Rent, Buy, Lease

1. THE RENT, LEASE OR BUY DECISION

2. BUY/ PURCHASE OR OWN
• A general rule-of-thumb for fleets that utilize equipment over a longer life (7 plus years) is
to purchase equipment rather than exercise lease or rental alternatives.
• According to Cudworth the following features may make purchasing an attractive
alternative:
1. Use and Possession: The owner has absolute control of the use and disposition of the equipment.
2. Flexibility: The owner can sell the equipment, trade it or use it until it is not economical to repair without having to
respond to any creditor. Ownership gives the user complete flexibility regarding servicing, maintaining and
insuring the equipment.
3. Price: The buyer with cash is usually able to get better discounts due to a stronger financial position in the deal.
4. Tax benefits: The owner can take advantage of depreciation and interest tax benefits associated with equipment
ownership.
5. Pride of ownership: Ownership can lead to better care and maintenance.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

3. BUY/ PURCHASE OR OWN
• The purchase option for equipment acquisition generally becomes more economically
attractive if there is a high utilization rate throughout the useful life of the equipment.
• This point is extremely important, because not being able to use the machine enough to pay
for its cost is the greatest risk and disadvantage of purchasing.
• Ownership is obtained when the equipment is purchased whether by financing or by cash.
• The overall responsibilities of equipment such as all maintenance, transportation are
included in ownership.
• Financing is the best method for owning the equipment instead of investing cash of high
capital.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

4. BUY/ PURCHASE OR OWN
• In today’s marketplace there are four primary methods used to finance the purchase of
construction equipment:
• conventional financing purchase,
• the financial lease agreement,
• The tax lease agreement and
• the rental purchase (rent-to-own) agreement
• Outright Cash Purchase - Putting tax and other considerations aside, an outright cash
purchase with funds provided from working capital is the lowest cost method of acquiring
needed equipment when funds are available. Service fees, finance charges and interest
expense are eliminated for the purchaser.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

5. BUY/ PURCHASE OR OWN
• In today’s marketplace there are four primary methods used to finance the purchase of
construction equipment:
1. conventional financing purchase,
2. the financial lease agreement,
3. The tax lease agreement and
4. the rental purchase (rent-to-own) agreement
• Outright Cash Purchase - Putting tax and other considerations aside, an outright cash
purchase with funds provided from working capital is the lowest cost method of acquiring
needed equipment when funds are available. Service fees, finance charges and interest
expense are eliminated for the purchaser.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

6. BUY/ PURCHASE OR OWN
• Conventional Financing Purchase - Many contractors are partial to the idea of owning their
construction equipment and building equity in it over time.
• Most times financial demands make outright cash purchase of equipment impossible or impractical.
• Conventional purchase financing provides the contractor with the capital required to make the
purchase through loan arrangements secured by accounts receivable, own equity in the equipment and
use the equipment to collateralize the loan.
• Many times trade ins or down payments are included in financial agreement.
• Installment sales contracts allow the contractor to purchase the equipment and pay for it over a period
of time.
• Installment loans offer many of the same general advantages offered by other financing instruments,
primarily in terms of cash flow advantages and lower payments than with outright purchase.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

7. BUY/ PURCHASE OR OWN
• Rent to Own (Rental Purchase) - Rent-to-own for one to two year projects with high
equipment utilization is a good approach if the user is uncertain about need for the equipment
after the completion of the project.
• The rent-to-own option can be an attractive alternative to an outright purchase for several
reasons.
• Rent-to-own gives the contractor the opportunity to build a down payment via the application
of rental payments toward the purchase price of the equipment.
• This allows the equipment to begin generating cash towards its purchase.
• It gives the contractor a trial period to see how the equipment works and a chance to verify its
need for future work.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

8. LEASE
• Over the past several years there has been an increasing trend toward leasing as a way to finance
construction equipment.
• It is usually easier to gain financial approval for equipment under a lease program than through
conventional purchase financing.
• In its simplest form, an equipment lease is simply a rental agreement. Rent is paid while the
equipment is being used. Once the agreement is over, the equipment is returned to the owner.
• The most significant factor that affects the decision of renting or leasing is the duration of time
the equipment will be required.
• Leasing is often considered more favorable when the equipment is needed for more than six
months.
• Most leases run from eighteen to twenty-four months.
• For large expensive equipment, leases can run as long as eighty-four months.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

9. LEASE
• According to Fetridge and Mac Manamy the following features may make leasing an attractive
financing solution for the lessee:
1. Lower rates and lessee cannot claim tax benefits. When the lessee cannot take advantage of tax benefits associated with
equipment ownership, such as depreciation and interest, the leasing is more attractive. The lessor can purchase the
equipment, claim the tax benefits and lease the equipment to the lessee. The tax benefits are passed to the lessee in the
form of lower lease rates.
2. Cash flow improvement. Compared with a loan, a lease typically gives the lessee a more favorable cash flow, especially
during the first years of use.
3. Carry on off-balance sheet for financial accounting purposes. The lessor assumes title to the equipment with interest
expense capitalized into the lease when the equipment is delivered and accepted by the lessee.
4. Impact on lessee’s income. During the early years of a properly structured lease usually there is less effect on income
depreciation and interest payments related to the purchase of the equipment.
5. Fixed-rate lease payments. The lessee can know the exact amount of future payments and avoid the risks inherent in
fluctuations in the cost of funds. By knowing this information, the lessee can predict future financing equipment costs and
cash needs more accurately.
6. Faster amortization of the equipment. The lessee under an operating lease may be able to amortize the cost of the
equipment faster through tax-deductible rentals than through depreciation and after tax cash flow.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

10. 7. Hedge against inflation. Future lease rentals are paid in inflated currency. The lessor (bank) can borrow long to minimize the
effect of inflation and pass on this protection to the lessee in the form of long-term level lease payments.
8. Payments coordinated with lessee’s cash flow. Payment schedules can be coordinated with earnings generated from the use of
the equipment by the lessee. This flexibility may not be available with other financing methods.
9. Long-term financial availability. Leases can be structured for most of the useful life of the equipment. The lease contract can
exceed the period of time normally available on a term loan. Lessors can offer lease terms due to faster return of capital from
cash flow generated by tax benefits.
10. Convenience. For leasing contracts below $5 million, documentation may be simpler and more flexible than other sources of
financing.
11. Full financing. Leasing can provide the lessee 100% financing. The amount can include shipping and installations charges. A
typical equipment loan may require an initial down payment.
12. Earnings from the retained capital. A lease allows retentions of lessee’s capital that can be used elsewhere in the lessee’s
business.
13. Obsolescence. Leasing avoids equipment obsolescence for the lessee. If equipment becomes obsolete faster than its
depreciation life, leasing may be more attractive.
14. Uncertain residual value. The more risk associated with the residual value of the equipment, the more attractive leasing
becomes
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

11. LEASE
• The reputation and reliability of the lessor and terms of the lease agreement should be verified prior
to entrance into a lease.
• There are many types of leases and conditions can vary based on the market or the lessor.
• In some instances the total sum of all leasing rates can reach a total amount greater than the cost of
the equipment new.
• The lease is the long term contract with an option to purchase or return the equipment at the final
stage of the agreement.
• In general, the lease includes preventive maintenance in some forms breakdown return coverage.
• Leasing is done in long term contract equipment such as Tower cranes.
• It is short time when compared with purchasing and long term compared to renting.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

12. CONSTRUCTION EQUIPMENT ACQUISITION METHODS
RENT
• Renting is gaining popularity as an option for contractors when it comes to acquiring equipment.
• In CIT's 2000 Construction Industry Forecast, sixty percent of respondents cited "a limited need for
the equipment" as the reason for renting.
• The CIT’s 2004 Construction Industry Forecast highlighted that as equipment fleets grow older, more
contractors are finding it necessary to use rental equipment to back up the equipment they own.
• Twenty percent of non-builders said covering equipment that breaks down is one of their top reasons
for renting.
• The most obvious disadvantage of straight-out equipment rental is that there is no option for accruing
equity.
• Equipment rental has no impact on the balance sheet. It does, however, impact cash out of pocket.
• Rental payments reduce the company’s earnings as an operating expense and since the equipment is
not owned, there is no impact on depreciation.

13. CONSTRUCTION EQUIPMENT ACQUISITION METHODS
RENT
• Dealer equipment rental programs offer many of the same advantages or benefits of lease programs.
• The contract period for rental provides complete flexibility, with contract periods as brief as a day or
week or as long as a month or year.
• One of the greatest risks any business can incur is that of having a large portion of its capital tied up in
non-productive assets.
• Construction equipment sitting idle in a yard or warehouse still demands outlays for insurance and
maintenance and depreciation may continue just about as fast as if the equipment were working.
• Most contractors rent approximately 25% of their total equipment requirements.
• This follows the 80/20 balance for equipment specification and purchase.
• A contractor should purchase or lease equipment that is appropriate for 80% of the work performed
and rent the other 20 percent.

14. CONSTRUCTION EQUIPMENT ACQUISITION METHODS
RENT
• Most rental companies calculate their rates on a monthly basis.
• Weekly rates usually run about three times daily rates.
• Similarly, monthly rates run about three times weekly rates.
• On an hourly basis, renting is typically the most expensive of the three acquisition solutions.
• However, it is ideal for work activities not performed on a regular basis, because it minimizes idle
time for seldom-used equipment.
• Renting is the best solution when equipment will be utilized for a short duration.

15. RENT
• The American Rental Association suggests the following advantages for renting equipment:
1. Minimum equipment for the job. Equipment ownership becomes particularly expensive when the equipment is idle and
not utilized. When ownership of basic equipment is combined with rental as needed, idle time is minimized.
2. Right equipment for the job. Ownership encourages inefficiency through use of wrong size or type of equipment for a
given job. Renting can minimize this hidden cost.
3. Warehousing or storage. Warehousing facilities are seldom needed for rental equipment thus reducing overhead.
4. Breakdowns. The renter will typically replace equipment if there is a breakdown, thus minimizing down time due to
repairs.
5. Maintenance. Full maintenance is covered on a day-to-day basis. The user needs no repair shop, no spare parts supply, no
mechanics and no maintenance records.
6. Equipment obsolescence. The renter may provide the latest types and models of equipment that are faster and more
productive than older models.
7. Disposal cost. Selling used and obsolete equipment is not required.
8. Cost control. Cost is easier to monitor and control with rented equipment. Knowing the true cost of owned
equipment is often difficult to determine.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

16. 9. Inventory control. Contractors have less inventory loss when equipment is rented. The presence of continuous billing
on any rented item tends to establish accountability for that item.
10. Taxes and licenses. Personal property taxes and license costs are eliminated on rented equipment. Leasing cost is 100%
deductible.
11. Conservation of capital. The lessees’ capital is available for other uses or investment. Contractors should analyze cash
requirements and consider renting equipment as a method of conserving working capital.
12. Increase in borrowing capacity. Rented equipment does not result in a liability on the balance sheet. Dept ratios will
improve making the lessee firm seem stronger financially.
13. Cost estimating and bid preparation. Renting can increase estimating accuracy because all repair and downtime costs
become more predictable.
14. Short term jobs. Renting is the most economical solution for short term and specialty jobs.
15. Transportation costs. Renting is the best way to avoid transporting equipment from project to project, thus reducing
transportation costs. This is especially beneficial when dealing with heavy equipment requiring special hauling
equipment.
16. Equipment testing. Allows use of equipment in the field without purchase, leading to a better understanding of
equipment capabilities and suitability for the work.
CONSTRUCTION EQUIPMENT ACQUISITION METHODS

17. CONSTRUCTION EQUIPMENT ACQUISITION METHODS
RENT
• The greatest disadvantage of renting is the resultant higher unit cost to perform the work.
• Typically, the hourly rental rate is more than the lease or ownership rate.
• Higher unit cost will typically result in a less competitive estimate when bidding against
someone who owns their equipment
• There are plenty of rental companies are available in the market now a days with different
capacities, capabilities, and efficiencies.

18. Rent-Lease-Buy Decision
1. The primary consideration in the buy, lease, or rent decision is the amount of risk the
equipment user wishes to assume. This risk is typically associated with financial
considerations.
2. Along with these financial considerations, how much the equipment is to be utilized is
the most important consideration for return on investment.
3. Future work volume, production needs, project specific or client requirements, long-term
company goals, acquisition time and equipment availability must be considered when
developing a utilization strategy for a piece or fleet of equipment.
4. For this reason, subcontracting small parts of the work that are equipment intensive
minimizes risk and is typically most efficient. Ownership of a particular type or types of
equipment, combined with expertise and experience, makes specialty subcontractors cost
efficient and minimizes risk for the contractor.
Whether renting, leasing or owning, equipment must pay for itself by earning more
money than it costs.

19. Rent-Lease-Buy Decision
• One of the most common methods to decide is a comparison of hourly cost using different
methods for the same equipment.
• Breakeven point method is one of the methods which make hourly rate comparison one
step further.
• It shows required usage to identify the benefit of long term of Rent-lease-buy. Because the
average hourly costs are not constant between the daily, weekly, monthly rents and with
the lease and ownership options, the break-even method can be used to decide the
optimum rental period for the given project use required.
• There are several factors that are to be considered by the owner to increase the
profitability: cost control and replacement decision being the most important among all.
• Minimizing the expenses is one of the major factors to protect the estimated project cost
and project profit.

20. Rent-Lease-Buy Decision
The factors that are included in owning-leasing-Renting tool are listed in below table

21. Rent-Lease-Buy Decision
Table suggests the optimal approach for equipment acquisition based on customer need or criteria.
Adapted from Coomb’s and Palmer’s book,
“Construction Accounting and Financial
Management”

22. • The following comparison is based on discussion with a Caterpillar dealer financial representative
• Typically the potential user will meet with a salesman prior to meeting with the financial
representative. It is the job of the financial representative to verify the user’s needs and match them
to the best acquisition option.
• In this example a contractor needs a Caterpillar D6R bulldozer.
• The finance amount for the D6 is $290,000.
• The contractor estimates about 1500 hours of use each year.
• The interest rate is 7.85% and the term is 60 months.
• Insurance for the D6 is adjusted for the option plan.
ACQUISITION COMPARISON – CASE STUDY

23. Table shows projected financial amounts for different finance options available through Caterpillar.
ACQUISITION COMPARISON – CASE STUDY
• Based on this situation, the FMV and CVO plans are very close and yield the lowest monthly
payment.
• Primary difference between these two alternatives is the purchase option at the end of the lease term.

24. A Model Study on Comparative Cost Analysis of Equipment Management in Construction
Companies in Tirupati Region
• Collecting data from four rental companies it is found that rental charges include repair and
maintenance cost.
• It does not include the charges of transportation for pick up and drop of equipment and insurance.
• The following table represents the average rates obtained through data collection from construction
equipment rental companies.
• The average rates are converted into 160 hours for monthly
RESEARCH CASE STUDY

25. • It is observed that Rental charges are between 25% - 40% that of weekly Rental charges.
• The daily charges are about 33% of weekly charges.
• When the working hour’s requirement of equipment is more in project, hiring equipment for weekly
or monthly is better than hiring per hours.
• Lease rated provided without negotiations is same as monthly rates.
• It is important to observe that lease rates are equal to monthly rental rates is not covering the factors
and values, lease maintenance is scheduled only for preventive maintenance.
RESEARCH CASE STUDY

26. RESEARCH CASE STUDY

27. RESEARCH CASE STUDY
• The Table shows that the most equipment are less than 5 years of monthly rents would have purchased the same
item. This analysis suggests the over expected life of the equipment.
• If the demand for equipment is equal or greater than the equipment time to purchase. Then it is better to
purchase.
• The costs are 10-60% more than owning when compared to hourly charges.
• For short-Term (equipment requirement hours in the project is low) projects Renting is preferred by considering
all parameters included above.
• When the project is long-term (equipment requirement for several years) it is preferred to own the equipment.

28. CONCLUDING REMARKS
The buy, lease or rent decision is most influenced by how long the equipment
is needed. A short period of utilization favors renting and a longer period,
favours leasing or purchase.