Rent Vs. Own
Fewer and fewer contractors are buying and owning their construction equipment.
By Tim Hyer
When people hear the word “construction,” their minds often become filled with images of equipment – excavators, backhoes and forklifts. Heavy equipment and contractors go hand-in-hand since it takes the right tools to get the job done. Some contractors even name their trade based on the types of equipment they use – excavation contractors, demolition contractors and asphalt paving contractors, for example.
Obviously, equipment is a big deal to construction professionals – which is why most of them choose to purchase and own the equipment they need most. Until recently, owning equipment was the only way to get access to equipment. Which means only contractors who owned equipment could actually be available for hire.
Twenty-five years ago, contractors owned more than 95 percent of equipment in North America. There were very few alternatives back then – something that has changed significantly over the past two decades. So what changed? A novel concept was introduced to this industry: rental. Renting equipment wasn’t very popular until the early 1990s, but has since skyrocketed onto the scene. Renting offers immense flexibility from both a capital standpoint as well as the types of projects contractors are able to bid on. So much so that, as of today, more than half the equipment used by contractors is rented versus owned.
To the surprise of many economists, the number of consumers who are willing to rent products that they previously would only consider owning has jumped dramatically in the past several years. In fact, there has been a rise in a number of services that allow users to rent cars, lawn equipment, furniture and even pets. This increase in demand for rental equipment also has affected the construction industry.
From 2013 to 2014, the construction/industrial rental penetration index in America increased by 100 basis points. This data from the American Rental Association Rental Penetration Index shows that there is an increasing demand for industrial and construction equipment that can be met by the rental market.
The year 2014 was the fifth straight year of growth in this index following the dramatic drop during the Recession in 2008 and 2009. As the construction industry continues to improve in recent years, it seems as if many contractors are more interested in renting their construction equipment than they are in buying it. Many industry analysts believe that there are several reasons for this shift:
1. Lack of credit – Typically, the purchase of large construction equipment has to be financed. With credit markets tightening dramatically in recent years (especially in the construction industry), many contractors do not have the means to purchase their equipment. A signed contract, however, is the collateral that many banks feel comfortable with to loan the money for rental equipment. Many contractors are using rental machinery because it is easy to get a loan for the total cost of a job than it is to get a loan for an equipment purchase.
2. Increased flexibility – Renting equipment allows small contractors to only use the equipment when they need it for a job. Once the work is completed, the equipment does not have to maintained or stored by the contractor. That freedom allows the contractor to focus on his or her core industry and/or work, instead of being sidetracked with other concerns. Construction managers also like the fact that renting their equipment allows them to change pieces if the need arises. Larger or smaller machines can be swapped out with a rental equipment provider much faster than they can be sold and purchased.
3. Cost control – The purchase of a piece of large equipment means with a large upfront capital investment, or a recurring business expense that must be met every month. When there’s no work that needs that particular piece of equipment, the costs of that machinery still have to be met. With a rental, however, the costs of the equipment are directly tied to the job that it is being used for. It’s much easier to itemize the cost to rent a backhoe for a week than to purchase one for a job and then try to find more work that will justify the cost.
4. Controlled set-up and teardown – With many rental equipment providers, the responsibility of getting the machinery to and from the job site falls on the rental company. The contractor simply has to arrive at the job site and start work. When managing a large or complicated project, that essentially amounts to subcontracting the set-up and teardown work. That can save a lot of time and money for construction companies that don’t want to make the large investment in transportation equipment.
Since 2003, the rental penetration of construction equipment has increased from 42 percent to 54 percent. This trend will likely continue and contractors will increasingly demand rental equipment as the market becomes more competitive and it’s necessary for contractors to keep their costs in check as much as possible. Because renting construction equipment allows contractors to control their costs on a project-to-project basis while eliminating the overhead costs of caring for and storing equipment, it’s very possible that this trend towards contractors choosing to rent their equipment will continue to rise. Renting equipment allows contractors to be more nimble anticipate their costs better, and better adjust to changing market conditions.
In a world where vacation homes are rented on Airbnb, media is accessed via streaming Netflix, and transportation is on-demand through Uber, it’s clear that people are more often electing to pay for access instead of ownership. What we’ve seen over the past 20 years in construction, the same holds true for heavy equipment. So the next time you see an excavator, a backhoe or a forklift, don’t assume it belongs to a construction company. There’s a better than 50 percent chance that the machine is owned by a rental company that exists for the sole purpose of delivering, servicing and maintaining heavy equipment so that contractors don’t have to.
Tim Hyer is the founder of Getable in San Francisco, which connects equipment rental companies with construction firms in need of products, from hand tools to bulldozers to giant cranes.