Construction Accounting Article -
Repair or Replace? That Age-Old Equipment Quandary

Target Audience: Construction Industry Professionals, Information Technology Professionals, Contractors, Preventative Maintainence

Unlike typical manufacturers who have stationary factories and produce the same product year in and year out, a construction company sets up a new “factory site” with each job. As you well know, transportation and setup puts a lot of wear and tear on your equipment. And, of course, the actual work these assets perform is rarely gentle.

For these reasons, an age-old quandary that every contractor faces is whether to repair or replace construction equipment. A clearer understanding of the costs of either option can help you make this decision a little more easily.

Repair: 3 categories to consider

Repairs are a normal part of owning equipment. Because repair costs will increase as an asset ages, it’s usually better to budget these costs on an increasing scale, rather than managing them as a constant over the life of the equipment. Generally, you can break down repair costs into three categories:

1. Regular preventive maintenance. View this task as an investment, not just a cost, because preventive maintenance can extend the lives of your assets. Establishing an effective program also limits downtime and lost productivity.

2. Minor repairs. These don’t extend the life of a machine — just bring it back into operation. If you lack an efficient system for handling minor repairs, they can stack up and become a big problem.

3. Major repairs. You’ll have many decisions to consider with major repairs, as these are usually very expensive. The first is whether to replace the equipment or proceed with the repair. If you proceed with the repair, you’ll incur costs for removing and installing the part, actually repairing it (parts and labor), and incurring the downtime (which includes lost labor hours).

Also consider the age and efficiency of the equipment as well as the future — if the asset will be largely idle in the future, there may be no point in fixing it.

Choosing to undertake a major repair demands another decision: whether to replace the part or rebuild it. Although rebuilding a major part may seem cost effective, you need to add up all of the costs of doing so — including the extra time involved. Also weigh the life of rebuilt parts against that of replacement parts, which typically last longer.

Replace: Making the right purchase

Replacing a piece of equipment may seem more expensive than repairing it. But this isn’t always the case. Making expensive repairs on old, inefficient equipment may not make sense in the long run if these assets are constantly breaking down and slowing job progress.

New equipment offers several advantages. New machines will likely have higher productivity rates than older ones. And initial maintenance costs should be lower and project delays fewer because new assets are generally more reliable.

Naturally, though, you have to make the right purchase. The lowest price isn’t always the best choice; the availability and terms of dealer financing and support are critical. Also look at the asset’s operational costs and maintenance requirements. Every machine breaks down eventually — look at the average speed of repairs and cost of returning it to service. Historical resale or salvage value is important, too.

Last, don’t forget the importance of your operators. Will you have the time and wherewithal to properly train them to use the new equipment? Failing to do so can drastically affect the life and effectiveness of the piece.

Success: Setting up a system

Ultimately, successfully grappling with the repair vs. replace decision calls for knowing as much about your equipment as possible. To this end, keep detailed maintenance, repair and use records. Ask your CPA for help setting up an effective system for doing so.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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