Make Sure You Can Get Your Money's Worth

I’m sitting here perusing a pile of economic and construction industry surveys and stats trying to find that magic bullet that will put more dollars in your pocket. As you know, that’s tough to do these days.

As I was thumbing through, I noticed some interesting facts that don’t seem to be helping the situation:

•Equipment prices are increasing because of commodity prices.

•Further price increases are being driven by regulation, including Tier 4 emissions requirements.

•Double-digit or high single-digit price increases seem to be the norm for the short term.

•The amount of construction spending per unit of construction equipment sold went from $13 million in 2009 to about $5.5 million estimated for 2013.

Add it all up and you have a compelling story as to why equipment rental is becoming the primary source of equipment acquisition in the construction industry.

Properly Analyze Your Situation

One of the publications I reviewed was the Wells Fargo 2013 Construction Industry Forecast, which includes survey questions for both equipment dealers and contractors.

Comparing the last three years, it appears that 47% of contractors want improved equipment pricing (up from 41% in 2010) and 15% want additional finance options (14% in 2010). On the construction equipment dealer side, 35% of those surveyed want improved pricing (up from 30% in 2010), 27% want improved inventory availability and 12% want better finance options. Very similar results for both dealers and contractors.

Unfortunately, on the pricing side, the cost to own is going to remain an issue until commodity prices recede and Tier 4 costs are potentially recovered. With construction backlogs holding steady, and the amount of work generated per units sold lower than it was in 1992, the decision to buy a unit has to be backed up with high utilization estimates and the ability to earn a return through equipment charges to the job.

We all know there are regions of the country where the workload is so strong, you know you will have a positive experience buying new equipment, even given the higher total cost to own and operate. For those of us who have to think twice about the cash flow associated with an equipment purchase, the experience may be positive or negative depending on whether the business has an extended backlog, and what is being replaced.

If you are adding to the fleet rather than replacing a unit, then you better be able to properly analyze your situation to avoid negative cash flow implications should utilization not materialize as planned. When I say properly analyze the situation, I mean: