Construction firms, big and small, often fall into a rut involving the decision to either buy or rent their heavy machines. From a general perspective, it would seem that buying heavy machines which are expensive would be a good option as it adds to the asset level of the company. However from a financial perspective, the value of assets are not contrasted against their value, but the value of how much revenue these assets generate over a period of time (usually a period of a year).
The decision made on this could mean the difference between having sufficient cash flow and working capital and stressing these financial elements to the point where the balance sheet starts to look unhealthy. The calculation that revolve around the return of assets which is dividing total fixed assets against revenue generated gives investors the value of ROA (the returns on each dollar of assets owned). Hence, these machines that are costly could result in the company looking inefficient with regards to managing their assets.
The answer to this dilemma however is not that easy to answer as it depends on a situational analysis. For example if a project is going to take an entire year to complete and the use of a standard excavator is required on almost a daily basis, then it would be certainly more viable to just buy the excavator. On the other hand if the project is going to take about a month and the use of an excavator is only required for 4 days in that duration, then obtaining an excavator on hire would be the best way to go about it.
In general smaller construction jobs do not require the use of an excavator daily; most jobs such as landscaping or home improvement projects for example use excavators sparingly, usually in the beginning and towards the completion. It is important to breakdown costs when renting heavy machinery between buying them and renting excavators. Renting is always cheaper in the short term compared to buying. If a project is scheduled to be started and completed in 2 weeks and a mini excavator is required on the first two days for digging, demolishing and trenching and the last day for clearing, the total cost for renting a mini excavator in Melbourne would only come up to no more than 700 AUD, this compared to buying a mini excavator that may cost up to 15,000 AUD.
Such machines make a dent in a company’s budget, which can actually impede the progress of projects due to shortage of finance. Securing excavators for hire does not require big capital, which allows the company to direct the money to other needs. Other factors that need to be taken into consideration is the fact that heavy equipment require a lot of maintenance and storage facility not to mention repairs, therefore by renting them, the company would be saving a huge sum of money in maintenance and repair costs.
The cost of maintenance, repairs and replacements (and logistics such as moving the excavators from one place to another) is all taken care of by the rental companies. This also saves time, on the other hand owning such machines, will also require the company to purchase additional items and vehicles such as hydraulic tools (extended tools) and trucks to move the machine.
It is quite evident that unless a project is long term and the frequency of using the excavator for the project is high, it is not worth buying heavy equipment such as excavators. Rentals are always, cheaper, more strategic and in plain words – it is the most sensible thing to do.
