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Sat July 31 2021

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Plant owners turn to academics for solutions to existential crisis

23 Jun The Scottish Plant Owners Association is looking to commission a business school to come up with some answers to the problems facing their industry.

SPOA president Callum Mackintosh
SPOA president Callum Mackintosh

How come all the costs facing plant owners go up every year but rental rates never seem to move? That is the conundrum that needs answering if the industry is to survive.

In a bid to help its members navigate the challenges they face, The Scottish Plant Owners Association (SPOA) is inviting business schools in Scotland to examine the industry in depth.

SPOA president Callum Mackintosh explained: “This will be the first white paper of its kind for the plant hire industry, and I believe it is a great opportunity for business schools in Scotland to examine an industry that is often overlooked but which contributes £4bn to the UK economy, with Scotland accounting for £1bn.

“Every industry is adapting to the challenges caused by Brexit and Covid-19, but I can think of no other industry where market forces dictate a reliance on a pricing structure from the 1980s. We are still hiring out 120 rollers for around £120 per week yet if you look at the price of a pint of milk, it has more than doubled over the same time period. Similarly, the cost of purchase of a 13-tonne excavator has risen by between 50-65%, yet the hire rate has barely moved from around £450 per week.

“We owe it to our members to conduct a thorough review of our industry and present a roadmap to help them navigate the future. I am passionate about this industry and I want to see it flourish for years to come.”

The key challenges facing the plant hire industry, identified by the SPOA and which will be analysed as part of the white paper, include:

Rising costs of capital equipment (machinery and parts) especially technology required to meet emission restrictions set by government

  • Transport costs (driver wages, costs to buy, run and maintain HGVs)
  • Financing costs
  • Fragmentation of industry with the top 10 accounting for less than 20% of the market share
  • Commoditisation of trading plant
  • Staff costs (training, pension contributions, National Insurance)
  • Risk/ROI ratio of holding plant is skewed against plant operators
  • Overheads (IT, software, insurance)

The SPOA has produced its own initial report on the problems it is facing and the questions for which it hopes academics can provide solutions. We reproduce it in full below.

Working profitably in plant hire [Report commissioned by the SPOA]

A review of the past and future challenges facing the plant hire industry

The magical formula that all plant hirers would like to adopt and apply to their business, does Utopia exist in plant hire? Many have tried, some have failed, and a few wise owls have retired wealthy. Those wise owls have tended to be good at navigating the factors explained in this article.

There are many factors that will influence the profitability of a plant hirer, they must manage the investment cycle! The owner must purchase on the best possible terms. With long lead times currently being experienced in the new equipment market, this puts a huge burden on the owner to gamble on future orders.

When the equipment is finally delivered, utilisation and hire rate become the key factors. Equipment is not paying for itself in a yard, it must be hired out as quickly as possible and having a ready market is essential. Maintenance downtime is also key, Plant must be reliable and regularly serviced whether in a workshop or on site. Longer intervals between servicing are one plus factor that comes with the costs of new technology.

When hired, it must also be at an economical rate that is both fair to the owner and hirer. Hire rates should be increasing faster than they are, given the large increase in cost of new equipment, especially with Stage V engines and a desire to move to more battery technology, otherwise there is a rising cost of capital which the owner must bear.

Finally, disposal. The owner must decide when to sell used equipment. A balance must be struck between, age, hours, and reliability – clearly this is also the time to consider re-investment and focusing on the higher returning assets would be wise! There is no easy solution; every plant hirer will have their own ideas!

Taking an example of a 13-tonne excavator, the average cost of purchase has risen by between 50-65% in the past 10 or so years, yet the average hire rate has barely moved from circa £450 per week (£26-28ph operated).

Although wage rates have increased very gradually over this period and are still only just above pre-recession levels other costs such as pension contributions, NI, holidays, white fleet, other benefits have added to the total cost of employing operatives and most recently the removal of red diesel subsidy in April 2022.

The time taken for hirers to recoup their original investment has extended by many months even years on some core product lines eg Dumpers, rollers, compressors, cut-off saws despite the increasing capital cost.

With equipment prices rising consistently year on year over the past 10 years most notably and hire rates under constant pressure due to high availability / supply, plant hirers have a significant challenge facing them with greater price increases set to be applied.

Capital investment – costs rising significantly

Manufacturers are investing heavily on technology to meet emission restrictions set by government to save the planet, which is a good thing, but it comes at a cost. Capital equipment is set to rise between 30-50% due to new Stage 5 engines, some products are set to double in price!!

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Reflecting on some of the innovations which have been introduced to improve emissions, but which have come at a cost to plant owners not easily passed on due to the lack of added benefit to the production of the machine on site:

  • Emission Control systems have emerged & evolved, expensive diesel particulate filters appeared, requiring re-gen cycles, expensive sensors and, in many cases, software closely guarded by engine manufacturers to 'force re-gen’ would come at a price when the operator had by-passed the routine cycle.
  • Ad-blue joined us. If we wanted the same power that we used to have to maintain production – this came with expensive pumps, yet more expensive sensors that will put machines in limp mode at the blink of an eye – another added cost to the plant owner!
  • To make all this work, more computers and ECUs were added – not conducive to machines working near salt (contractors have generally passed this risk onto hirers rather than accepting damage relating to salt corrosion).
  • Injectors used to be serviced but no longer with common rail and controlled by computers, they have become disposable items at almost £1k each – hirers need to beware fuel and filter choice!
  • To keep the air clean, in many cases the engine fuel consumption has increased.
  • Oil and maintenance costs have risen – low SAPS oil, additional fuel filtration, Adblue filters etc
  • Increased cost of manufacturer attendance and reliance due to software requirements.

The cost of parts over the past 5-10 years has risen by 15-20% and the future does not look much better with a significant volume coming from EU and delays crossing the border meaning next day delivery could be up to three days costing plant owners machine downtime on site. Clearly larger spare parts stock holding will be required again increasing the cost to keep plant operational.

Some components such as EGR valves and coolers and NOx sensors which owners never needed in the past are rarely available when required and again very expensive to fit – these repairs can easily wipe a week or more off in hire revenue which is usually absorbed!

Finance costs – remain low since 2009 recession

Cost of finance to buy plant over the past 10 years has been and continues to be very low with a variety of schemes, such as hire purchase/leasing/balloons, all offering cheap methods to fund assets. Interest rates before the 2009 recession were in the region of 5-6% but have remained well below 1% since then and are forecasted to stay very low. A bit like the automobile market where car financing schemes (with unrealistic balloon payments) have offered private individuals access to more expensive cars at an ‘affordable’ level, the finance companies are creating a larger market through affordable short term repayment schemes and a presumed residual value!

Number of suppliers – range of size of competitors with different cost structures

The hire industry is highly fragmented with the top 10 accounting for less than 20% market share and a high degree of regionalisation due to the variety and specialisation of Plant and local customer relationships. Larger suppliers may be able to operate with a lower cost than smaller regional suppliers, yet contractors will rarely accept a higher rate despite other factors such as quality, service, relationship.

Trading plant – commoditisation

Over the past 10 years trading plant has become more easy and common place for plant owners, with residual value information readily available. This has led to increased confidence amongst owners in the holding cost of plant, which potentially due to a strong demand for used plant has depressed rates.

There are some rental models which only procure plant for specified contract periods and trade them at the end of the contract also benefiting from dealer warranty support minimising the holding cost during the contract and allowing them to quote a lower rate. This rate can be used by buyers to benchmark other hires of a similar piece of kit, but without the same contract T&C’s to fish out the supplier with available kit sitting in his yard (perhaps for weeks!) and so the cycle continues.

Sales staff training – commercial understanding

Training and educating staff to understand the life cycle cost of owning and servicing plant is key to the future of the plant hire industry. More investment in courses/ qualifications for sales and hire desk staff to understand the equipment and servicing costs, other variable costs, and fixed overheads to apply would be of great benefit to hirers.

Risk – Is the risk/return ratio out of sync?

One of the key factors determining the rate for a piece of plant is what risk the plant owner is accepting. Who the customer is, what is their credit rating, time established, ability to pay and how long, where the hire is located, and hire commitment and where does the insurance obligation lie in the terms and conditions of the contract?

Plant owners bear a lot of risk in holding plant that needs to be factored in when quoting a rate which reflect this, however the market (contractors) have become used to a certain rate for a certain item and expects to pay this regardless of some of the factors.

Overheads – IT/software/insurance

We are moving into an age of digitalisation of the workplace with paper quotes, timesheets, hire lines, job sheets being replaced by tablets, web portals, PC workstations and electronic signature capture via email. This investment in R&D and IT is going to make hirers more efficient and accurate but the front-end costs are significant, and part of ongoing continued investment required to keep pace with customer demand.

Summary

The future trend suggests that plant equipment and parts prices will only be going up with T5/ electric/ hybrid/ autonomous plant on the horizon, and whilst strong residuals have been held up to now there is uncertainty around the future residual value of Plant given these new variants, exchange rates, Brexit and now Covid.

In addition, the industry needs to attract the right level of skilled labour to drive, maintain and deliver Plant safely, proficiently, and ultimately profitably. This can only be achieved by paying the going rate (versus other industries) and investing in training for all staff including back office support.

When compared with the price of bricks, concrete and other materials used in construction, it is hardly believable that you can hire a 120 roller for about the same rate as you could back in the 1980s and ’90s…. £120 per week. The wise owls who retired wealthy know that hiring out at the lowest rate quoted by competitors is rarely going to be the economical rate that is both fair to the owner and hirer!

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MPU

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