Should Your Construction Business Buy, Rent, or Outsource Construction Equipment?

By Jeff Heybruck

Are you in the market for equipment or trucks for your construction business? You have options. Construction businesses that need additional equipment to support upcoming jobs, continue the growth trajectory, or to replace what has reached the end of its “useful life” should evaluate the following options:

• Buying/leasing construction equipment
• Renting equipment
• Fully outsourcing the equipment and operation of the equipment to a subcontractor

While there are plenty of articles that claim one option is better than the other, there’s not a one-size-fits-all “best choice.”

Whether you need a dump truck, skid steer, grader, excavator, or trencher, the decision to buy, rent, or outsource will be based on your specific construction business’s situation and the jobs at hand.

5 ways to determine your construction equipment options

Consider the following factors to evaluate options for your specific business and equipment needs:

1. Length of use

Consider how long you will need to use the equipment. Do you need the excavator for only a three-week project, or will you need it for 70% of business hours? In general, the shorter the period that you will be using the equipment, the more you should lean towards renting. A longer length of use and higher frequency of use could indicate that you should buy or lease the equipment.

Rule of thumb:

Shorter length of use = rent

Longer length of use = buy/lease

Tip: 12 month before “useful life” lease payoff rule. When considering financing schedules, make sure to consider the equipment’s “useful life,” typically represented in hours. A mini excavator, for example, has an average “useful life” of 10,000 hours. Calculate the expected utilization in number of hours per month and aim to have the equipment paid off so that it will not hit its “useful life” until at least 12 months after the loan payoff. I’ve seen situations where clients had a worn-out piece of equipment but were still making payments on it.

2. Specialization

If the equipment requires a specialized operator with certifications and experience (and you do not currently have a resource with those certifications or experience), and it will only be used for a few jobs here and there, then it might be best to completely outsource to a subcontractor. In this case you have a need for both equipment and a skilled resource. “Renting” both via outsourcing is a good option to reduce the complexity of finding the right resources to operate the rented equipment.

The same rule works for any equipment that might be so specialized it is not needed in the regular fleet, regardless of if an existing member of the team knows how to drive it or not. For example, we have a client doing a large renovation of their shop yard/parking/storage area. They needed a large loader to remove excess dirt from the job, but had no use for it after this one job. Accordingly, they rented a loader and are using a few employees on staff who have the experience to operate it when there is loading to do.

Rule of thumb:

Shorter length of use + highly specialized = outsource (if you don’t have the operator resources on staff)

Tip: If you are planning a job that will require outsourcing, build the cost of the outsourced equipment and labor into your revenue model. While the short-term "apples to apples" cost for outsourcing might be much higher than renting or leasing, you can offset this by billing the cost back to the customer.

3. Utilization ratio

As a rule of thumb, if the equipment is running more than 60% of the time during business hours, you should consider buying or leasing.

Rule of thumb:

Greater than 60% utilization = buy or lease

Less than 60% utilization = rent or outsource

Tip: Rent before you buy. If you are uncertain about the percent usage estimation in the event of purchasing new equipment when scaling, you may want to first consider renting to gather some data in the short term about how much the equipment is used. Once you better understand how often the equipment is used, you can more confidently make your decision to rent vs. buy.

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• How to Build a Construction Business From the Ground Up
• The Benefits of Outsourcing for Small Businesses
• Consider These 7 Things Before Outsourcing Your Next Project

4. 5-year ROI analysis

To lead your business confidently in the case of deciding whether to make a large capital expenditure like an equipment purchase, it is recommended to perform a full five-year ROI analysis of buying the equipment.

Make sure to consider all associated costs and considerations, including but not limited to:

• Cost of fuel
• Operator salaries
• Storage costs
• Cost of transportation of equipment
• Utilization rates
• Cost of maintenance and repair
• Depreciation
• Resale value
• Estimated revenues from projects

If your ROI is higher for buying the equipment after five years vs. renting, and your purchase fits the mold for all the other “buy” indicators—long term, core to business, high utilization—then you can move forward with your purchase with the peace of mind that you made the best possible decision for your business.

5. Tax implications

While tax implications alone will likely not determine your decision to lease vs. buy, they are an important consideration to avoid surprises at the end of the year. Whether you choose to rent vs. own will impact your tax write-offs at the end of the year.

Rented equipment can be written off as a business expense for that year; purchased equipment, on the other hand, will be eligible for depreciation deductions. Check with your accounting team or accountant to understand the most recent tax laws, and factor any or benefits into your ROI analysis and comparison.

Construction equipment: buying vs. renting vs. outsourcing

In summary, while a variety of internal and external factors could impact the following rules, they are a good place to start as you weigh your options.

Buying:

• Long-term investment in business
• Core to business services and offerings
• 60% or higher utilization rate
• 5-year ROI analysis shows buying is better option

Renting:

• Short-term project
• Operators for rented equipment already on staff
• Less than 60% utilization

Outsourcing:

• Highly specialized equipment and labor
• Very low utilization (short term and infrequent projects)
• Not core to the business