Repair or Replace?

A common question for construction companies is when to repair or replace failing equipment that may have some life left in it. Too often, this question arises at the time of equipment breakdown, when other matters are more pressing. The fleet manager and business owner make a decision based solely on the cost of the repair versus the cost of a new piece of the same equipment. They know there are additional factors to consider, there just isn’t enough time to address them.

No matter how quickly equipment decisions need to be made, they impact the bottom line down the road. Repair-or-replace decision trees remove time pressures and allow business owners to make decisions that are aligned with long-term equipment management strategies and contribute to growth, profitability and sustainability.

The decision tree outlined here (see graphic) provides a process for creating a best equipment management practice.

Start with the Facts

When assembling the parts for a decision tree, decision-makers should begin with the knowledge they already have at hand. The fleet manager should collect the make, model, year, book value and utilization specifics for each piece of equipment, as well as aggregate numbers for pieces of equipment in different categories. For example, how many excavators, dozers and scrapers does the company own, and which ones have value-added capabilities? This information establishes the foundation for the decision-making to follow and provides a holistic view of the fleet.

With the basic information at hand, the decision tree can be mapped step-by-step. By understanding equipment fleets and needs, the company can answer the many questions involved in advance of making a decision to ensure the best possible – and fastest – outcomes. This might also set the stage for a long-term equipment strategy that could eventually catapult the company in the marketplace.

Critical Considerations 

In following the flow of the decision tree, business leaders must evaluate several considerations and their importance to the company:

  • Does the piece of equipment produce revenue or does it service revenue-producing equipment? The company must look at its production fleet and its service and fuel trucks. The support equipment in a company’s fleet can get overlooked and create excessive, unnecessary spending.
  • Is the equipment an essential component of the fleet? Based on current and projected work, is the equipment the correct type or model needed, or would another model be more suitable or less costly to operate? At times, companies keep equipment that is not being used. The misconception is that if the equipment is fully depreciated, it doesn’t cost anything. However, there is always a cost to keeping equipment around, especially if it has trade-in value that could be used to update the fleet.
  • What is the availability of company-owned or rental equipment to replace the equipment, short- and long-term? How important is it to get the piece of equipment up and running? When is the equipment needed on a regular basis? How long will it take to repair it, and how long will it take to replace it? Will revenue be lost while it is out of commission, and if so, how much over what period of time? Given business owners’ hesitation to move forward in purchasing equipment in recent years, the industry has seen increases in rentals. At times, rental demand has led to a lack of availability for rental equipment.
  • What is the magnitude of the repair cost compared to the potential life of the equipment? Based on utilization, is the cost to repair the equipment recoverable before the end of its useful life? Will the repair improve the equipment enough to increase productivity or reduce future costs? If so, what are the lengths of time and dollar amounts involved?
  • What are the costs and benefits involved in replacing the equipment? How much will it cost to purchase new or used equipment to serve the same or additional purposes? Will upgraded equipment, whether through repair or replacement, lower costs involving fuel, maintenance, or other expenses? Understanding the cost and benefits is essential to making an educated decision as opposed to an emotional decision. At the end of the day, companies should focus on what is going to improve productivity.

What are the additional factors to consider regarding the costs and benefits of acquiring new equipment or replacing existing equipment?

Additional questions include:

  • Will equipment replacement enable the company to perform more work, integrate work teams or locations, save time and increase other efficiencies? Will replacement bring in new revenue, and if so, how much?
  • What is the current market value of the equipment? The used-equipment market is strong now due to lack of purchases in recent years. The value of the equipment may be greater than anticipated.
  • What are the availability and benefits of equipment warranties that come with a new piece of equipment to cover unexpected repairs?
  • What is the expectation of future downtime and repairs? As equipment ages, the frequency of necessary repairs will also generally increase.

By creating a decision tree and taking a strategic and proactive approach, companies can reduce the disruption and financial impact – not to mention the headaches –  involved in making equipment decisions.

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