Should Your Business Lease or Own Construction Equipment?
Megan R. Nichols,
Freelance Technical Writer
It's not a secret any longer that infrastructure far and wide needs a lot of attention. Even beyond public works, the future looks ripe with opportunity for construction companies that are ready to capitalize on it.
In many cases, however, chasing down valuable bids comes with a critical choice: Do I lease the construction equipment I need to get this job done, or do I bite the bullet, make the investment, and take on the burden and opportunity of ownership?
Here's a breakdown of some of the most common situations in which companies just like yours have had to make this all-important decision.
In Which Situations Should I Lease Construction Equipment?
There's one case where companies are almost certainly better off pursuing a construction equipment lease: if they are, as the saying goes, "cash poor." A lease is defined by a period of usage rather than a period of ownership. Taking on an equipment leaserequires no cash up front requires no cash up front in a majority of cases, making it a clear winner for businesses just starting out, emerging from a slow season or whose assets aren't as "liquid" as they'd like. But what are the other considerations, beyond the day-one expenses?
Equipment redesigns and technological leaps forward are two major reasons that some companies will always favor leasing. After your lease is up, you'll generally have the option to return the equipment or commit to purchasing it yourself.
The appeal of this arrangement is that you get to see how the machine's usefulness and onboard technologies stack up to a newer model. Need something cutting-edge with built-in electronic systems or GPS? Return what you've got. This arrangement is sometimes called a flex lease. If not, you can hang on to your current machine, having already paid a good portion of the purchase price.
There are just two other notes for businesses considering leasing. First, do some research on the potential tax credit of leasing equipment in your industry. Lease payments constitute a business expense in a majority of cases. Second, remember that as the lessee of a piece of equipment, you're not responsible for the cost of maintaining that equipment. If something goes wrong with it, the equipment company that leased it to you will likely provide either field service or a replacement machine.
Are There Downsides to Leasing?
Remember that leases aren't really "a la carte" affairs. You'll be locked into, on average, a 24- to 36-month period. It's also good to remember that leasing a piece of equipment may result in a higher price overall than buying it outright.
Lessees are also responsible for early termination fees if their needs change — including not needing the equipment any longer, a change in their regular business or even an economic downturn.
In Which Situations Should I Buy Construction Equipment?
Construction can be a variable industry. Part of the appeal of leasing involves maintaining some flexibility in your inventory as the market and your docket of jobs change with time. Owning equipment is a different beast than leasing, but it's definitely appealing for more mature, better-established companies whose heavy equipment needs aren't likely to change much.
As far as taxes go, companies like these are also in a better position to absorb the sales tax lump sum, which would otherwise be divided between lease payments. On the other hand, companies can deduct for depreciation, thereby lowering their taxable income. Interest is deductible too in the event that you decide to pursue financing, which is fairly likely.
Realistically, the decision to own often comes down to how often you anticipate needing access to the equipment in question. In the construction industry, one rule of thumb is to consider whether you'll use the equipment in question during more than 60 or 70 percent of the time you put in.
You can also base your decision on what your workload might look like a month or six weeks from now. Nobody knows better than you do. The point is, the nature and volume of your work need to dictate the ownership decision above most other concerns.
Are There Downsides to Owning?
In many cases, with a lease, you get to see which machines work best for different types of projects. When you've taken on ownership yourself, there may be times when you have to compromise by using a tool that's only 85 percent correct for a task instead of 100 percent.
On the other hand, if you have a well-established niche in the broader construction world, and you've got proven workflows that you've been carrying out to wide acclaim for seven generations, maybe flexibility isn't a top-of-mind concern for you.
Transportation and logistics are more challenges awaiting you when you choose equipment ownership. Some construction companies are less tied to a specific region than others — and when jobs take them elsewhere, they rent or lease in the new location. That way, they don't have to transport the equipment themselves or hire another party to do it for them. Fleet managers and contractors sometimes overlook the logistics associated with moving heavy assets around the countryside.
When you enter into this decision with a clear head, armed with these reminders about the pros and cons, you should be able to arrive at a decision that suits you and keeps your company well-equipped for the foreseeable future.