A survey conducted in Melbourne as of 2022 indicated that most large construction companies have dismembered their fleet ownership of heavy machines such as cranes, trucks, dumpers and excavators as they have established partnerships with heavy machine rental companies. This partnership has been proven to be a cost effective measure for large construction companies based on the lower cost of using equipment such as excavators for hire in contrast to owning such machines that carry heavy ownership costs that range from maintenance, breakdowns that disrupt construction schedules, storage and transportation costs and other elements related to logistics.
Most rental companies that serve larger construction companies provide a range of services such as replacements, delivery and pick from project sites and are even able to provide or recommend the services of operators who are experienced in performing specific tasks with specific machines. Construction rental companies have become integral partners to most large construction companies, however, such partnerships according to the survey have not yet been embraced by smaller construction enterprises as they often own heavy machines such as excavators, trucks and skid steers for example. This is due to the fact that these companies’ owners are often under the notion that owning such machinery improves their asset structure without realising the downside of such decisions.
Apart from the cost of ownership of these machines, these machines also carry significant burden on the calculations associated to Return on Assets or ROA which may negatively influence loan or investment decisions by third parties. Many investors often calculate the return on assets of a company which involve dividing the total assets with total income and as such, the higher the total assets the poorer the results of the calculation.
For example a construction company that owns 3 or four excavators valued at about $100,000 will indicate lower returns on the assets when divided with the total income, for instance, if the total value of assets is $100,000 and the company’s total income is also $100,000, it simple means that for every dollar of asset that the company owns, one dollar is generated as revenue. In contrast a company that has assets only worth $20,000 and obtains machines such as excavator for hire, and generates about only $60,000 in revenue will present an ROA of 2 to 1, this means that for every dollar of asset that the company owns, it generates $2 from the asset. This is an indication of the efficiency of the company in managing their assets.
Added to the fact that when companies that own such expensive assets do not use the asset in between projects, these assets generate zero revenue, in contrast companies that do not own such assets have their money sitting in the bank earning interest. Another positive factor of having money in the bank is the strength of the company’s cash flow which is often a good indicator when the company needs to secure loans. In summary, it is better in Melbourne to hire or rent excavators and other construction machinery such as skid steers instead of owning them.
