The Contractors Speak

Hawaiian Dredging Construction Co. is No. 1 in Building Industry’s current list of Top 25 Contractors. It is undeniably a giant in our state’s construction industry, however, no company is immune to the effects of an economic downturn. So when it comes to equipment, this contractor makes prudent purchasing choices.

David Gomez, manager of the equipment division for Hawaiian Dredging, says, “The present economic recession has dictated that our company refrain from purchasing or leasing equipment unless a job has a demand for its long-term use. We have an expansive fleet of new to fairly new equipment so our company’s main challenge has been to keep the equipment we own in top working condition to guarantee that each piece operates at its maximum potential.”

Gomez explains the basic factors that affect Hawaiian Dredging’s decision on whether to buy or lease a piece of construction equipment:

“The decision on whether to purchase, lease or even rent a piece of equipment relies on our ability to service each job in the most efficient manner. Purchase price is only one consideration to be dealt with. Insurance, taxes and interest, if any, are others. A machine used at its maximum capacity for a period of time makes it a logical purchase. We must compare different factors including but not limited to outside rental rates, rental blue book rates, projected utilization and expected useful life.”

Gomez continues, “Our company will consider leasing a piece of equipment for a job when we have a long-term projection for its use, but don’t want the initial purchase expense. While leasing, we often have the opportunity to take the monthly payments and apply them as operating expenses rather than capital expenditures. We also consider whether a particular make or model has a history of breakdowns since we are responsible for maintaining and repairing the leased equipment. We check whether there are any advantages or disadvantages in insurance provisions; sometimes the premium will be much higher on leased equipment versus owned.

“Although renting a machine is the last considered option, we do rent when we don’t have the needed equipment readily available,” says Gomez. “Sometimes it is a sensible option. Seeking out and dealing with reputable rental companies who provide us with quality equipment is an advantage appreciated by our jobsites. The fact that while renting we are not responsible for repairing or disposing of the machine at the end of its usable life makes renting an option highly regarded for short-term use. It is just not feasible to own or carry a piece of machinery if it ends up sitting most of the time. Again, we will only rent for short-term requirements or if all owned equipment in that class are in use, as we are not able to build equity in a rental machine. Also, rental availability and configuration requirements may present their own problems for a jobsite that may have an instant need for a machine that has to be rented.”

Hawaiian Dredging used this Komatsu 500 loader
on the recently completed Queen Kaahumanu Highway project in Kona.

In the 2008 equipment report, Glenn Nohara, president of sitework specialist Koga Engineering & Construction, Inc., said the company makes it a practice to purchase only the equipment for which it foresees an extended need and usage. And for short-term usage or intermittent usage Koga chooses to rent. Even though the rental rates are high, it’s the right choice for the company.

This year, Nohara says, “Our thinking has not changed. Particularly during this current slowdown, we will only purchase equipment that we see long-term needs for and rent the rest.

“We try to maximize the utilization of equipment that we own over the long run. Therefore, we purchase only a portion of our current equipment needs and rent or lease the balance. This minimizes the downtime of our own equipment and allows us to downsize our fleet quickly when we need to.”

Last year’s equipment article also featured Hawaiian Crane & Rigging, which operates as both a contractor and a dealer. Company Vice President Kerwin Chong’s outlook was by far the most confident and optimistic of all those interviewed. He did not go into details about how the downturn affected his business. He offered no economic predictions, however, he did say Hawaiian Crane & Rigging carries on because of its knack for problem solving and its reputation for providing customers with reliable service and innovative ideas that save money.

This year, Chong acknowledged overall sales have been down about 30 percent since November. But just like last year, he seems unflappable.

“We here at Hawaiian Crane & Rigging don’t get into economic predictions,” says Chong. “Like many companies that have been around for a while, we’ve been here before. We know that recessions always end. It’s the cycle of our industry. And there is always a boom after the bust. You just have to be positioned for the boom.”

In response to our buy or lease question, Chong says, “In these uncertain economic times you need to look at the health of your company. You need to keep it warm, give it vitamins and keep it safe. If the health of your company is shaky, the last thing you want to do is increase debt.” Nevertheless, Chong says, “There are opportunities out there during this economic crisis to gain a better position in the market.”

Great Deals Are Out There

Last year, Gordon Ogi, president of American Machinery, reported a drop in new equipment sales. However, he said the company’s parts, service and rental revenues were stable due to its strong marketing base. How is the company doing this year?

“Luckily for us, equipment sales have remained stable, at the same rate as last year,” says Ogi. “There are little signs indicating we may be headed out of the economic lull. We are starting to see a lot more activity than before. Also new jobs are starting up once again.”

Despite the positive signs, Ogi says his customers are being optimistically cautious at this time.

“Renting equipment is a safe solution for contractors who don’t have a huge backlog,” says Ogi.

On the other hand, Ogi says, due to excess inventory available in the market, vendors are offering excellent incentives to purchase through rebates and low-rate financing. “If a customer can afford to purchase, now is the time to take advantage of great deals,” he says.

Ryan Ouye of Service Rentals & Supplies, Inc. on Maui says his company somehow manages to cope with the slowdown.

“We’re hanging in there just like everybody else; trying to do the best we can,” says Ouye. “Unlike Oahu, the outer islands rely (more heavily) on tourism and private development.”

Does Ouye see a light at the end of the tunnel?

“For 2010, we anticipate the same as 2009,” says Ouye. “As far as any light, we are looking at the way we do business so that we will become a stronger company in the end.”

What suggestions can Ouye offer to contractors trying to decide on whether to lease or buy equipment?
First, Ouye advises contractors to look at the overall cost.

“How many real jobs do you see in the future?” he says.

Second, think about the maintained cost over convenience.

“There are certain pieces of equipment that you should always rent instead of buy because of storage needs for that piece of equipment and the cost to maintain it,” Ouye says. Like Gordon Ogi of American Machinery, Ouye sees incentives to buy now instead of lease.

“Discounts and financing from the manufactures are great now,” Ouye says. “Lower prices on older models that are still brand new, i.e. a 2008 model with warranty, are going for great prices. Don’t hesitate to ask for deals on older models.”

Barry Castle of equipment dealer Vertical Technologies offers this suggestion to contractors trying to decide on whether to lease or buy equipment:

“I think in times of uncertainty, leasing or renting is the best choice. Why be stuck with an asset that will not be productive over slow periods? Depreciating the asset is great if you have revenues to depreciate against. With that said, purchases can still receive accelerated rates of depreciation according to federal tax incentives, which may not be available next year. So refer to your tax professional to help you decide what is best for your situation.”

One equipment company that is faring well despite the tough economic conditions is A&E Equipment Rentals. “Our equipment sales have actually increased since last year,” says A&E’s Keene Nagatoshi.

Nagatoshi says A&E’s success is partly based on a Hawaii contractor’s desire to buy locally.

“With the high cost of ocean and surface freight for heavy equipment, more customers have been looking to purchase here locally than before,” says Nagatoshi. “In addition, they do not have to bear the travel costs of having to visually inspect the machine on the mainland.”

Nagatoshi says the company’s out- look for 2010 is somewhat optimistic.

“I believe the military projects throughout the island are going to keep our company busy through 2010. We are expecting that the private sector work will remain the same as the volume of work now in 2009.”

Nagatoshi says a contractor needs to consider the following before deciding to lease or purchase equipment:

• Will I get the utilization of owning versus renting?

• Am I willing to perform the scheduled maintenance of this equipment?

• Am I going to have qualified operators perform the proper daily inspections?

• Have I considered the storage costs of owning the equipment when not in use?

“The benefit of renting,” Nagatoshi says, “is that it relieves the customer of the responsibilities of the dealer or owner, which would be to properly maintain the equipment every 90 days and for performing the annual inspections. In addition, the user would not have to bear the costs of storage and for dealing with replacement parts and service labor when needed.”

Most Wanted Features

What kind of features matter the most to Hawaii builders? Is sustainability still a top-of-mind issue during this economic downturn? Or is the main priority getting the job done efficiently and cost effectively?

Hawaiian Dredging’s David Gomez says, “Features most important when selecting new construction equipment during this economic downturn are durability, longevity, fuel efficiency and meeting environment specifications. Hawaiian Dredging’s equipment yard will do detailed comparisons with information obtained by multiple vendors prior to even getting price quotes for purchases. We may even meet with manufacturing companies and visit factories to better understand an equipment’s features and uses. We send our mechanics to training to keep them educated in the newest technologies. This assures the job of their competency and ability to repair machines in the quickest and most efficient manner, minimizing downtime and the need to rent machines.”

In addition, because of escalating fuel prices and the high cost of replacing worn out equipment, Hawaiian Dredging is taking steps to achieve the highest fuel efficiency possible and prolong the life of its heavy equipment.

“Hawaiian Dredging maintains detailed maintenance and service records on each piece of equipment,” says Gomez. “We keep stringent service schedules to assure us that the equipment will perform at its optimum level, which in turn undoubtedly prolongs its life in all working conditions.”

When shopping for new equipment, Koga’s Glenn Nohara says he generally will opt for manufacturers that have a fairly large presence in Hawaii as well as dealers who provide excellent service.

“Since we are not a large company with a huge shop, we tend to be more dependent on our vendors for our equipment needs, both from an availability and durability standpoint,” says Nohara.

He says Koga tries to replace most of its high-use equipment starting at the five-year mark. “In this manner, we tend to have fairly recent technology, fuel efficiency and the latest innovations in ergonomics for our operators,” he adds.

Koga also is not preoccupied with purchasing the most state-of-the-art equipment, says Nohara. It prefers instead to buy reliable equipment from local dealers.

“We try to avoid these types of problems by not trying to be the only one or the first one in the state with the state-of-the-art equipment. As much as possible we try to go through local vendors who have stronger relationships with equipment manufacturers or have the advantage of dealer networks,” says Nohara.

Kenneth Kobatake, president and RME of Delta Construction Corp., says his company presently has an excess of machines. The company keeps a well-maintained fleet by paying serious attention to fuel efficiency and prolonging the life of its heavy equipment.

“In an uncertain economy, we need to be innovative and resourceful in the utilization of our equipment to maximize our efficiency and minimize cost,” says Kobatake.

What features are most important to Delta when selecting new construction equipment?

“New equipment tends to be fuel efficient, environmentally correct and comfortable,” says Kobatake. “It is important that we are supported by the respective manufacturers with technical service. Parts availability is another important consideration when selecting a machine along with cost and resale values.”

“Various types of heavy equipment allow themselves to total tear down and rebuild. Depending on the type of machine, Delta will refurbish the rig internally or have the dealer perform a rebuild,” says Kobatake.

John Neff of Concrete Coring Company of Hawaii, Inc. says he first looks for quality equipment from a manufacturer that offers reliable services and parts. In light of escalating fuel prices and the high cost of replacing worn out equipment, he says, Concrete Coring dutifully maintains its equipment.

“Maintenance is a must if you expect to get the efficiencies and life expectancy you figured on,” he says.

Neff recognizes one important factor when purchasing new equipment: Hawaii is a state surrounded by ocean and 2,300 miles from the mainland. This fact presents a unique challenge to Hawaii contractors who need to have reliable and cost-effective machinery.

“Best management practices are always a cost concern to consider on every project,” says Neff. “It will need to be addressed on the job in order to control any unforeseen cost impacts. Shipping equipment to Hawaii always has added significant cost to a purchase. Shipping schedules also need to be considered due to the limited ways to get equipment to the islands.”

American Machinery’s Gordon Ogi says most of his customers are mainly concerned about finishing their jobs quickly and efficiently.

“This requires good reliable equipment and a dealer that can service them quickly. Time is money in a tight economy,” Ogi says.

On the other hand, says Ryan Ouye of Service Rentals, “Being energy efficient and green are important factors for some customers.” However, he says, these factors are “dependent on the generation of the purchaser.”

Ouye adds, “Extended warranty has become popular for the manufacturers as well as the consumers. Unfortunately, training seems to decrease in a weakened economy.”

Barry Castle of Vertical Technologies says, “Green equipment continues to evolve in the industry, a significant change to the average equipment owner is that older diesel engines will need to be retrofitted to meet new standards in the future. One thing that will never change is that maintaining your equipment to operate at proper performance levels will always help keep emissions at their lowest.”

 

The Power of Positive Thinking

Do equipment companies need to work twice as hard to please customers who demand more value for their money? Has the shaky economy forced them to change their approach to customer satisfaction?

Service Rentals’ Ouye says it hasn’t changed the way he conducts business; customer satisfaction has always been his top priority. “We have always tried to improve our customer service rental expertise here at Service Rentals,” says Ouye. “With times like today, no one can afford to lose customers.”

Keene Nagatoshi of A&E Equipment is in agreement with Ouye. “Whether in good times or in bad, our approach to the importance of satisfying the needs of our customers has been constant,” he says.

American Machinery’s Ogi says the current economic challenges can be turned into a positive experience for customers. “Actually, we have been using this time to reacquaint ourselves with our customers,” says Ogi. “When things are moving too fast, it’s hard to spend quality time with your customers. We have been taking the time to reinforce the dealer-customer relationship through support, mentoring and partnering.”

Kerwin Chong of Hawaiian Crane & Rigging also has a positive outlook on the industry. He says his company successfully copes with downturns in the economy because of its reputation for providing clients with cutting-edge engineering solutions and service. While other companies may panic, he says, his company thrives because of its reputation for getting the job done.

“Many contractors are taking jobs with very thin margins,” says Chong. “The stakes are higher as there are contractors out there that are one bad job away from filing bankruptcy. What Hawaiian Crane & Rigging provides is a guarantee that the job will be done right the first time.”