This plant for hire

Along with materials and labour, equipment represents one the largest expenses of any construction project. CW’s Colin Foreman explores one method available to contractors for avoiding these costly investments

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By  Colin Foreman Published  December 1, 2003

|~|cat_b5_200w.jpg|~|Standard equipment like this excavator can be hired on contract-by-contract.|~|It is fair to say that anyone who left Dubai ten years ago would no longer recognise the city. From the skyscrapers attempting to pierce the ozone layer alongside Sheikh Zayed Road to the iconic Burj Al Arab, large construction projects have altered the skyline of Dubai forever. This flurry of activity shows no sign of abating with the last six months witnessing Emaar announce its plans to build the world’s tallest skyscraper and more recently the announcement that Dubailand will have the world’s largest shopping mall.

The speed with which these projects have been, and are predicted to be, completed are also staggering. Although this is testament to the advances that the construction industry has made in terms of efficiency, faster delivery times do have one drawback once equipment is considered. As with any manufactured goods, construction equipment has a product lifecycle, and advances in mechanical engineering and production techniques have meant that product life cycles are now longer than ever.

If you combine these two factors, shorter delivery times and longer lifecycles, it makes much better financial sense to hire the equipment rather than buy it, especially if you are a multinational coming into UAE, or an established contractor that needs specialist equipment, to do a particular job. Once that job is over, the plant may then spend a lengthy period in depot until another applicable contract is undertaken.

If you do buy, you will have to spread depreciation costs over a much shorter time frame, reducing the scope for recouping the initial cost of the equipment. This is particularly true of more specialist equipment that may only be needed on one particular project. Generic construction equipment will always be used, a road contractor will always need jackhammers, but more specialised equipment that is needed for a particular job is more than likely to be used just once, resulting in vast amounts of idle capital.

Buying expensive equipment therefore becomes bad economic sense. In the case of cranes, a 400 tonne Liebherr heavy crane would cost somewhere in the region of US $2 million – a massive sunk cost for any contract bid. In a market where the bid price is so important such sums of money may mean the difference between a successful bid and a losing bid.

Profit margins

In addition, even if the project were won, the initial expenditure would severely constrain precious profit margins. Less expensive lighter equipment also falls into this category as the aggregate expenditure on smaller items often exceeds the expenditure made on larger pieces of equipment.

One solution to the trappings of the product life cycle is to hire the equipment. Various companies in Dubai and the UAE specialising in different areas offer equipment for hire at a fraction of the cost of actually purchasing the equipment. Rental companies are able to do this by utilising the product life cycle to their advantage, by making the equipment available to the market as a whole rather than just being available for work with an individual contractor. Rental equipment can therefore be employed on a near full time basis. Both Caterpillar (Cat) and Gallagher boast utilisation rates of nearly 80%.

Hiring equipment obviously saves contractors the massive sunk costs associated with purchasing new equipment, it also has other benefits. Hired equipment is supplied with experienced operators that require no training, avoiding the all too often problematic task of recruitment. The valuable expertise that rental companies gain from a familiarity with their equipment can also be utilised when determining what equipment is needed.

The ability to rent also enables contractors to bid on a wider variety of projects as jobs that require specialist machines and operators can be undertaken cost effectively. This is particularly true of heavy cranes that may only be used for a few days at a time. For example, for the installation of the sky bridge connecting the two towers of the Fairmont Hotel in Dubai, seven cranes were needed for one night to lift the 108 m long 208 tonnes bridge into position. Purchasing this equipment new would have represented a colossal investment for the contractor and would probably have prevented them from undertaking the project. With over 40 cranes to hand, companies like Gallagher are ideally suited to such jobs. “We operate like a taxi service, you call we send a crane,” says Arty Wartanian, general manager, Gallagher International.

According to Arunava Dastidar, rental services manager, The Cat Rental Store, rental is also proving to be attractive to foreign firms entering Dubai construction market as they can avoid purchasing all the equipment they need for a job. This is of particular benefit to companies engaged in Dubai on a project-by-project basis where any equipment is likely to be used only once. For customers such as these, or any other client seeking to minimise their initial outlay on capital, Cat Rental provides “a one-stop shop for customers in the region, this includes a comprehensive range of machines, tools, accessories, and operators with all the required local insurance and registration documentation. And by using the Cat Rental’s global network we are able to supply almost any equipment that a contractor may require,” adds Dastidar. The market for rental services is not merely confined to the UAE with local companies supplying equipment to Bahrain, Oman, Saudi Arabia and Qatar.

It is this flexibility and the ability to maximise the utilisation of expensive equipment that has contributed to the hitherto success of the rental business.

This trend looks set to continue as more and more projects find their way of the drawing board both in the UAE and the surrounding region. “The next five or six years will provide enough business for everybody,” predicts Wartanian.||**||

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