Leasing is a long-term, fixed financial commitment. “With rental, you can walk in and say I’m going to keep it two months. If your job gets cancelled in two weeks, you can turn it in and there’s virtually no penalty,” Michaels comments. But if you sign a lease agreement, you’re on the hook for the payments for the duration of the lease, whether you have the work to cover the cost or not.
Comparing costs between a rental, purchase or lease can be a challenge.
“Rental rates can and do vary largely by market, so an accurate comparison is difficult,” says Strand. He cites the following scenario, noting that the rates shown are for example purposes only.
Say you rent a 3.5-ton excavator at a rental rate of $250 a day or $2,250 per month. Now compare this to the payment rates for a loan or a lease, based on a sales price of $42,000 at 0% for 36 months. The payment would be $1,166.67 per month. For a lease, the payment would be approximately $779 per month.
However, as Strand points out, “With a purchased or leased piece of equipment, you have an annual cost tied to it. For example, your annual payments on the loan would be roughly $14,000 or $9,348 with the lease. This cost is incurred if you use the machine or not. With a rental piece of equipment, you can return it any time you are not using the equipment.”
Owning and operating costs must also be factored into your calculations. Unfortunately, not all contractors understand the true cost of owning equipment. “Ownership cost is the realistic depreciation of the unit over the time you plan to keep it,” Bartecki explains. “The residual should be based on the expected wholesale value at the end of the period, taking into account the number of hours you expect to put on the machine.”
For easy figuring, he uses a $100,000 piece of equipment as an example. “A $100,000 machine used for 2,000 hours a year for five years, with a 25% residual (of cost), generates $75,000 of depreciation or $7.50 per hour,” he points out. “Interest comes out to approximately $3.70. So if you use the unit for 2,000 hours annually, it is costing you $11.20 an hour. Use it less than the 2,000 hours and the hourly rate increases.
“At 1,000 hours, the $100,000 unit will cost about the same as a rental,” he says. “And if that’s the case, I would rather rent because it provides a lot more flexibility.”
Next, calculate the cost to operate the machine. “These costs include normal wear and tear, inspections, preventive maintenance,” says Bartecki. “Obviously, the older the unit gets, the higher the costs become. It would not be unusual for the operating costs to double the hourly ownership cost over the five-year period.”
This would equate to an operating cost of $22 an hour, with a combined owning and operating cost of $33.20 per hour. Add in a couple dollars for administrative costs and the overall cost would be $35.20 per hour.
Now, let’s look at how this compares to renting the $100,000 machine. Bartecki estimates rental companies in today’s market are basing monthly rental rates on about 3.5% to 4.0% of the acquisition cost, or $3,500 to $4,000 per month in his example. The weekly rate is based on roughly a third of the monthly rate, and the daily rate on a third of the weekly rate, or $4,000 monthly, $1,350 weekly and $475 daily.
“To compare, if you rent a unit for the full year, it will cost you $52,000 (or a negotiated rate for a full-year rental) compared to 2,000 hours times $35.20 per hour, or $70,400, to own and operate,” Bartecki indicates. “If you’re at the point where it costs more to own it than to rent it, you either have to buy a new one or you have to rent one.
“Obviously, a new unit will experience lower operating costs that reduce the annual cost to somewhere close to the rental number,” he comments. “Lower time utilization also lowers your total cost to own and operate. Cost to own remains the same, but the hourly operating costs are lower only if you hit that 60% to 80% time utilization.” At 75% time utilization, the total cost should be similar to rental.
“Even if the cost to rent is similar to the cost to own and operate, you have to consider the other costs of ownership,” says Bartecki, “namely the balance sheet effect and the flexibility rental provides to expand your business or go into new lines of work. Rental also frees up your borrowing and bonding capability.”