Respondents to the
2006 EC&M Construction Equipment Usage Study
follow national trend toward
rentals and online purchases
Up until 1993, equipment ownership exceeded rental by a large margin — 95% to 5%, respectively, according to industry analyst Daniel Kaplan, president of Morristown, N.J.-based Daniel Kaplan Associates. Only recently, shortened forward planning, the need for portability, and a wider range of equipment available from rental companies have racked up rental revenue numbers. A study by West Allis, Wis.-based Association of Equipment Manufacturers (AEM) tracked an 8% increase in rentals in 2004, 8% in 2005, and fully expects a 5% spike in 2006.
In addition, demand for new equipment — both domestically and internationally — has pushed manufacturers to maximum capacity, causing longer lead times as well as out-and-out shortages in some regions. Unable to get the new equipment on deadline, some contractors are forced to rent.
But don't let the rental numbers fool you. It's not that sales are declining. In 2006, U.S. sales of equipment is expected to rise 9.3%, say analysts at AEM. However, the shortage of equipment — according to James Haughey, director of economics for Reed Business Information, manufacturers' order backlogs have been at eight weeks for more than a year, compared to the typical five weeks — will fuel demand for rentals.
The presence of rental companies and manufacturers online has also had an impact on how rental companies rent and manufacturers and distributors buy and sell their equipment. While contractor firms are reluctant to make actual purchases or consummate rental agreements over the Internet, large numbers are researching and comparison shopping online. Also, the ability to remotely check equipment availability can mean the |difference between being able to bid on a job in another region and letting it pass.
Backing up industry forecasts for 2006 and beyond, the 145 respondents to the 2006 EC&M Equipment Usage Study survey echo the trend toward rentals. Their answers also provide proof that electrical contractors are aware of the rental and manufacturer presence on the Internet, but aren't quite ready to consummate actual transactions on their computers. The objectives of the 2006 study were to examine construction equipment usage among electrical contractors; investigate the ownership, rental and leasing practices among respondents; and determine future purchase, rental, and leasing plans.
Survey says. The average annual construction equipment budget among respondents is $49,623. Only 9% report a budget of more than $50,000. As far as actual equipment usage goes, almost two-thirds of respondents use scissor lifts one or more times a year. Trenchers, cable/wire/rope pullers, and aerial lifts (both standalone and truck-mounted) are also used by at least 40% of respondents one or more times per year (Fig. 1 on page 28). In support of our own research, analysts at AEM predict that sales of lift equipment will outperform all other categories in 2006 with an 18% gain, but this may largely be due to demand from international markets. Janice Wilson from St. Peters, Mo.-based Elite Enterprises, a family-owned residential contractor, agrees with the AEM. “The only heavy equipment that we actually use is a lift,” she says. “Sometimes we rent scaffolding, but we have our own lift.”
The average equipment maintenance budget of electrical firms who responded is $25,631. Only 5% report a maintenance budget of more than $50,000, and 19% report a budget between $1,001 and $5,000. One in five respondents do not outsource any maintenance or repair work. Of the equipment respondents that maintain and repair themselves, cable/wire/rope pullers top the list, followed by trenchers. The maintenance and repair of scissor lifts is most likely to be outsourced, along with aerial lifts, cranes, earth movers, and pole-hole diggers (Fig. 2 on page 28). For those that do outsource maintenance and repair, they will most likely take the equipment to a dealer/distributor or repair specialist.
An average 16% of respondents rent their equipment fleet. Nearly two-thirds (63%) of survey respondents expect this percentage to remain the same in 2006, while 15% expect the percentage to increase. These figures are well below the 35% national average given by Kaplan. According to the rental-industry analyst, the rental forecast for 2006 will drop to 30% rented, but by 2010 will rise to at least half.
For rent. Almost half of the respondents who rent their equipment do so from a local rental company. Less than a quarter rent from a national rental company, while 19% rent from an equipment dealer/distributor (Fig. 3 on page 32). “We have three or four renters we generally go to,” explains Michael Pesl, VP of construction at Houston-based “design assist” commercial electrical contracting firm Wayne Electric. “We put things out for quote and go from there.”
Respondents most commonly rent scissor lifts, trenchers, and bucket aerial lifts. More than one in five respondents indicate they will rent scissor lifts, with 11% planning to do so within the next three months. Trenchers may be rented in the next year by 17% of respondents, with 8% planning to rent them in the next three months. For each type of equipment, 1% or less lease the equipment. Of those who do plan to lease, 8% will lease scissor lifts, followed by trenchers and bucket aerial lifts (Fig. 4 on page 32).
According to Kaplan, there are specific reasons why rentals are currently rising. He cites improved customer service and a wider range of inventory on behalf of rental companies. Benefits for contractors who rent include reduced storage and maintenance costs, an avoidance of capital outlay and risk of obsolescence, and a way to improve asset utilization. “To justify owning the equipment, electrical contractors would have to be utilizing the equipment at least 65% of the time,” says Kaplan. “It's more economical to rent it unless you can really keep it busy.”
Recent revenue gains for NES Rentals in Chicago are proof that rentals are on the rise. Rental comprises almost 80% of the Chicago-based company's $555 million revenue for 2005. The remaining 20% are from sales of new and used equipment and parts. Mike Disser, vice president of marketing, claims that rental penetration is indeed “improving traction” over ownership. “From a resource or capital standpoint, this type of equipment ties up your working capital,” he says.
Disser points to maintenance and storage, transportation, repair, safety regulations, insurance, and inspections as reasons why contractors may prefer renting their equipment. “You may buy something and two years from now a new and improved, better and more efficient widget comes on the marketplace,” he says.
Used equipment is getting scarce, and manufacturers continue to raise prices on new machines, so rental has become a viable option to contractors under tight deadlines. “I wouldn't call it a ‘shortage’ of equipment,” says Disser. “Lead times have been lengthened significantly due to the increased demand, so you're always able to get it, but you may not be able to get it in the timeframe that you're looking for. That's also one of the reasons why people are renting, because they physically can't buy the equipment.”
Douglas Winston, proprietor of residential firm Winstonz Electric Dreams, Chicago, rents heavy equipment instead of purchasing it. Last year Winston rented a trencher from a local firm, but when he arrived at 7 a.m., the trencher was still out. To make up for the AWOL equipment, the company upgraded him for free. “The person who was supposed to bring it back didn't,” says Winston. “I don't know if they needed an extra day or were just late getting it back.”
Ownership society. Not only is there a shortage of the actual equipment, but tires and components for equipment are also running low due to increased demand. According to analysts, suppliers of these parts were wary of building inventory after the market bottomed out in 2002. Now manufacturers are running at capacity, but still aren't able fulfill demand.
“Tires are the well-known shortage, and it's a biggie,” says Russ Hutchison, AEM's director of Technical & Safety Services. “Demand has gone up. One of the real challenges is that the big tire manufacturers are not adding capacity. The time and cost in increasing capacity is significant, and the concern is that by the time you get the capacity increased, the demand will have disappeared, and you will now have excess capacity that you invested a lot of money in. So their attitude is that we'll just run the shops we've got at full blast and do the best we can. Unfortunately, for the big haul truck and the mines, that's not necessarily a good solution.”
As for the electrical contractor, many still plan to purchase equipment within the next year and beyond. According to the EC&M Construction Equipment Study, cable/wire/rope pullers, scissor lifts, trenchers, and truck-mounted aerial lifts are most likely to be owned. According to respondents planning to purchase equipment, the transaction will most likely take place in a year or more. Scissor lifts will be purchased by 15% of respondents, while only 1% plan to purchase derricks and reel carriers. Only 17% of respondents opt for an extended warranty plan when purchasing new construction equipment. More than half do not use a finance company for making new purchases.
E-commerce. Of those respondents purchasing equipment, nearly one in four has made a construction equipment purchase online in the past year. Among those respondents, 29% report that more than one-quarter of their equipment purchases have been made through the Internet (Fig. 5a below). More than half who have made online purchases in the past year expect the percentage of e-commerce to increase in 2006, while 31% expect the percentage to remain the same. Nearly one in four respondents buys replacement parts online (Fig. 5b below). Many industry experts agree that equipment rental and purchasing, like so much other commerce, is going the way of the Internet. For now, however, most contractors use the Internet as a way to research equipment for purchase or check rental availability and price.
“I frequent a couple of different boards,” says Winston of Winstonz Electrical Dreams. “But in terms of rental equipment online, mostly I just poke around and kill some time. The places I've seen to rent from are way south in the suburbs. Their prices are pretty comparable to the local rental place, so by the time I add in my time to go down and bring it back, it's cheaper just to do it locally.”
Larger electrical firms are more likely to use the Internet to find rentals. “The ability to determine what's available and what it's going to cost is probably one of the real benefits to a contractor who's got cost pressures,” says Hutchison, agreeing that most contractors will buy or rent from a local company that's proved reliable unless it becomes more economically viable to shop around in cyberspace.
For contractor firms with projects in different parts of the state, or even in different states, online rental may prove to be a salvation. “I would assume that if you can, you're going to rent locally,” he says. “But you're not going to rent, and then haul it all with you.”
NES Rentals has had a Web site since it was founded in 1996, but while the site contains locations, contact names, specs, and pictures of equipment, and access to account information, the site is not 100% transactional. Contractors still have to visit the stores to sign a rental agreement. “The goal is to go that way at some point in the future, but I can't really answer when,” says Disser. “There's really a lot of things you need to work out.”
For instance, customers must have an adequate certificate of insurance and a credit account an account on file. Disser also stresses that the Internet has yet to come up with a better alternative to old-fashioned in-person customer service. “Much of the time customers think they know what they want, and only through careful probing can we really prescribe what they need accurately,” he says. “It's not that it's not doable, because you can rent a car online without ever talking to an agent, so I'm sure at some point we'll get to that stage. It is a little different though, especially with heavy equipment that's worth $100,000.”