In the never-ending effort to balance financial return and operational efficiency, the age-old debate of rent vs. own echoes through the corridors of most shops and yards. It could be a small business owner standing outside the local equipment dealer thinking, “Do I really need to buy this skid steer?” It could be the CEO of a multinational corporation reviewing the capital expenditure plan thinking, “Why do we need to buy another five skid steers when we bought 10 last year and own 30?”
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In each scenario, the question of whether to rent or own comes up. As most equipment-intensive companies grow, it becomes increasingly complex to prioritize operational needs and efficiently deliver a return on investment. To compare both alternatives, consider a standard piece of equipment used by most companies: the skid steer loader.
Read also: How Deep To Go with Financial Details, Mike Vorster
First, let’s look at the costs of owning and operating the skid steer. Ownership costs are the costs incurred when the machine is purchased and made “work ready,” ie, the cost to get the keys. Operating costs are the costs incurred as the machine is used, ie, the costs once the key is turned. Let’s use these inputs: The purchase price is $65,000; estimated useful life is 8,000 meter hours; 10% residual value; depreciation over eight years. When operating costs are added, the utilization-adjusted costs per day can be calculated for owning the skid steer (see table below).
Skid Steer Costs per Day
Ownership costs per day decrease the more the machine is utilized, whereas the operating costs per day do not. This happens because the ownership costs are fixed, so the more the piece of equipment is utilized the cheaper these costs become on a per-unit basis. Meanwhile, the operating costs are only incurred as the unit is operated, and for this example, we used lifecycle rates much like when we do sweet-spot calculations.
An internal rate can be set using the above information; in this case, $275 per day will recover both the ownership and operating costs based on an assumed utilization of 38%.
Next, let’s look at the cost of renting a skid steer (see table above). To rent an equivalent skid steer costs $450 per day, $1,110 per week, or $2,860 per month with the fine print mentioning 240 allowable meter hours per month. Many end users might conclude that it is cheaper to rent it weekly ($1,110 / 5 days = $222 per day) or monthly ($2,860 / 22 days = $130 per day) because the rate per day is lower than the internal rate. This is often where a debate occurs between operations and equipment.
Read also: Extending the Sweet Spot on Machine Life
Remember that the rental rates are charged no matter whether the machine is utilized or not; they are time-based rates. Internal rates are often usage-based rates charged only when the piece of equipment is used. What separates these two rates is utilization.
To properly compare a usage-based rate with a time-based rate, create a utilization-based rate table for the optimal usage of the rental per day. Make sure to include a small provision or allowance to cover cleaning as well as any excessive wear and tear that will be assessed upon return.
Next, plot costs per day for both own and rent to allow for comparison (see graph below).
First, we can see that the rental costs (the red line) for this skid steer are always below that of the costs of owning (the blue line). This leads us to conclude:
- Under optimal usage conditions, ie., fully utilizing the rental hours, it is cheaper to rent this skid steer than to own it. If utilization of rental hours is inefficient, then it may be more cost-effective to own. There is a 30% difference between the estimated costs for these two options.
Looking beyond the numbers, there can be instances when companies are okay with paying a premium for rental equipment.
A few words of advice on integration: If rental equipment is introduced into the fleet with classes of equipment already owned, monitor the utilization of both owned and rented units for two things. First, make sure that owned equipment is still being utilized, which is necessary to coverinternal costs. Second, make sure the fleet isn’t incurring “over-hours” on the rental machine.
Incorporating rental equipment into a fleet program with a critical and strategic mindset enables the company to be more effective in the usage of resources and capital.
