What guides contractor choice

Construction companies from medium to large reveal the criteria they adopt when deciding whether to rent or buy equipment to handle a new construction contract

The rental of construction equipment in Brazil is a US$ 1.6 billion-plus-a-year business and, according to surveys commissioned by Sobratema, the activity already accounts for almost 30% of the entire market for purchases of new machines. With the rapid professionalization of companies in the equipment rental sector, which never cease to develop new solutions to better meet their customers' needs, expectations for growth are positive, not least of all because this kind of activity still needs to evolve considerably in Brazil to achieve the same degree of representativeness that it enjoys in more developed countries.

To advance that far, however, rental companies need to align their strategies with those of their customers whose companies have distinct requirements and factors that determine their decisions to rent or own equipment. Understanding this is not simple and varies greatly from one client to the next, whether because of the type of activity, the client’s size or specific demands. Although virtually all construction companies speak of rental as a way to reduce operating costs, some still loathe the alternative due to rental costs and the practices adopted in this market.

Corporate culture also weighs heavily in the decision, as demonstrated by Terrabrás, a company in the state of Bahia. Since the construction company’s business is mainly road works, its fleet of equipment already has a profile suited to this type of activity, explains José Luis Vicentini, manager of supplies and equipment at the company. “We currently operate with about 300 to 400 units of heavy equipment of which approximately 30% are supplied by rental companies,” he says.

Factors to consider

According to Vicentini, the rate of rental is higher in the line of grading and earth moving machines. “In road construction, where work is performed in areas that are widely scattered geographically speaking, we evaluate the greater or lesser degree of need to rent equipment according to the profile of the project.” He points out that this decision takes into account factors such as the region of operation, availability of rental and amount of time involved in the execution of the work, among other issues.

Thus, if the work is going to take more than seven months to perform, the company assesses whether the best sourcing strategy is to purchase or rent the required equipment. “In these cases, we also consider factors such as the availability of lines of credit for the acquisition of equipment,” he says. Vicentini explains that Terrabrás, as well as other mid-sized construction companies, is increasingly adopting the view that machines are not company assets, but rather a way to meet the needs of the job at hand. Thus, the choice between renting or buying is based solely on economic, productivity and operating logistics criteria.

To Construtora Santanna, which has a fleet of 200 to 250 units of heavy equipment, the time involved in executing the work is the determining factor when it comes to deciding whether to rent equipment or use the company’s own machine assets. “In a large project that we undertook last year, we mobilized 230 units of equipment, 130 or so of which were rented,” affirms Delton Galuppo, maintenance manager for the construction company.

In this particular case, the logistics of supplying machines to the construction site was a crucial factor that determined the strong participation of rental companies in the project. Going against the general view on the subject, Galuppo said that his company has already turned to renters of equipment for projects with less than six months of duration, even as a way of reducing the company’s fixed assets. “In the future, we expect to rent more and more equipment, especially at times like these that are characterized by forecasts of few long-term contracts.”

A different view

A diametrically opposite strategy is adopted by the Queiroz Galvão construction company. “Our principle is to use our own machines and only rent equipment as a last resort,” says Francisco Neto, superintendent for equipment at the company. As a result, Queiroz Galvão has one of the largest wholly-owned parks of equipment in Brazil, tallying about 4,800 units. “I can assure you that these machines represent over 90% of our fleet in operation, since our volume of rentals is not very expressive,” he says.

Based on this principle, whenever the company is requested to undertake a new project, the Queiroz Galvão equipment department immediately checks its own equipment yard to assess the availability of machines. If no units are available, the company considers the possibility of making an acquisition; a process that takes into account the amount of time the equipment will be used in performing that job.

“After that, we assess whether that equipment will continue to be used immediately or if it can be applied in performing other works in the future,” Neto explains. In this assessment, rental provides advantages when you’re talking about very specific equipment and machines that apply to few types of work; such as dredges, for example. On the other hand, machines that are more versatile and used in a variety of projects, such as backhoes and mid-sized excavators will surely join the list of equipment assets to be acquired by the construction company.

The cost of rental

Even in such specific cases, however, Queiroz Galvão will only opt to rent if it cannot justify the cost of ownership of the asset, where the company assesses the amount to be paid in acquiring a machine, maintenance costs during its service life, cost of operation, and the productivity it can provide -  an aspect that is directly associated with the time of use of the equipment. “It is worth noting that when we calculate the cost of ownership we also evaluate equipment depreciation, and in analyzing the cost of operation we compute the operator, spare parts, lubricant and fuel,” the executive explains.

At the Camargo Corrêa construction company, the policy is very similar to what we find at Queiroz Galvão: rental, only as a last resort. And the main reason for this philosophy, according to Pedro Bianchi, equipment manager at Camargo Corrêa, is the high cost of rental in Brazil. “If you compare the cost of a wholly-owned fleet, where we consider issues related to ownership, maintenance, operation and other factors, with the prices charged by rental companies, ownership provides a 50% advantage. “To Bianchi, this demonstrates how rental companies are not yet prepared to supply much of the market demand, “because they want to win momentarily and don’t have a long-term vision.”

That’s why, of the 2,800 units of equipment that Camargo Corrêa currently deploys at its operations in Brazil, Bianchi estimates that the share of these assets that are rented from third parties is minimal. The company’s wholly-owned fleet, however, has grown at an annual average of 15% over the past three years and is expected to increase by over 50% by 2016 in view of the company's plans to increase its share in the Brazilian market for construction during this period.