The stuttering economy has now set out on its second full year, and one thing to consider is how to manage your tools and equipment in a market short of jobs and perhaps shorter still of cash.
A quick look at different areas of the country tells us that many AWCI member contractors are not very optimistic about the economy in 2010. Many contractors, like David Sharpe of C-Sharpe Co., LLC, in Alabama, feel the economy “will stay the course in 2010.” Why? He says, “I don’t see any indicators to give me any idea that it will improve.”
The economic downturn did not hit everyone at the same time, nor with the same ferocity, but everyone appears to be experiencing a work slowdown. Some areas are so overbuilt that it may be a while before the demand for new construction starts to grow. Michael Hoffarth, project manager at Canyon Plastering & Drywall, does not think it is going to get any worse, but “I think it’s still going to be very tough and sluggish. Arizona is one of the hardest hit states in the country, we’ve really overbuilt.”
A view voiced by many is that projects are indeed planned, but lack the funding to go ahead, primarily due to tightened credit. As David Hamilton, president of A.E. Conrad Company, Inc. in Minnesota, puts it, “The banking industry is going through extremes. First they dug themselves a hole by being way too liberal in lending, and now the pendulum has swung to being way too conservative. The pendulum has to come back and settle at some mid point.”
Daniel Corker Jr., president of DACO Interiors, Inc., says, “At this point we still see a fair amount of bidding, but these projects don’t fund, and one of the problems, in talking to some developers that we deal with, is that they are reluctant to build anything now because of uncertainty about what their tax situation will be with the new administration. There is uncertainty about the bail-outs, the health care legislation and other free spending. Someone has to pay those bills, and they hope it’s not them.”
Brian Jahn, controller at Jahn & Sons, Inc. in Wisconsin, where business is down quite a bit, says that “there are projects out there to bid, but I don’t foresee real improvement anytime soon. Banks have shut off funding. Once credit loosens a bit, I think we’ll see a return to normal.”
A hope that many share—and perhaps not an unwarranted one—is that once credit eases and projects are once again funded, there will be a backlog of projects that might fuel a more rapid than expected construction recovery.
Buy versus Rent
So let’s imagine that your region experiences a bit of a recovery. If today you should land a project so large that your current tools and equipment inventory does not cover the needs, should you buy or rent the needed equipment? It’s a question worth considering.
Pros and Cons—Buy. The main pro in buying is that you do, in fact, own the equipment, to be used on as many projects as it will last, and that you can depreciate over time and so “earn” the cost back as tax deductions.
The con is the initial outlay of money, which, if you’re hit hard by the downturn, is a precious commodity that is worth keeping in the bank.
Pros and Cons—Rent. Two immediate pros are the lower initial cost, especially if it is a one-time or a short project, and the ability to expense the entire amounts as a tax deduction.
The con, naturally, is that you have to give the equipment back once the lease period is up, and that over time, should the project extend—or additional ones come to fruition—you will end up spending more on the rental or lease than you would have with an outright purchase.
The Question. Our contractors are split on this question.
“Should I need additional equipment for a project I would probably set the limit at $50,000. Above that, I would lease and expense it, below that I would buy it and depreciate it,” says Sharpe.
Tom Russo, CEO of Division Nine Contracting, Inc. in Arizona, concurs, but only with the second part of the prior statement. He says, “We really don’t rent; we would buy.”
As does David Hamilton: “A tool we feel we would continue to use, we would buy. Something very unique, we would lease. Typically, in our business, we view things from a long-range perspective. We are more likely to buy than rent.”
Gabriel Castillo of Pillar Construction, Inc. in Virginia thinks otherwise: “At this point I would rent, especially if it is a single job. We would lease and expense that money. But if I knew I had a certain volume, and the depreciation would make sense, then yes, I’d buy.”
Daniel Corker thinks renting is the way to go as well. “It would depend on what the tool or equipment was,” he says, “but everyone’s reluctant to let go of money at this point, us included.”
Roy Glisson, who owns All Wall Contracting, Inc. in Idaho, typically buys. “We usually can afford it, and we achieve better costs that way. Now, if we’re talking heavy equipment, say, scissor lifts and things like that, which need a lot of maintenance, we usually rent.
Rob Little, vice president of Little Construction Co., Inc. in Indiana, believes only in buying. “The only time I would rent equipment would be for expensive items. Actually, right now I’m renting a 120-foot boom lift and some swing stages for a large job site, and the only reason I’m renting is that I’ll only use the 120 foot boom lift once in a blue moon, and as for the swing stages, I don’t want the liability of maintaining them; the rental company picks up the maintenance on this equipment. But we own our own 60-foot lifts and scaffolding—anything we’ll use over and over again.”
At this point Nancy Dennis, president of Anchorage Lath & Plastering, Inc. in Alaska, would rent. She says, “I think large cash outlay is a problem right now, so I’d most likely rent, especially since we don’t know if the promised government jobs are going to mature.”
The Journeyman’s Tools
Tools and equipment owned by the journeyman seem to hold up, and break far less, than tools borrowed from the contractor. It boils down to care.
As a rule, the AWCI member contractors that we interviewed expect their journeymen to bring their own tools, and it may be sage advice for those who at this time don’t, to follow suit, especially if cash is tight.
One solution offered by several contractors is to offer to buy the tools for the journeyman—at the company’s cost—to be paid back through paycheck deductions.
Offers Sharpe: “Some contractors, when they hire on a guy—and we’ve used this philosophy sometimes as well—pay them a 10 or so percent premium if they show up at work every day with our list of required tools.”
Corker also has a list: “They have to bring their own hand tools, their own screw guns and their own pocket lasers. If they don’t have them, we offer to buy it for them at our cost, through payroll deductions. The thought behind that is that people will take better care of tools they own than of company tools.”
Glisson takes the same pragmatic view, “If you call yourself a journeyman, then we expect you to have your own hand tools. We provide lists for each trade of what we require them to own. If you don’t have these, you’re not really a journeyman. We handle this in the interview process. This is also a good way to establish bogus from real.
“We used to provide hand tools, but we’ve learned the hard way that such tools either grow legs or break way too often. Now, what we do—if the guy does not have the tools—is buy them for them on our account and then deduct payments from their paychecks, say $25 a week. If they quit before it’s paid off, or finish the job before then, we deduct the balance from the final paycheck. We’ll help them out in that respect.”
Even if all journeymen bring their own hand tools, including screw guns and pocket lasers, there remains an impressive amount of equipment inventory just waiting to be broken or lost.
There are a fair amount of tools and equipment tracking software on the market today, all of which work on a barcode system, and which may go a long way to automating inventory tracking, but few contractors have deployed tracking-specific software, relying instead on more standard software like Microsoft® Excel® or Access®.
Glisson is such a contractor. “We have thought about utilizing tracking software,” he says, “but so far we use MS Access. We built that database years ago, and we have kept it up ever since as we add/delete tools and equipment.
“Every time we purchase a new tool, we cost-code it accordingly and accounts payable then passes it on to our shop guy who assigns it a number and enters it into the database: description, cost, where it was purchased, warranty period, and such. Then, as jobs call for various tools and pieces of equipment, we mark them in our out. This way we know at any time where our stuff is.”
Sharpe, however, does deploy tool-tracking software. “It’s a barcode-based system that our shop foremen use to check tools in and out, which also functions as a log for how long they’ve been on the job versus budgeted estimates. This gives us a good reading not only of where our inventory is, but also how it’s performing against budget.”
Hoffarth says his company does not use computerized tracking. Instead, “we have a clipboard in our equipment supply room and we check what’s going in and out that way—screw guns and generators, taping tools and such. But we do use computerized inventory for our scaffolding.”
Little says, “We do it the old-fashioned way: pen and paper.”
So does Hamilton: “Ours is really a manual system. We have a good handle on what we have, our foremen are all long-term employees, and trusted, so loss and theft has not been an issue for us over the years.”
Well, don’t knock pen and paper; it works very well, too. And until your inventory of tools and equipment grows so large that tracking it manually becomes a full-time job, it may well be all that you need.
The important thing, however, is that you do track them, whether by hand or computer, so that at any give time you know where your tools and equipment are. They are an asset you cannot afford to squander in these times.
How long a tool or piece of equipment lasts—which, of course, also means how soon it must be replaced—comes down to TLC (tender loving care).
Hamilton vouches for that: “We constantly monitor and maintain the equipment we have. Once a piece of equipment returns to the warehouse, our warehouse guy inspects it to make sure everything works correctly. He also checks with the foreman on the job to see if he had any problems with the equipment. If there’s a problem, he determines whether it’s something we can repair ourselves—and if so, makes the needed repairs—or if we have to send it out for service. This way, our equipment lasts and lasts.”
Russo concurs: “As for our plaster mixers and such equipment, we just keep maintaining them and they generally last forever.”
The only thing certain about this economy is that it still in the doldrums with few signs of life, and while it does, keeping a closaer eye on your tools and equipment inventory may help sustain survival.
Demand that your journeymen bring (or buy, through payroll deduction) their own tools, and track and maintain your larger equipment to make it last well into the next economic resurgence.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.