2.3. Owning and Renting Equipment

The first point is equipment must pay for itself. So what I mean by that is generally we have invested a huge amount of money in the equipment, there are a lot of costs invested in the equipment. So everyone knows about the purchase cost associated with the machine other than that there are components of ownership cost also like your depreciation cost, cost of investment, say for example, if you are going to procure the equipment through a loan, you may be paying interest for the loan that is the cost of investment. Similarly, your equipment is an asset so you have to pay the property taxes for the equipment so that is a part of ownership costs. Similarly, you have to pay the insurance premium to protect the owner of the equipment from the loss of theft or fire or due to accident. So the insurance premium whatever we pay, it forms a part of your ownership cost, then the storage cost of equipment, then the other operating costs, like your fuel costs, lubricating oil costs, filter cost and the wages to pay for the operator, maintenance and the repair cost and the cost of mobilization of the equipment to the project site all these costs make up the cost of the equipment.

Understanding ownership costs is crucial for any business investing in equipment. Owning a piece of machinery incurs several ongoing costs beyond the initial purchase price. These include depreciation (the reduction in the equipment's value over time), financing costs if purchased through loans, taxes based on its assessed value, insurance against risks like theft or damage, and monthly running costs such as fuel and maintenance. All these factors together determine whether the equipment is a financial burden or a beneficial investment. If the equipment does not generate enough returns to cover these costs, it may not be worthwhile to own it.

Think of owning construction equipment like owning a car. You don't just pay for the car itself; you also have to pay for gas, insurance, maintenance, and any repairs that might come up. If your car sits in the garage and doesn't get used, all those costs add up and can exceed the benefits. Likewise, construction equipment must be actively utilized to justify its ownership costs.

Another point to be kept in mind is in some cases the value of the equipment may be greater than the contract value that means, there are some high end equipments like say tunnel boring machine it may cost so many hundreds or crores. Similarly, cranes of heavy lifting capacity like 2000 tons lifting capacity crane. So, they are all high end machines in this particular case, there are chances that value of equipment may be greater than the contract value. So, in this particular case, it may not be possible for you to recover all the costs invested in the machine in one particular project itself. So, you may need so many series of jobs to recover the cost invested in the machine. So, when you plan for procurement of such high end machines, we should do proper economic analysis, whether there is a likelihood of future jobs which may involve the utility of the particular machine.

When it comes to high-end equipment, such as tunnel boring machines or large cranes, the purchase costs can be substantially higher than the total value of the contracts they are intended to serve. This can create challenges when trying to recover the initial investment, often necessitating multiple projects to justify the expense. It's vital to perform a thorough analysis to ensure there's enough future work requiring that equipment, as this will help determine whether the investment is financially viable.

Imagine buying a high-end piece of machinery like a luxury car that functions perfectly but only serves a very specific purpose, like a race car. If you only plan to race once a year, the cost of owning that car is not justified. If the car is only used in that one race, you might never get back the money invested in it. You would need to ensure there are plenty of races (projects) ahead where you could use the car to make the investment worthwhile.

And another general point to be kept in mind is, it is not possible for a contractor to own all the types and all the sizes of equipment. Say for example, if we take an excavator, there are different bucket capacities of excavator, so, it is not possible for the contractor to have all the bucket capacities models in the project site. Similarly, if you look into the crane, there are different models of crane with different lifting capacity. So, you can have a horizontal boom crane, you can have a luffing jib crane, you can change the angle of boom that is called as luffing jib crane or you can have a telescopic boom crane. So, different configurations are available with different capacities. So, it is not possible generally to own all the types, but the contractor will generally make a decision whichever equipment is more frequently used for his job.

Not every contractor can afford to own every piece of construction equipment needed for all potential jobs. There are numerous types of excavators with varying capacities, and the same goes for cranes that come in different configurations based on the tasks involved. Therefore, contractors often focus on purchasing only the most frequently used machines and rent or subcontract others as needed. This allows them to optimize their equipment use without incurring unnecessary costs.

Think of a modern chef who runs a restaurant. They might own essential kitchen tools like mixers and ovens, but when it comes to specialty tools like ice cream machines or wood-fired ovens that are only used occasionally, it may be more cost-effective to rent them as needed instead of buying. This allows the chef to maximize utility while minimizing expense, as they won't have unused equipment taking up space or draining finances.

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