determine whether equipment needs to be replaced. If an employee asks to replace a dump truck—and its maintenance cost was under 41 cents per mile—DeRousse would probably deny the request.