DEFERRING PURCHASES? KNOW THE RISKS.
As the end of the year rolls around, contractors often begin considering capacity requirements for the next busy season. You create forecasts, analyze cost and utilization data, review maintenance records, then make the best decisions you can about fleet size, composition, age and acquisition.
In recent years, it’s become more common to defer replacement purchases. Contractors are hanging on to older assets, cutting fleet size and using rental to expand capacity fast. That can be great strategy, especially in an uncertain economy. But before choosing that path, it’s important to consider some of the risks.
If you decide to keep one or more units beyond the normal replacement cycle, you may experience unexpected downtime as you eke out those extra hours. Reliability could decline, repair costs could rise and production losses could put a dent in your bottom line.
Variable cost escalation
When you postpone equipment replacement, you exchange fixed costs (for new machines) for variable costs (for repair, maintenance and breakdowns). Rising variable costs could increase bidding uncertainty and put pressure on profitability.
Forecasts never seem to be quite as accurate as we’d like them to be. If your estimates are correct or lower than expected, you’ll probably be glad you didn’t buy. But if there’s an unexpected upturn, you could be in trouble. The aging machines you’ve held onto might not deliver the performance you’ll require. And if business is booming everywhere, rental inventory could be harder to come by.
Misunderstandings with management
Sometimes the finance people view decisions to defer equipment replacement as permanent and adjust budgets accordingly. That could be an issue down the road. So before agreeing to delay any equipment purchase, make sure it’s understood that you’re postponing the investment, not scrapping it all together.
Hanging onto older assets could take you out of the running for future projects if the bids require low-emissions engines. You’ll have to use other strategies to compete for the business—renting newer equipment, buying low-hour used models with Tier 4 Final engines, or teaming up with a partner who has a newer fleet.
Know the risks
There are many good reasons to defer an equipment purchase. Just make sure you’ve looked at all the risks and benefits. For help sizing your fleet and timing replacement decisions, talk to the experts at your local Cat® dealer.