Digital Exclusive – Three Ways To Reduce Cost Pressure in Construction Equipment Market
As a result of cost increases, managers of construction equipment are under pressure to find ways to pare down expenses. Corcentric’s Steve De Franco examines some of the ways companies can do so to maintain a healthy bottom line.
Between June 2018 and June 2019, the price of construction equipment has risen by 5.8%. That’s a rate more than three-and-a-half times the rate of inflation.
As a result of these cost increases, managers of construction equipment are under pressure to find ways to pare down expenses in order to maintain a healthy bottom line.
While there’s not much that can be done about the increased price of equipment, there are three key ways managers can achieve savings:
- Improving the way they buy parts and supplies for maintenance and repair issues and also for indirect spend items
- Automating the procure-to-pay (P2P) process
- Focusing on total cost of ownership
Group purchasing organizations (GPOs) are a great way for managers of construction equipment to control costs on things like tires and maintenance items, as well as miscellaneous items such as cleaning supplies, computer equipment, office furniture, etc.
Being part of a GPO allows the manager to leverage the purchasing power of a large group of businesses. Typically this results in purchase prices lower than what the company could achieve on its own. In many instances, firms doing business through GPOs are also eligible for rebates on their purchases once they reach certain spending thresholds.
When it comes to the procure-to-pay process, the construction industry is still very dependent on paper. Paper in the P2P process adds both time and cost to the accounting function.
In fact, days sales outstanding (DSO) for the construction market are longer than in many other industries.
Waiting for invoices to be paid restricts cash flow and could prevent a company from being able to purchase necessary equipment. According to Contract Simply, 88% of contractors wait at least 30 days to receive payment of invoices and 46% wait between 60 and 90 days before invoices are paid.
Automating the P2P process will speed up invoice payments because billing discrepancies are cleared up before the invoice is sent. Timely payment of invoices frees working capital, which can be used to make needed purchases.
When it comes to equipment purchases, it is best to take a total cost of ownership approach rather than just looking at the initial purchase price.
There are a variety of factors that need to be evaluated before making the decision to procure a new piece of equipment. The efficiency and productivity of a new piece of equipment, the amount of maintenance needed to keep the older piece of equipment running, the cost of financing the equipment, and the anticipated resale value at the end of the unit’s life are just some of the issues that need to be evaluated when deciding whether to invest in new equipment.
Asset lifecycle modeling is a good way to assess the total operating cost of assets and will provide valuable insights to help managers make more informed and effective capital equipment decisions.
If the algorithms work out and replacing an existing piece of equipment or adding a piece of equipment makes sense, the next step is to determine whether it makes sense to lease or purchase the asset. Given the cyclicality of the construction market, it is wise to look for a lender that offers flexible financing options. This could include things like:
- no initial cash outlay
- low payment terms
- flexible terms
- no residual value risks
Changes in the economy, increases in equipment costs and market dynamics all put pressure on construction equipment managers. Fortunately, there are steps they can take to gain control over spend and improve cash flow, which will allow them to purchase the new equipment they need.
Steven De Franco is vice president of Sales, Procurement Services for Construction and Agriculture, at Corcentric. He has more than 40 years of industry experience, including previous work with Bridgestone/BANDAG.