Image
A new financial day has dawned: Procurement managers are considering more rental and lease agreements, and buying used equipment, rather than defaulting to purchasing. The Equipment Leasing and Finance Association recently reported a $6.8 billion increase in new business volume — up 10% since March 2011. Photo: United Rentals

In a time when most public works departments are forced to do more with less — even “make bricks without straw” — many procurement managers are beginning to rethink their former attitudes about renting versus buying vehicles and equipment. From chillers and aerial lifts to specialized trench-shoring equipment and generators, public works departments are now forced to rely on rental equipment to meet unplanned or infrequent needs.

But what happens when rental needs become more frequent and require more planning? That's when the inevitable “rent, lease, or buy” discussion must be had.

Prior to the current economic downturn, presenting the value of renting to procurement officials proved as fruitful as attempting to convince my daughter that there are better things to watch on TV than SpongeBob SquarePants. It was just a way of life to purchase the equipment they needed while their coffers were full.

Now procurement officials are calling me more than ever to satisfy their rental requirements, instead of going through the expensive and time-consuming request for proposal process they once did. There has been an increased interest in purchasing used equipment as well. That said, anyone who's looking to rent, lease, or buy equipment must ask themselves a few crucial questions.

Question 1: How often will we use this piece of equipment?

In the construction/maintenance industry, a good rule of thumb has been that if you don't use a piece of equipment more than 60% to 70% of the time, you should consider renting. If your operation rate exceeds that threshold, consider purchasing or leasing.

However, leasing or renting should always be considered as a forerunner to buying since these options provide an opportunity to test equipment without the burden of associated larger cost or long-term investment.

A word of caution: it's typical for a leasing agreement to contain a penalty clause if you later discover that you will actually need the piece of equipment for less time than the lease states and you want to turn it back in.

Rental agreements, on the other hand, allow you to call the piece of equipment “off rent” whenever you like and just pay for the period during which it was used.

Question 2: How long will we need the equipment?

This question is related to payback. If crews regularly require the equipment longer than the anticipated rental periods, the case to purchase probably is strong. In essence, if renting the piece of equipment will cost as much or more than owning it, then it makes more sense to buy it, get the benefit, and save the incremental cost.

Question 3: How versatile is the equipment?

Versatility can significantly affect the overall importance of a piece of equipment if managers can use it on various types of jobs. This will increase the frequency of use and justify the purchase of the unit. If either frequency of use or versatility is low, then the case to rent will be stronger.

One exception is equipment that is not used often but is needed in an unforeseen emergency or disaster response scenario, such as backup generators for power outages or portable coolers/heaters during extreme temperatures. While you might not be able to justify these purchases using a straight cost comparison, consider the potential for other losses such as health risk and safety or lost-opportunity costs that would occur if the equipment was not available.

The bottom line

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 such as changing lamps in high-bay lighting fixtures, cleaning windows, washing walls and ceilings, servicing electrical distribution systems, and painting.

Renting equipment is always the best option when facing an infrequent short-term need — especially if your department has experienced a cut in funding or simply can no longer afford to buy equipment as it once did.

Due to the inflexibility of leasing and potential penalties for finishing a job sooner than expected, this option is no longer as financially sound as it once was.

— James Hackley (703-789-2823 or jhackley@ur.com) is senior manager for state and local government sales at United Rentals. He helps public works departments take advantage of the National Joint Powers Alliance cooperative purchasing agreement to expedite equipment rental or purchase requirements at significant cost savings.