During a contractors’ panel at the Associated Equipment Distributors’ annual Summit, representatives from three well-established and diverse construction businesses shared their views on everything from equipment acquisition strategies to how technology is changing the business. The companies represented include Tarlton Corp., a St. Louis-based general contractor and construction management provider; Williams Brothers Construction Co., a bridge and highway contractor located in Houston, Texas, and Power Construction Co., which serves the multifamily, health care, senior living, education, office, hospitality, industrial, retail, aviation and individual luxury single-family and condominium residence markets in Chicago.
This group represents a mix of building, utility and highway projects. Their input may help your dealership identify potential opportunities or areas where you may improve.
Each Contractor Exhibits a Unique Approach
It is apparent that each of these successful businesses takes a different approach to how they run their business and manage their equipment fleets. This is something dealers need to understand in order to help any contractor achieve its goals.
“We do about $200 million a year in general contracting work, whether it’s high-end construction management or self-performed work,” says Dirk Elsperman, Tarlton Corp. “We do about 40% of our work with our own forces. We also have a subcontractor that does carpentry work. They are doing about $30 million of work with about 100 carpenters.”
Williams Brothers Construction self-performs a larger percentage of its business and is focused on Department of Transportation (DOT) work. “We were a 65-year-old bridge contractor and we evolved into road work,” says Bob Lanham of Williams Brothers. “We’re averaging about $600 million a year in gross sales.” About 75% to 80% of this work is self-performed. “We don’t get into municipal roads and bridges. We stay with the interstate class type of construction.”
Power Construction is a diversified company that provides construction management, general contracting, integrated project delivery (IPD), design/build and public–private partnership (P3) methodologies. “We have a self-performing concrete division,” says Brian Herold, Power Construction Co.
Companies that self-perform a large percentage of their work often have different equipment needs than those that subcontract larger percentages of a project. They may look to you for equipment solutions that can help them become more efficient.
Make Yourself Useful
Contractors are very busy, so you need to find a compelling reason to communicate with them. They are unlikely to be enticed by free food at an open house event.
“Everyone’s time is really precious,” says Herold. The time spent needs to be worth the investment. “We wouldn’t be enticed by a deal on skid steers today.”
Instead, what’s considered valuable is information on where the market is headed, what the manufacturers are working on that could be beneficial to their operation, or even software improvements that could extend the capabilities of the existing fleet.
Off-site relationship-building activities, like an invitation to the game, may not be a compelling way to earn a contractor’s loyalty. “There’s nothing that will make me go,” Lanham states. “My personal time is so scarce. If I have time to go to a ball game, I am probably going to go home and say hi to my wife.” But he also understands the value of quality engagement, including participating in forums and reading periodicals and trade magazines.
Lanham will make time, however, for someone with whom he has a long-standing relationship. These are individuals who have a history of providing great service and are there when you need them. “You don’t want to take me to lunch. Just do what you said you were going to do when you were going to do it and we will be best friends,” he advises.
“We all have limited time,” Herold agrees. “We get pinged via email or phone calls 10 to 20 times a day. It’s challenging to figure out which of those you want to call back and for what reason.”
Yet, he acknowledges there is value in investing the time in some cases. “I think it is important to get out of the office. I know in my role there are very few times that I can get an opportunity to do that,” he comments.
Deciding who to get out and visit comes down to relationships. “They must know our business and look out for me and my company. That’s the relationships that I want to invest in,” says Herold. “Tell me something I don’t know. Make me look good when I go back to the board room. The relationships that I have, they know what to bring me to help our business.”
Understanding the equipment in the contractor’s fleet is beneficial. “Know what we already own,” says Elsperman. “It might not be your equipment, but don’t come in and bash that fact. Help us work with what we have. Take an interest in what we are bidding. We don’t know what we don’t know.” Share information if you have a piece of equipment or can get your hands on a piece of equipment that will make a project more competitive.
Lanham adds, “Understand the makeup of our fleets and the psyche of the company, because there’s no two alike. Understand why we use a certain piece of equipment in an application.”
For instance, dozer size may not be based on the amount of dirt that needs to be moved on the job site. “Our selection is made based on what kind of a permit we need to move through downtown Houston,” Lanham points out. “I may use two smaller ones in an application.”
In addition, there may be economic or other regulatory drivers that influence business decisions. “If you get a grasp on that, it will help you understand your customers,” says Lanham.
Don’t forget to address the subcontractors on a project. “Subcontractors we work with are an important part of our business,” says Herold. If you can make them more productive, the contractor can get better pricing and win more work.
Despite all the hype surrounding tax incentives driving equipment purchases, the contractors on the AED panel said this does not rank high in their decision-making process. Section 179 and various tax codes can save contractors significant money when making an equipment purchase, but they haven’t tipped the scales.
“We haven’t used that to determine a change of strategy, although it is very attractive,” says Tarlton’s Dirk Elsperman. “As our self-performed groups grow, we will mesh that with our strategy and we’ll probably take advantage of more deductions.”
Bob Lanham, Williams Brothers Construction, adds, “We took the deductions that we could, but with our business strategies, we didn’t go acquire equipment just because of the tax offering. We have to limit that based on work, and that hasn’t radically changed.”
Being a controller, Power Construction’s Brian Herold provides a unique perspective. “If [crews] need a piece of equipment, they come to me. We’ll talk about cash flow and whether we can buy it or rent it,” he says. “You know you have to get the equipment that you are going to use.”
So while the tax deductions are a sweet deal when you can take advantage of them, they are not a primary driver in the contractors’ acquisition strategies.
Views on Ownership vs. Rental and Used Equipment
Depending on the work performed and the philosophy of the individual company, the views on rental versus ownership vary dramatically.
According to Elsperman, Tarlton Corp.’s fleet size and percentage of rental versus owned fluctuates with workflow. “One time it might be 60/40 owned versus rental. Another time it might be 40/60,” he notes. “We have a fleet of cranes that we use to serve our projects. We have some limited earthmoving equipment and more specialized excavation units.”
Tarlton Corp.’s views on rental have evolved. The company used to purchase the types of equipment it would use every day. “But as the rental market changed, we shifted our strategy. The cranes and larger excavators that we use on a job, we went to renting because we could get exactly the right size for the job,” says Elsperman. While the company still owns some cranes, it now rents all of its tower cranes.
There can be a temptation to fit a crane to a job because it is already paid off and you are going to make money on it. Rental eliminates this temptation. “Let’s get the one that you can rent that is the right size,” says Elsperman.
Williams Brothers takes a different approach, owning close to 100% of its equipment fleet. “We will sometimes lease, but almost all of our leases or rentals are with the purchase option,” says Lanham. “We believe in an owned fleet and that’s been the approach since the beginning of the company. It has served us well.”
Utilization is the key. “We look for the potential reuse of the equipment,” says Lanham. “We will buy a lot on resale if there’s certain specialized pieces of equipment that will not likely have a home when the project is over. We look at everything from a standpoint of how it impacts the cash position. Net quick cash is how you generate your bonding and bidding capacity. How that purchase of equipment affects our cash position affects our ability to go get additional work.”
Power Construction uses a mixed approach. “We have a good mix of owned versus rented equipment,” says Herold. “We like to have that flexibility.”
The decision of whether to rent or buy is based on the utilization factor over a time horizon of three to five years. “Our self-perform divisions are still developing their crew sizes and proving out that they can sustain that growth that they are projecting,” Herold explains. “I also look at the opportunities that they’re bidding on and the realistic probability that’s going to lead toward that growth. If we can’t sustain the utilization of that equipment over a certain threshold, it probably doesn’t make sense to own, so we continue to rent.
“The margins are not as strong, but I don’t present that risk to the company of making that outlay and not being able to utilize the equipment,” he adds. “We’re a fairly conservative company and we’ve been very successful being conservative.”
For Williams Brothers Construction, the decision really depends on the type of equipment and the anticipated utilization rate on future jobs. For instance, the company recently won a large earthmoving project and purchased new excavators to complete it. But the off-road dump trucks were all purchased used.
“In Houston, Texas, I will not need off-road dumps ever again, so I bought those used on the resale market,” says Lanham. “I will not have an application for them.”
Tarlton Corp. relies heavily on new equipment purchases. “We’re probably 95% new, and if it’s used, it’s only gently used,” says Elsperman.
Likewise, Power Construction realizes the value of newer machines. Used machines are carefully scrutinized. “We want to know who used it and for what purpose before we buy anything used,” says Herold.
Most contractors on the AED panel have been using telematics on their on-road fleets and quote the benefits of location information, the ability to identify issues before they lead to downtime, and routing efficiency. In addition, they emphasize the safety aspect of monitoring driver behavior.
Yet, telematics equipment tracking technologies have not gained universal acceptance. “Power Construction Co.’s culture is to empower our employees. Let them do their work,” says Brian Herold. “We shy away from any of those control mechanisms.
“I know that’s the trend in the industry. You are going to see the driving habits and have GPS on vehicles,” he continues. “The data analytics is helpful to understand mileage and location.”
But the company’s culture is not supportive of moving toward such products. “We do have dashboards that support where the tools are to be able to coordinate that between projects, but not to the degree that I think telematics are designed for,” says Herold.
Equipment is eventually going to fail. It’s how you deal with this and get the contractor back to work that makes the difference.
Many contractors like to see problems resolved within a day, ideally. “We love to see same day,” says Lanham. Though he understands that everyone is busy, many projects are very time-sensitive. “We have a project that is so time-sensitive we are working with three major equipment suppliers on the job. It’s a huge earthmoving job, probably the biggest in my 35-year career. We are paying to have a technician on the job every day from each of them.”
This added expense is worth it to ensure equipment uptime. If the contractor misses the completion deadline, it will owe a $45,000-per-day fine.
Lanham says in the past he has ordered more equipment than the company theoretically needed, with the realization that units will go down. The ability to eliminate this buffer would help.
Communication on the status of a repair is critical for a contractor to make decisions. “If it can’t be fixed the same day or the first thing the next morning, we need to know exactly when,” says Elsperman. “It’s a tough math equation. Do you keep a bigger stock of parts or a bigger stock of people?”
Servicing of equipment is becoming more of a challenge, as well. Tarlton Corp. has its own shop and mechanics, but the number of mechanics has been dwindling and it is harder to fill those spots. The company is having to farm out more equipment service work to third parties and dealers.
At the same time, demands on the equipment are at an all-time high. “We’re putting more stress on equipment,” says Lanham. “The nature of our projects is changing. There is pressure to run faster. You work nights, too. We’re doubling down on hours.” Tracking preventive maintenance is a priority. “Missing five days is like missing 10, because you missed the night shift, too.”
Williams Brothers uses every repair facility that has a decent reputation. “Any firm that is a viable heavy-duty diesel repair shop in the Greater Houston and seven-county region, I bet I’ve got a piece of equipment sitting in every one of their repair shops,” Lanham comments. “I am using everybody and they still cannot keep up.”
Any solutions you can provide to help contractors maximize uptime and effectively maintain and service their fleets will be key to both their success and yours.