Construction industry makes use of a large number of complex and varied equipment. Construction activities are many and diverse. They are also expensive and labor-intensive. Contractors have to control and coordinate all these activities into a functional whole. Cost is of paramount importance and tight budgetary controls ensure efficient project management. Construction equipment is expensive and costly to maintain. Specialized equipment requires trained and expert operators. Smaller contractors find it difficult to purchase new equipment since the available financing options are very tight. Bigger contractors require leased, rented and owned equipment in adequate numbers for cost-efficient operations.

Rent, lease and ownership have to be balanced delicately to reflect well on the company’s performance. Another option is to buy used equipment. A proper mix of the various types of heavy equipment and machinery increases profitability and productivity of operations.

There are several factors to take into account while making up your mind on a buy, sell or lease decision.

Factors to Consider

Capital

This is the most important and crucial factor to take into account. The current capital situation should be extremely healthy and favorable if you want to opt for buying equipment. Most of the heavy equipment and machinery cost thousands of dollars and upwards. If not properly planned and executed, a purchase will land you in a financial mess. Locked up dollars will make it difficult for you to meet your current commitments and pay salaries. Ambitious purchases do not sit easy on your cash reserves. Rentals and leases help you conserve cash for meeting day-to-day expenses.

Government Policies

There are several government regulations regarding the lease and purchase of equipment. OSHA also regularly updates its safety and security guidelines regarding the quality of equipment and machinery to be used in workplaces. Constantly upgrading your equipment will shoot your expenses through the roof.

In a lease, you can claim deduction for the full cost of the equipment from the taxable income. Capital allowances can be claimed for the entire cost of assets on leases that have duration of more than 5 years. In some cases duration of 7 years is required.

If you purchase the equipment you can show it as an asset in your balance sheet. More often than not, you would have availed of financing to fund the purchase. Deductions for depreciation and interests can bring down the firm’s taxable income. In this manner you can save on taxes but a major purchase can really dry up your cash reserves.

Many regulatory bodies and users of financial statements have pointed out the ambiguity in recording leasing transactions, and the difficulties in assessing an organization’s leasing activities. It is necessary you look up on the latest rules and regulations before making a decision on purchase, rent or lease. The rules also vary from state to state. See what is applicable in your city or state.

Equipment Management

Heavy equipment and construction requirements like cranes, excavators, diaphragm pumps, huge stainless steel pipes and rigging equipment are very expensive. You need to maintain them well, and train the workers on how to use them. You may need to employ services of professionals to manage them and regulate their use. Old and worn equipment is not easy to be disposed off. It is difficult to find buyers for used equipment and you will definitely not find the resale value worthy of the expensive buy.

Purchase Is Risky

The economy is yet to find its feet. There are not many big-ticket construction projects out there to justify a big buy. Cash reserves are extremely important in an unstable economy and you would do good to preserve your credit lines.

Let’s have a look at the different types of leasing options available.

Leasing Finance Options

The type of lease agreement you opt for depends on several factors. You need to take into consideration the specific needs of your business like profitability, tax situation and cash flow. Another critical factor to take into account is the duration you will require the equipment for. The long-term prospects of your business and future plans also need to be taken into account.

Here are a few leasing options for contractors to consider while making up their mind on equipment financing options.

Fair Market Value Lease

This is one of the most popular options when it comes to leasing heavy construction equipment. This is opted for in cases where there will be a rapid depreciation in the value of the equipment due to regular and intense use. Expensive maintenance activities may also prove necessary. Several leasing companies provide free services of skilled personnel for maintenance and repair work.

This type of lease provides flexible options to contractors at the conclusion of the agreement. They can return the equipment, renew the lease or purchase the equipment at fair market value. This gives contractors the freedom to upgrade to new and latest technology in a cost-effective and easy manner. Contractors have the choice to constantly renew and upgrade their heavy equipment and machinery without incurring expensive purchases.

Dollar Buyout Lease

This leasing option is favored by companies or contractors planning to purchase heavy equipment or machinery at the end of the leasing period. This arrangement allows the contractor to buy out the equipment by means of small lease payments. Freed up working capital allows funding of ambitious growth or expansion plans. Dollar buyout lease agreement allows contractors to purchase heavy equipment for one dollar at the conclusion of the lease.

Wrap Lease

This lease agreement allows consolidating several lease payments into a single, regular payment. This is the apt choice for construction contractors who face a sudden need for new equipment. Wrap lease agreement gives flexibility to finance new equipment with the existing lease. Lessees are able to consolidate their outstanding payments and use it to finance a new lease with additional equipment. This arrangement comes in handy for contractors working on huge and complex projects with unpredictable needs and demands.

Sale Leaseback

Sale leaseback is a great option if you want to ease the burden of a recent purchase. This allows companies to sell their newly acquired equipment to another company, and then execute a leasing agreement for its use. Small and regular lease payment weighs lightly on cash reserves. It’s also a great way to raise capital to fund other business initiatives.

There are several options available for contractors while leasing heavy equipment. Newly formed companies and startups need to be particularly judicious while using the leasing options to ensure maximum availability of working capital. Refinance options are also available for purchased or owned heavy equipment, vehicles and machinery. But the equipment should not be obsolete and must be reasonably new.

Conclusion

Quality and efficient equipment forms the backbone of all construction activities. Make sure you have the right mix of owned, leased and rented machinery in your worksites. They go a long way in ensuring a good bottom line for your business.