One of the things every business using heavy equipment will have in common is the goal to realize the maximum possible value of their equipment. Heavy machines do important work that keeps production moving and affects the bottom line as well as overall efficiency.
Anyone who owns or manages heavy equipment faces the decision at one point or another whether to rebuild or repair equipment or to simply replace it.
A rebuild includes changing out all of the major and most of the minor components of the machine. Calibration and settings adjustments are performed when applicable as well. The finished product is a newly revamped version of your machine that will run and perform like new.
Repairs usually consist of replacing only the faulty elements causing a problem.
Whether you have one piece of heavy equipment or a huge fleet at your disposal, this question arises as the machines reach the end of their practical lives. The decision to repair, rebuild or replace relates directly to the profitability of operations involving heavy machinery, and there’s a lot to consider when making the choice.
Rules of Thumb
Is the repair covered?
Anyone who has to answer for the profitability of operations involving heavy machinery should take the time to review the following considerations when deciding to repair, rebuild or replace heavy equipment.
Before committing to either repairing or replacing a piece of heavy equipment, it’s important to verify the status of the machine’s warranty. Warranties should be covering the majority of your maintenance costs for equipment in the first year or more. If your supplier is not offering a reliable warranty, consider switching suppliers.
Warranties represent a significant value add for any equipment purchase, even more so in the case of heavy equipment. Failing to take full advantage of warranty terms can result in significant loss of value for the equipment, and lost profitability for operations.
For issues occurring after the warranty has expired, the 50/50 rule of equipment replacement can be a helpful heuristic.
The 50 percent rule states that replacement is not necessary until the cost of repairing the machine exceeds more than half the cost of the desired replacement machine. For an accurate calculation, the costs of repairs should include labor expenses as well as the cost of parts for the repair.
Over the work-life of a given piece of equipment, repairs will increase in cost from minor fixes to major issues leading to inefficiency and even safety concerns. Recognizing the 50% threshold in repair costs as compared to the cost of replacement can help you identify the best time to replace the equipment.
Repair costs will tend to rise to about 30% of replacement over time, then jump to 50% in the following year. Following these general milestones in the life of a machine can help you plan years in advance for needed equipment repairs and budget appropriately.
There are many strong arguments for the 50-50 rule, but many repair/rebuild/replace decisions involving heavy equipment will require an even more complex analysis.
A profitable business formula in these industries depends heavily upon successful management and operation of the equipment. At MacAllister Machinery, we understand the factors involved and offer resources to help form and follow a proactive strategy for heavy equipment management, as well as follow through on the plan. We’re here to help with the full life-cycle of heavy equipment, including specific plans for the following:
- Dozers (tracked and wheeled)
- Forestry machines
- Lift trucks and forklifts
- Loaders (tracked and wheeled)
- Power systems
Priorities Lead the Process
Your company’s priorities should bring clarity to this decision.
For example, a government entity might have a policy that mandates equipment replacement at certain intervals. A private company might automatically replace a machine when it reaches a certain number of operating hours and not spend the time to anguish over the decision of whether to rebuild or replace construction equipment or other machines.
More often than not, the first priority is to do whatever will save the most money now without compromising safety or quality. That fact pushes many people toward a rebuild or repair solution.
In the majority of cases, it’s more economical to rebuild, repair and maintain big equipment than it is to buy a new or used replacement.
The perfect scenario is usually to extend its life for as long as possible without major breakdowns and then sell, rebuild or dispose of it before it fails. Everyone wants to try and maximize the dollars paid for heavy equipment.
Finances Shape the Decisions
Cash flow considerations and how much is on hand are among the top things supervisors examine when debating whether to rebuild or replace their equipment. Naturally, the price of a new machine would be considerably more than one for a financed rebuild or repair, and with a much longer time commitment.
The depreciation and taxes on a rebuilt or repaired machine will cost less than with a new one, and there are many other financial aspects to consider as well: We have listed some of them here.
- Is the machine in question paid for, or is money still owed on it?
- How much is the asset worth in a resale, trade or salvage deal?
- How much will the repair cost affect the balance sheet, income statement and cash flow?
- Have regular maintenance and service costs been factored in?
- What is the cost of taxes on a new unit?
- Are reliable estimates of the cost of needed repairs available?
- Could a new machine add significant financial value, such as allowing for bids on more demanding contracts?
- What disposal fees will need to be paid upon retiring a machine?
- Do any of the machines under consideration pose a risk that could incur expense?
- Will a rebuild or repair actually restore equipment to acceptable performance?
- How will either option affect fuel usage and costs?
- Does the option position the company with a competitive advantage in the future??
Many advise that replacement of a machine is preferred only when the monthly costs of a rebuild or repairs consistently exceed what it would cost for a potential new unit. It’s a misconception to presume that equipment will fail just because it’s old. The point of failure depends on multiple variables unique to the machine.
For example, a wheeled truck used hard in mines by untrained workers without proper maintenance will have a problem well before its projected lifetime is fulfilled. However, the road grader of a township or small city that’s not used regularly and is maintained to suggested standards will probably exceed its life expectancy.
Use Cost Analysis to Get to Details
While it’s a more common practice at large companies, any business can conduct a life-cycle cost analysis (LCCA) on each of its machines. It may be conducted fleetwide or just on the older machines. The LCCA is normally detailed and thorough and is conducted according to one of several accepted methods.
Owners and managers use the resulting data as a tool to analyze, forecast, schedule and compare the characteristics in order to make sound decisions about repair, rebuild and replacement. Keep in mind that the process may involve quite a bit of digging, analysis and thought but ultimately leads to confidence, knowledge and savings over time. An LCCA typically examines equipment expense from two angles:
- Ownership – which includes purchase price, insurance, interest, taxes, storage, depreciation, decommissioning and disposal.
- Operating – which includes repair, maintenance, fuel, operator labor, tires, fluids and other consumable costs.
Most analysts will assign a multiplier to account for such variables as fuel-cost fluctuations. The multiplier may also take into account things like market conditions, production levels and forecasts.
A cost analysis should be built into a spreadsheet with multiple columns and subsections for the various items. The life-cycle itself may range from 7 to 50 years, depending on the type of equipment you’re analyzing and its projected lifespan.
It’s common practice to create and analyze two or more different scenarios — one for keeping and rebuilding or repairing the equipment and another for replacing it with new or used equipment. The work results in a personalized comparison that you can put side-by-side and examine in detail.
While other factors are involved in making the decision, most people want to see and compare the numbers.
Experts agree on the most important number to know: The cost per mile or operating hour to own and operate the equipment.
Armed with the cost per mile/hour data and a projection of the machine’s life expectancy, you can make many useful calculations in a practically unlimited number of scenarios.
Pick and Employ a Method
Preferred methods of conducting such an analysis vary by company, and your own accounting department may have suggestions or established models. There are also working examples available through the federal Army Corps of Engineers and organizations like the Associated General Contractors of America.
It’s easy to get overwhelmed seeking the right method for analyzing costs at a particular business, because there are several ways to conduct the process and scores of resources to guide it. You will find academic, scientific, industrial, basic business and other approaches, with one or several to fit your needs.
It’s also possible to tailor a method to better suit your business — for example, to leave out rows on the spreadsheet that don’t apply to you, or to make necessary additions. The hypothetical life-cycle cost analysis for a small-scale machine repair might work like this:
- Determine the cost of a new and used part.
- Figure out how many miles or hours are needed from the equipment.
- Add in the labor cost for installation.
- Divide the cost by number of hours to obtain cost per mile.
Using this method, and based on a need for 600,000 miles over six years’ time, the analysis for determining the cost of a new versus a rebuilt alternator might look something like this:
- New alternator: $800 and good for 120,000 miles
- 600,000 / 120,000 = 5
- $800 x 5 alternators over six years = $4,000
- Add labor at $100 per hour for six hours = $600
- Total of $4,600/600,000 = 0.008 cents per mile
- Rebuilt alternator: $500 and good for 100,000 miles
- 600,000 / 100,000 = 6
- $500 x 6 alternators over six years = $3,000
- Add labor at $100 per hour for six hours = $600
- Total of $3,600/600,000 = 0.006 cents per mile
If you use that machine for the whole 600,000 hours, you stand to save a good amount of money over the years using rebuilt alternators:
- 0.002 cent (difference between two options) x 600,000 = $1,200.
Along with these all-important numbers, other factors can affect the outcome of the cost equation:
- Age and condition of the equipment
- Need for increased capacity
- Frequency and severity of repairs
- Level of maintenance in its life
- Availability of parts or rebuild services
You can follow these same basic steps to conduct a life-cycle cost analysis or cost-benefit analysis for heavy equipment. Generally, the more details you can gather and include in the examination, the more thorough your data will be to guide your decisions.
Pros and Cons Influence Choice
As each organization faces its own equipment decision, the advantages and disadvantages of each option will help them clearly see which choice is right for their business and applications.
Pros of Replacing with New Equipment:
- Latest technology
- Longest life expectation
- Comfort and safety features
- Top efficiency
- Low maintenance costs
- Increases capacity
Cons of Replacing with New Equipment:
- Greatest expense
- Possible learning curve
- Long-term commitment
- New payments
- Warranty obligations
Pros of Replacing with Used Equipment:
- Recent technology
- Lower cost than new
- Low hours available
- Less depreciation than new
- More capacity
- Possible price deals
Cons of Replacing with Used Equipment:
- Unknown history
- Quality standards may vary
- Shorter life than new
- Requires big cash outlay
- May not include warranty
Pros of Rebuilding Current Equipment:
- Overhaul eliminates problems
- Like-new for less money
- Avoids pain of depreciation
- Long life expectancy
- Sidesteps selling/trading
- Adds value to equipment
Cons of Rebuilding Current Equipment:
- Long lead/down time
- Not all technology can upgrade
- Major expense
- Service/build quality varies
Pros of Repairing Current Equipment
- Fastest solution to run again
- Least amount of money
- No depreciation
- Keeps familiar machine on fleet
- Options to add power, strength
- Easiest short-term fix
Cons of Repairing Current Equipment:
- Shortest life expectancy
- Parts may be hard to find
- No modernization of technology
- May have long lead time
- Repair may find other problems
- No added, enhanced capacity
Brands, Dealers Make a Difference
The decision about whether to rebuild or replace construction equipment or other heavy machines also depends on what brand it is, how it’s used, what dealer does the work or sells the machine and the type of environment in which it works, among others.
MacAllister Machinery carries many brands and types of machines, but we choose to feature Cat equipment and offers — for example: The Cat Certified Power Train Rebuild (CPT). The process entails professional technicians disassembling the entire power train to update or replace all of its parts, with options for extended coverage.
A certified construction equipment rebuild gives clients peace of mind, since all the major components are examined and either refreshed or replaced, including:
- Drive line
- Engine control module
- Pumps (fuel, oil and water)
The thorough work includes options for such services as hydraulic overhauls and improvements, exterior paint and cab amenities. It’s worth considering how heavy equipment and the vendors that sell it have a range of standards, just like with most products and services.
Often, the successful implementation of a repair, rebuild or replacement project depends on choosing or having a good relationship with trusted equipment professionals. MacAllister Machinery, for example, offers three levels of rebuild, including a certified, to-the-frame job that reconditions everything to give the equipment a new life.
Rentals Fill Gaps, Offer Benefits
A large number of businesses across multiple industries augment their fleet with rental equipment. Rental agreements can also be a way for owners and managers to delegate some of the duties associated with managing the multiple machines, jobs, locations and transport schedules.
When something breaks, or needs maintenance and service, a rental can fill in the gap and help avoid lost productivity on the job site. Rental machines can open new opportunities for businesses with access to specialty machines, attachments and accessories that enable them to do more or different kinds of work.
For example, a bricklayer may rent a lift to do taller buildings or a construction contractor may rent an earthmover to do foundation work.
Machine rental offers a number of other benefits, including:
- Sustains business deadlines
- Does not incur capital expense
- Provides on-demand resources for a number of industries
- Relieves worry about transportation and storage
- Offers specialty attachments and accessories
- Enhances a company’s capabilities
- Eliminates responsibilities of testing, maintenance and service
- Translates into possible tax deductions
- Complies with all applicable codes
- Enables testing, experimenting and trial runs of different machines and technology
Maintenance Prolongs Life
Owners, managers and operators of heavy equipment always aim to use it for the maximum possible number of operating hours it’s designed to provide, and perhaps even beyond that. Many things affect the lifespan of a machine, but the number one factor is maintenance.
A well-maintained machine will last longer than one which is not. For example, two loaders of equal age in comparable environments and conditions may have dramatically different lifespans, depending on how they’re used and maintained. Properly trained operators and regular maintenance keeps a machine humming along, while poorly trained operators and no maintenance will cause delays and mechanical breakdowns.
Problems cost money, and regular maintenance can prevent many problems.
MacAllister Machinery offers equipment management services to help prevent things from breaking or going wrong. It can be a help to fleet owners and managers to offload the maintenance tasks and not worry about what changes and inspections are due for which machines.
Many of the Cat machines we sell feature technology that takes the guesswork out of maintenance, since they have electronic alerts to tell you when service is due or when minor problems arise, such as dropping pressure or rising temperatures. The innovative Cat technology also allows for fleet-wide fluid monitoring, machine tracking and other capabilities to enhance business. Some of the technological tools can even be affixed to machines that did not come with them, or retrofitted onto older machines.
General best practices for maintenance are to know and follow the factory recommendations for maintenance, keep good service records and get to know the machine thoroughly. Data has shown repeatedly for many kinds of equipment that preventative maintenance lowers long-term costs. That seems especially logical considering how much money is lost when a machine dies before its time or requires frequent maintenance.
Partner with the Professionals
MacAllister Machinery brings all its clients the benefit of extensive and detailed knowledge of a diverse range of machines, as well as an expansive inventory.
A family-owned business since 1945 that’s now in its third generation of ownership, we serve as the Cat dealer for the majority of Indiana counties (68 of 92). While recognized as a premier Cat dealer throughout Indiana and Michigan, we offer comprehensive services including sales, service and rentals of about 50 other brands.
Other advantages to teaming with our experts our specialized knowledge from of a number of divisions:
- Agriculture: Equipment, parts and service solutions across many brands
- Power Systems: Supply generators and uninterruptible power systems
- Outdoor: A spectrum of outdoor power equipment
- Railroad: Specially designed machinery for railroad use
- Rentals: Lifts plus trucks, cranes, tools, forklifts, telehandlers, pumps and trailers
- Used: High-quality used machines from Cat and more.
- Transportation: Passenger buses for schools and commercial use.
We use the knowledge, skill and enthusiasm of each person on our staff to fulfill clients’ needs and act as a valuable, collective resource. We have earned a position as an industry leader because we support businesses, share knowledge and help solve problems, including major decisions involving heavy equipment.