Owning equipment and machinery: asset or liability?

On the surface it makes sense to buy the equipment and machinery you use regularly. It’s got to be cheaper, right? Well, that’s not always the case. The question must be asked on a case-by-case basis, and hopefully this article will help you answer it for your business.

To buy or hire? That is the question!

On the surface it always seems like buying equipment outright is a smart move.

Let’s look at the case study for a motorised wheelbarrow. They cost around $230/day to hire and around $4000 to buy. So, if you know you’ll use the wheelbarrow more than 20 times in the year you should be saving money, right?

You need to take many other issues into consideration when deciding. The wheelbarrow needs servicing twice a year which will cost around $500 each time, not to mention breakages, float and down time. Doing the sums, it still looks cost effective to buy the wheelbarrow if you’re going to use it more than 30 days of the year. Anything less than that and you’re better off hiring.

What about a 1.8T excavator?

They range in price from $25,000-$50,000 plus attachments and trailer. Let’s say your excavator, including trailer and attachments, costs $50,000. Don’t forget to add on service and breakage fees. The machine will cost you at least $500 twice a year to service (plus float). And, unless you buy the excavator outright, you need to add on the interest you’ll be paying on the loan.

Hire ground

Let’s compare that to hiring.

Hiring will cost around $400/day plus attachments and float. Even if you’ve purchased the machine outright you’d have to use it for more than 130 days for it to cost the same as hiring, so you’d need to keep it twice as busy to make it worth the purchase.

Hiring comes with way less headaches and way more flexibility.

Hiring is a more efficient way to operate. You are no longer burdened by the need to use that one machine you own; you can hire the right machine for the job. Hire the tiny machine that gets down the side of the house, or that five-tonner to get the job done efficiently. And no need to worry about floating the machines from site to site, the hire company will do that for you. You can have as many or as few machines as you need. Your fleet is flexible!

Do the maths

You’ve probably guessed by now I’m a big fan of the hiring model. Not only do I think it makes sense from a logistics and financial perspective, but most people find it much easier to cost into projects.

Many people make the mistake of charging too little or nothing at all for their machine on site. To correctly add a purchased machine into quotes you need to know what it will cost per billable hour to run. That hourly rate must be passed onto the client with a healthy markup.

The best way to know what your machine costs is to track the costs over the year and divide that by the number of hours the machine worked during that time. Those costs include: lease/loan, fuel, service, depreciation, insurance, breakages, float and so forth. When you don’t have those numbers to hand, start with what you can work out. The repayment costs, fuel, insurance, and servicing, then take an educated guess at additional charges you may incur. Divide that by number of hours you guarantee you’ll bill for the machine in a year and you’ll have your cost per billable hour. That rate must go into your quotes with a healthy markup to ensure you’re making money from it.

If you own or intend to own the machine, you absolutely must run the numbers above to give you a baseline. However, I think the best way to charge for a machine is to use hire rates. Use the daily hire rate for the appropriate machine for the project and don’t forget to add in plenty of float charges on top. This way you should always be charging an appropriate amount for the project at hand.

In conclusion, always run the numbers before you buy a machine. Smaller equipment and machines are usually more cost effective to purchase than larger ones. Be aware that you’ll need to keep the machine very, very busy to make profit from it. Always make sure you add the cost of the machine and equipment to your quotes with a healthy margin; you’re not running a charity. And keep in mind hiring offers much more flexibility that buying.

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