Masonry Magazine June 1965 Page. 20
$100,000 of volume, whereas the giant contractor with over $10 million of annual volume owns only $1,500 of equipment per $100,000 of volume.
Now let's look at cost comparisons as Bytwork suggests. Ownership costs include such items as:
1) Depreciation
2) Major repairs and over haul
3) Interest on investment
4) Insurance
5) Taxes
6) Storage, incidentals and equipment overhead
The amount included for each of these items of ownership cost depends on many variable factors and is subject to the conditions and experience of individual owners.
Generally speaking, rental must necessarily be more expensive than owning, assuming the rates have been properly established.
The rental business has its own peculiar risks and intangible costs which must be reflected in the rate. The owner who rents has all the elements of ownership cost we have mentioned, plus more. Some of these added costs are:
1. Faster depreciation. It has been estimated by some who have examined machinery under both ownership and rental conditions that rental equipment depreciates an average of 20% faster than owned equipment because of the absence of ownership discipline. Abuse must either be reflected in the rental rate or charged to the lessee in addition to the established rate. Most rental contracts provide that the machine must be returned in the same condition as it was sent out, normal wear and tear excepted. (Unfortunately this often becomes a point of contention between the dealer and the contractor when a machine is returned in poor condition.)
2. Free service. Although most rental contracts are written without maintenance, many dealers find it necessary to give some "free service" on units rented out. This added cost must be reflected in the rental charge.
3. Nonuse. Idle equipment is a factor in computing ownership cost. It is debatable whether the dealer can keep a piece of equipment working a greater percentage of time than a contractor can.
4. Duplication of expenses. There may be more overlapping of expenses. For example, the owner of equipment may be liable for damage resulting from an accident even though he was not operating it himself. To protect himself, the owner must also insure at additional expense.
5. Uncollectible charges. Experience teaches that not all rents can be collected. This additional cost must be included in the rate and borne by others who rent. There are some who have suggested that a payment bond should be required of contractors who rent. This would guarantee payment of rental and return of equipment in satisfactory condition. However this would be an added cost to the contractor renting and is no necessary when dealing with reputable contractors.
6. Added overhead. Some suggest that a ready-to-serve charge should be added to the ownership costs to cover the overhead of maintaining a rental operation. Over and above all these additional costs must be added an amount for profit.
And there are other factors influencing the rental charge, such as weather conditions, job location, length of construction season, type of work, and care of equipment. Thus, rental rates are not determined by any precise accounting formula. They must always be tempered in the light of individual experience.
Now let's look at depreciation. Depreciation has been described as "the certain road to the junk yard". There are several objectives of depreciation:
1) To provide a means of allocating the cost of capital assets to current cost of operations.
2) To evaluate capital assets.
3) To convert capital assets in working capital.
Depreciation does not mean merely a decline in value (i.e., the opposite of appreciation). Depreciation denotes an element of physical exhaustion of useful life because of use or the passage of time. In other words, the decrease in value must be the result of exhaustion, wear and tear, or obsolescence.
Temporary idleness or insufficient earnings does not stop or limit depreciation. Property once used in business remains in such use until you can convincingly show it has been withdrawn from such use. In other words, you can't arbitrarily stop or reduce depreciation simply to conserve it for a deduction at a later date.
There are four general factors to consider in computing depreciation:
1) Basis.
2) Estimated useful life.
3) Estimated salvage value.
4) Method of computation.
Notice that useful life and salvage values are estimates. For this reason these factors are generally the
THE AUTHOR
Elmer H. Jaster is Vice President and Comptroller of Road Machinery & Supplies Co., Minneapolis, Minnesota. This address, "To Rent Or To Own" was presented in February before the American Road Builders Association and is printed with the permission of CE News, the official publication of the Associated Equipment Distributors.
Elmer H. Jaster