Equipment policy

Equipment acquisition:

Equipment can be acquired by purchasing, leasing and hiring.

PURCHASING:

It is the activities for getting the right material to the right place at the right time, in the right quantity and quality at the right price from reliable source.

Methods of purchasing:

1. Receiving requisition
2. Review requisition
3. Selection of suppliers
4. Place order
5. Monitoring
6. Receive orders

a.Receiving requisitions:

All department of company demand materials or equipments to the purchasing department according to their needs to perform their functions.

Receiving requisitions should include:

• What to buy
• how many items
• when to provide
• name of indenter (representative of foreigner company, product, a person)
• estimated cost

b.Review requisition:

Before taking final decision, it is done to get materials or equipments for following purposes:

• Buy in best price,
• Get alternative materials for longer life,
• Redesigning and revision of specifications for getting latest version of equipments for more efficient, more production etc.

c.Selection of suppliers:

To select the supplier from short list, consider following factors:

• Quality of their products
• Product price
• Delivery schedule
• Services (repair maintenance, sales spares etc.)
• Technical assistance (installation, commissioning)
• Training program
• Lead time

d.Placing orders:

After selection of suppliers and negotiation of prices, orders of materials or equipments are placed formally to purchase. Determine the following:

• Items numbers and quantity
• Quality of products
• Fix delivery schedule
• Delivery place etc.

e.Monitoring :

Monitoring of purchasing order is for controlling delivery schedule. Delivery schedule may change due to suppliers production delay and change orders with in his own firm. Untimely deliver of materials or equipments create problems such as:

• Decrease production
• Increase stop cost etc.
• Purchasing methods

f.Receive orders:

• Receipt contracted item numbers and quantity
• Receipt contracted quality
• Receipt material or equipment in an acceptable condition and provide payment.

Final price can be discount for large quantity and for prompt cash payment.

LEASING

Over the past several years there has been a growing trend of leasing as a way to finance construction equipment. It is normally easier to gain financial approval for equipment under a lease program than through conventional purchase financing. In the simplest form, an equipment lease is simply a rental agreement. Rent is paid for the equipment during the rental period. Once the agreement is over, the equipment is returned to the owner. In a true lease, the lease payments are considered as an expense of the lessee. The lessee does not own the equipment and it is not shown as an asset on financial statements. The most significant factor that affects the decision of renting or leasing is the duration of time the equipment will be required. Leasing is normally considered more favorable when there is requirement of equipment for more than 6 months. Most leases run from 18 to 24 months. For large and expensive equipments, leases can run as long as up to 84 months.

Leasing arrangements are a form of finance in which third party acquires an asset, usually a bank, finance company, or dealer and then leased to the end user for a predetermined agreed upon period of time. This arrangement means the leasing party never actually has title to the asset for the term of the lease, although it is allowed to use the asset during that period. In the normal capital equipment lease, the term of the lease will be equal to the operating life of the asset and the repayments will be set up by the cost of the asset spread over that time, plus a certain profit margin for the lessor. Leasing does not have any impact on a company’s current or debt-to-worth ratios, thus presentation a more positive financial condition for bonding purposes. Leasing gives rise to a more orderly planned equipment replacement strategy, reducing the maintenance costs before they become excessive. Leasing also eliminates the works such as used equipment disposal or resale for the user. Leasing of construction equipment allows for more flexibility dealing with cyclical and regional variations at a work level.

Many leasing companies offer seasonal leases which are termed as skip leases that allow the user to skip the scheduled payments during busiest months, thus minimizing cash flow concerns during seasonal periods when the work is low.

Step-up leases start with lesser payments that increase over time, allowing the user to generate revenue while initial payments are lesser.

Deferred payment leases allow the user to defer initial payments until cash flow is started.

There are two common types of equipment leases offered by most equipment dealers. They are:

The finance lease is a lease that allows the contractor to make lease payments over a period of time and purchase the machine for a bargain purchase or mandatory amount at the end of the lease term. The lessee typically retains the tax benefits. The term for new equipment ranges between 12 and 60 months.

The tax lease typically offers a lower monthly payment than a finance lease. At the end of the lease term, the contractor has three options: buy the equipment at a fair market value, extend the lease for a new fixed term or month-to-month basis, or return the equipment to the dealer.

RENTING

Renting is gaining popularity as an option for contractors when it comes to acquiring equipment. In CIT’s 2006 Construction Industry Forecast, respondents as in the past, cited limited need for the equipment as the primary reason for renting. The forecast highlights that as equipment fleets grow older, more contractors are finding it necessary to use rental equipment to back up the equipment they own.

The most obvious disadvantage of straight-out equipment rental is that there is no option for accruing equity. Equipment rental has no impact on the balance sheet. It does, however, impact cash out-of-pocket. Rental payments reduce the company’s earnings as an operating expense and since the equipment is not owned, there is no impact on depreciation. Dealer equipment rental programs offer many of the same advantages or benefits of lease programs. The contract period for rental provides complete flexibility, with contract periods as brief as a day or a week or as long as a month or a year.

One of the greatest risks any business can incur is that of having a large portion of its capital tied up in nonproductive assets. Construction equipment sitting idle in a yard or warehouse still demands outlays for insurance and maintenance, and depreciation may continue just about as fast as if the equipment were working. Most contractors rent approximately 25% of their total equipment requirements. This follows an 80/20 balance for equipment specification and purchase. A contractor purchases or leases equipment that is appropriate for 80% of the work performed and rent for the other 20% of the work.

Most rental companies calculate their rates on a monthly basis. Weekly rates are usually about three times the daily rates. Similarly, monthly rates equal about three times the weekly rates.

On an hourly basis, renting is typically the most expensive of the three acquisition solutions. However, it is ideal for work activities not performed on a regular the basis, because it minimizes idle time for seldom-used equipment. Renting is the best solution when equipment will be utilized for a short duration.

References

1. Technical book, “Construction Machinery Training”, Instate, Imlambad
2. Harris, F. and McCaffer, “Management of Construction Equipment”, Macmillan Education Ltd. London, UK.
3. Erich J. Schulz, “Diesel Equipment I and II”, Mcgraw-Hill book co.
4. Frank Harries, Ronald McCaffer, “Construction of Plant Excavating and Material Handling”, Granda Publishing.
5. SAE Handbook Volume 4
6. “Caterpillar performance Handbook”, Edition 33, Caterpillar Inc, Peoria, Illinois, USA.