Equipment acquisition has been a difficult business problem to navigate in the last 18 months, even for the most experienced equipment managers, but Tom Christerson, director of sales at EquipmentWatch (a Randall Reilly company), believes this volatility can be an opportunity.
EquipmentWatchChristerson spoke at a recent Association of Equipment Management Professionals Triangle Talks webinar on how the supply chain crisis is affecting construction contractors and fleet managers.
In surveys conducted by the Associated Builders and Contractors and Wells Fargo, construction executives’ concerns over supply chain and worker shortages almost doubled between late September and early December 2021, says Christerson. (See Chart One below.)
EquipmentWatch“Our State of the Construction Equipment Economy white paper published just a few months ago, noted that delivery delays on both new and used equipment channels have been a constant theme over the last 12 months,” says Christerson.
The supply chain crisis has tempered expectations and sent contractors and fleet managers scrambling for alternatives. These include renting what little equipment is available, purchasing older equipment and holding on to equipment longer than ever before. “This trickles down, putting stress on project managers who are dealing with increased downtime, sourcing mechanics and technicians to fix the equipment, and tracking down parts,” says Christerson.
Use it or rent it
Trends indicate retail rental rates are on their way up because they closely follow used equipment pricing, says Christerson. Used equipment rates are rising but rental rates have not followed yet, which likely means rental rates are going to go up in 2022 and beyond.
“We suggest a periodic review of retail rental rates versus your internal rates, or what we call the rental decision point,” says Christerson. “If you’re not using your equipment a certain number of hours per year, you should start thinking about renting that equipment instead. We’ve also seen an uptick in contractors renting their underutilized assets via third-party peer-to-peer rental services or even splitting off a rental division of their company. It’s a hot market, so you might as well capitalize on that.”
In December 2020, the average price at auction for excavators (irrespective of size brand, age or condition) was around $45,000, says Christerson. Fast forward to Q4 2021, and it was up about $10,000. “But if we isolate to the last three months of the year, trends suggest it’s retreating in the other direction,” he says. “It’ll be very interesting to analyze the data once Q1 2022 wraps up.” (See Chart Two below)
EquipmentWatch“If we took the same trend line back to 2019, you’re seeing a $15,000 increase in premium over the last 24 months, which is, again, just incredible,” says Christerson. “The last six months have been super-volatile; however, it is reasonable to assume from this analysis that the market may be very slowly correcting.”
EquipmentWatch data on skid steers show the same trend, Christerson says. In December 2020 the average skid steer was selling at auction for just over $10,000 compared to almost $15,000 just 12 months later. But Christerson believes it is reasonable to predict that the market may be normalizing. (See Chart Three below.)
EquipmentWatchHow do we respond?
- First and foremost, says Christerson, embrace data. It’s definitely not the time to put your head in the sand.
- Place orders now. Get with your local dealer to communicate needs as early as possible. If you have a job coming up, be proactive.
- If you’re not using a machine, consider selling it or renting it. Do the math, look at the project calendar. If you don’t need it anytime soon, you’ll likely command a premium for that asset.
- It’s also a good time to look at renting out your idle equipment.
- Be cautious when buying older equipment, especially if a machine needs repair or replacement parts. Have a third party inspect the equipment before purchase.
- Work with your inspection team to understand what replacement parts you’ll need in the future. Be proactive about ordering those parts and don’t wait for a machine to break down.
- If you’re loyal to a couple brands, be willing to try other brands.
- Periodically reanalyze and recalibrate your internal rates, but add in changing use hours, rising fuel costs, mechanics, wages and the cost of parts. Your owning and operating costs are more volatile than ever.
- Ensure clear communication between estimators, the equipment team, leadership and project teams. Over-communication is always best.
- Be flexible. Consider an all-of-the-above strategy. If you’re in a spot where you have the choice to rent or use owned equipment, run the math, do the calculations. You’ll often be surprised there are many situations where it will make more sense to rent.
- And finally, stay current with industry news. Create a Google news alert for these topics. Information has never been more valuable.
Equipment Watch offers rent-versus-buy formulas for free on its resource pages, says Christerson. “We’re planning to release an updated version later this year, but the 2017 version still holds true today. All that math and the formulas still make sense. Optimize your position by planning in advance, watching the market closely, analyzing historic trends, and then tracking every single maintenance event when possible.”
Volatility equals opportunity
Supply chain constraints will likely continue throughout 2022, says Christerson. “But we’ve learned that volatility can be an opportunity. Embrace the data that’s available and take advantage of it. The equipment lifecycle is changing. Know the possible outcomes and be quick to adapt. Contractors must think outside the box to continue thriving.”