8 key total cost of ownership considerations
By Steve Ducker06 April 2022
In recent years, the Coleman Group has changed its approach to buying equipment in line with the different requirements that customers are placing on the business. Chief executive Mark Coleman talks through some of the thought processes involved.
How demolition contractors approach the total cost of ownership question usually depends on the structure of their business.
Typically, most like to own their plant, so they have the equipment when they need it for a job. Within that, there are various ways of owning the plant, either through hire purchase, contract hire or a lease.
What we used to do at Coleman was buy plant over time on hire purchase and use the older plant so it would be paying for the new plant to work.
That was OK in the old days – people almost accepted plant breaking down on site and being repaired.
Fast forward to now and it is totally unacceptable to have plant standing on site. People are monitoring the situation. You cannot take five machines to a site and have only three of them working.
Because of this need to change equipment more regularly, we have moved into a mix of leased and hire purchase machinery.
And to be honest, financially there is not much difference.
It is just that the lease hits your balance sheet in a different way. Hire purchase will show the overall debt on your books, but a lease will show that you are in a weekly contract hire for your machine.
The great thing about using fixed term pricing, bundled up with a maintenance package, is that you would buy a machine depending on usage.
On average, you would get around 1,500 hours a year from a normal machine, but a high reach might only be half of that. For specialist machines, you would put up the base rate automatically because you are trying to recover the amount of money that you are financing over fewer hours.
A lot of contractors now have a fixed term contract.
They have an agreed buy back price at the end of the three-year period based on the average amount of hours and decent wear and tear. You go into a deal, and three years later you negotiate, you get the new machinery and you go again for another cycle.
The problem with that is, particularly with some manufacturers, users are worried that they get locked in with those machines. You can sell some machines anywhere in the world, but with others you will have more trouble, especially after three or five years of use.
If you are not careful, you can get locked into a brand.
This is because the equity in the equipment has reduced so much that when you come to buy new machines you cannot afford another brand because the gap is too great. Unless you want to spend big money to change things, you end up stuck with the brand that you already have.
With plant and equipment, you have the purchase price, but also the operator, running costs, wear and tear, movement, insurance, replacement costs.
You also have the support staff, fitters’ vans, a workshop, all the equipment. If you are working all round a large country or all round the world, it is not ideal to have your own fitters. We were hiring machines in Scotland while we had machinery standing in our yard in Birmingham, over 480 km (300 miles) away. It just did not pay to put a machine up there for two weeks, bring it back down, and then potentially have a problem with it breaking down on site.
We decided 18 months ago to work with supply chains that specialise in plant hire. This meant we could get the exact machine we needed for the site in the area that the machinery comes from and reduce our costs. We didn’t need all this support, we didn’t need the yard, but the services that we are providing are in the right area at the right time.
So now everyone is looking at downtime, at utilisation, and the green agenda. When emissions are changing all the time, you must pay attention to what equipment can work in what areas. We have found that carbon reduction has been a key driver in plant purchasing and equipment hire.
We work with a local plant hire company.
They lend or hire us the plant, we use it on the job, and they sort our any problems. When the job is done, we send the equipment back.
When we hire the plant, we operate it with our own operators, unless it is specialist equipment which is operated by the hiring company.
We have been working with that model for 18 months now, and as a business we have moved into focusing on the demolition, rather than buying and using plant equipment out on site, because we saw that as a cost drain and a risk, particularly when you look at the effect of Covid-19.
And we were able to become a lot more agile and nimble as a company, keep our cash reserves, and we can ride any storms better rather than the reverse, which is getting into negative pricing because you have so many machines standing.
That is when the red pen comes in. You start knocking all the figures down just to get the machinery out, and then you are working at a loss. And of course, a decent job comes up, which you can get good money for, and all your machinery is tied up on the other job.
There are choices for contractors around what they do and how they do it.
Are they going to buy all the equipment themselves? Are they going to look after it?
Are they going to buy the equipment and get someone else to look after it?
Contract hire or lease?
For example, we are charging all our car fleet to electric, but we do not believe electric is the ultimate solution. We think hydrogen is a major part of this.
Now we are putting the cars on an 18-month lease, because the change in electric technology is such that we don’t want to get asset stranded, like when you get modern tech like a television or a computer and then 12 months later it is worth nothing.
We see that coming into machinery as well. It is more sophisticated.
But you must add into the mix the arduous nature of demolition. The wear and tear on the machines are much more, there is more tracking around, there is lots of dust, and the machine needs more greasing. Another important aspect in that part of the maintenance is to make sure you have one driver, one machine. This is virtually impossible, because they leave the company, or they go on holiday, and the older the machine gets the more drivers operate it, so it is less well looked after, and it becomes the machine that nobody wants to operate.
Typically, we would spec and resource our machines as a group, at the board meeting.
Any investment is part of short, medium or long-term planning, what jobs are coming up, what those needs are.
Then what we would do is come up with an idea of what we need. For example, we want four 40-tonners standard, two 40-tonners straight boom, this, that and the other. And then we would go and talk to the operators about the machinery they are on, get feedback about what they think about it, and get their advice, because they are going to be sitting in the machine all day.
We would even get machines on loan, or on demonstration, and put those operators in to trial them and let us know what the think.
When we talk to different manufacturers, every company has their own culture. The biggest problem I find is people coming in to sell you millions of pounds of plant and equipment and they know absolutely nothing about the demolition spec side of it. Years ago, that was not a problem. Now, with all the different options, there is a lot to think about.
In the United Kingdom construction industry, the environment is a massive subject, as is the environmental impact of demolition.
My belief is that in the future you will see a change in mix in terms of demolition fleets being used to reduce carbon.
But are clients going to pay more for cut and lift wire cutting because it is environmentally friendly, or are they going to suffer the carbon footprint of the demolition contractor and their supply chain with big heavy diesel machines?
You can see how much environmental trends can influence purchasing policy for a demolition contractor.
- Read the full interview, along with other total cost of ownership content, in the March-April issue of Demolition & Recycling International