If you are like most construction company owners, the addition of new or used equipment begins with a telephone call to the usual suppliers. Whenever there is a plan to buy equipment, the process begins with a request for price quotes. The quotes arrive and you shove on your negotiation hard hat and prepare for the battle of wills. Who wins? Usually the victor is the one with the most patience and perseverance.
Why waste time writing out equipment specs and financing options for the next equipment addition? Everyone knows that writing a Request for Proposal ("RFP") is something the big contractors do when spending $500,000 or more. Why take the time to write a complicated RFP when a phone call will get you what you want? The price is all that you don't know.
While owners might begin the buying process full of optimism, they often find themselves stuck in the beginning phases of negotiations far too long and this can negatively affect you and your customers. A new backhoe or excavator to replace the undependable unit will help finish the work faster and make you more money. Using the RFP process can save your operation money and time.
Whether Large or Small, Big Money can be Saved with the RFP
Big and small contractors, accounting and law firms, insurance agencies, and most county, state and local governments use the RFP method for acquiring goods and services. Using a modified RFP or Term Sheet is sufficient when buying equipment less than $100,000.
Kevin Carlisle, owner of Perfect Image Inc. a small commercial printer located in Charlotte, N.C. used an RFP when purchasing a new digital copier for his business. Carlisle used the services of a lease review expert who helped him draft the RFP. When he began to purchase the new equipment, he had one proposal from the equipment supplier's leasing resource. He decided to invite four additional lease companies to present financing proposals in response to his RFP Term Sheet. He was surprised to find that the best pricing came from his bank's leasing company. He saved $7,200 (14% of his total investment).
Shook Hardy and Bacon LLP, a large law firm in Kansas City used the RFP process when they were preparing to move into their new corporate headquarters. They chose to lease telephones, furniture, computers and video conferencing equipment. Dale Chaffin the Chief Operating Office of Shook, Hardy and Bacon LLP (now retired) knew what managers and business owners everywhere know; leasing equipment makes good business sense. According to the U.S. Department of Commerce, 80% of U.S businesses, large and small, lease rather than buy when adding or upgrading equipment and needed assets.
Chaffin, like Kevin Carlisle of Perfect Image, agreed that the best leasing deal does not always come from the equipment dealer. Thirteen leasing companies and financial institutions responded to the RFP. After a full review of all proposals and lease contracts, four leasing companies were invited to continue the process. The firm conducted negotiations with all four leasing companies simultaneously. During the negotiations, one leasing company resisted making changes that Chaffin required. Because he had three other leasing companies to meet his terms, Chaffin could shift lease business at any time before the contract signing.
Using the RFP process leveled the playing field. It was easier for the Shook Hardy and Bacon RFP team to spot the differences in various financial solutions and the equipment benefits. Dealer presentations changed from glitzy sales sizzle into firm offers and contracts. Once the selling price and lease terms are on paper in a proposal, negotiation can begin.
The result of following the process shaved thousands - actually more than a million off the total lease cost for Shook, Hardy and Bacon.
Guides to a Great RFP that Save Time and Money
- Recruit The Team
- Select the RFP team from staff involved in the financing, maintenance and operation of the equipment. RFP Teams often include the superintendent, lead equipment operator, the company finance officer, and the maintenance department manager.
- Consider hiring an RFP specialist experienced in drafting and analyzing the leasing portion of the RFP. They can guide you through the confusing double-talk of leasing and help save time and money. They allow you to keep focused on your day-to-day operation.
- If leasing is an attractive option, discuss the tax benefits and implications of leasing with your accountant.
- If the dollar amount of the investment is large or the leasing companies want a personal guarantee to do the financing, include your attorney in the process.
- Budgets and timelines
- Don't get carried away with all the bells and whistles that you read about in equipment trade publications. The needs of the business are not the same as the wants of equipment operators.
- Your budget is your business. Don't let the dealer know exactly how much you plan to spend.
- Include your desired financing alternatives in the RFP. Suppliers and manufacturers may have interesting financing options including special leasing plans or low interest finance plans. Always remember: there is no such thing as a Free Lunch or Interest Free money. Free is never really "Free".
- Always ask for the total equipment cash purchase price. Never focus exclusively on the monthly payment. Remember to step back and look at the total cost of the lease over the life of the contract.
- Find dealers and leasing companies you can trust and stay in contact with them.
- Establish timelines and require all the participants to adhere to them.
- What goes in - what stays out?
- Company History: Include company background such as number of employees and a general description of the type of construction you specialize in.
- Equipment: List the equipment specifications that are essential and options you might consider. Prioritize the equipment features as either mandatory or optional.
- Seasonal Payments: If you have seasonal fluctuations in your cash flow, consider requesting structured lease payments: higher payments when cash flow is strong and lower payments in the off season. Some traditional banks and financial institutions are not big on flexible payment plans. Leasing companies understand structured payments.
- Trade-In: Will there be trade-in equipment available?
- Maintenance: Who will maintain the equipment? Will the equipment dealer supply maintenance or will you need an additional maintenance company?
- Lease Quotes: Always get lease quotes from at least three independent leasing sources in addition to the equipment vendor's usual leasing sources. Independent leasing companies have no affiliation to the equipment supplier. Their only business is financing and leasing.
- Bank Quote: Don't forget to contact your banker. Many banks have leasing divisions that provide excellent financing options and they already have a history with your company.
- Require all bidders to submit their proposals with copies of all documentation required to do the deal. If leasing is involved, that means copies of all standard lease documents, proof of insurance requirements, guarantees and down payment requirements. The lease contracts can have added "gotchas" in them that increase the total cost of financing.
- The Final Steps
- Analysis: The lowest selling price or lowest lease payment is not always the BEST deal.
- Read Terms and Conditions: Examine all maintenance and service contracts from each equipment distributor. Who will maintain the equipment according to the manufacturer's recommendations? It is extremely important that someone commit to delivering timely preventative maintenance to avoid expensive emergency service calls.
- Discounts: Check and compare prices and terms with contractors in your area. Calls used equipment dealers for the value of your trade-in before the RFP process begins or use online resources such as www.rbauction.com, www.machinerytrader.com and www.rockanddirt.com to find the market value of your trade-in.
- Lease Quotes: If you consider leasing, get quotes that include a fair market value purchase option lease, fixed purchase option lease and a $1.00 purchase lease. The lease term should be one that works not only because the monthly payment fits company cash flow but because the length of the lease parallels the time the equipment will be of value in your company plan.
- The Clock is Ticking
- Don't let the process drag on forever. Limit analysis time.
- Timing of dealer discounts should work in the contractors favor. Sales teams face production quotas at various times of the year. Co-ordinate the RFP process with their selling cycle and receive maximum discounts.
- The decision is taking too long if you started with brown hair and are now bald or very gray.
- Know When to Walk Away
- Always be prepared to walk from the deal. Be ready to tell the sales rep "We do not have to do this deal now. We can wait until next month, quarter or even next year.
- Negotiate the price of the equipment first. The lease negotiation comes second. The bigger the discounts on the selling price, the lower the monthly payment will be.
- Use the Kenny Rogers Technique: Know when to hold them: know when to fold them. And Know When To Walk Away.
The RFP process saves many business owners time and money. Analyze your savings and see if you want to try in again the next time you are in the market for new equipment.
Mary A. Redmond, a 26 year veteran of the equipment leasing industry, founded Independent Lease Review, Inc. in 2002. Her company identifies and eliminates lease gotchas for large and small companies, manufacturers and distributors saving customers over $4.5 million. She speaks and writes nationally on leasing and contract negotiation. Her book The LeaseSpeak Dictionary: Understand the Terms that Save YOU Money will be released in Spring 2008.