By: Lyman Russell, Contributing Author
With the U.S. economy on the upswing and construction activity expected to increase across most of the country in 2005, many contractors plan to add construction equipment to their company’s fleet in the year ahead. In fact, 44% of the 455 American contractors surveyed for CIT Equipment Finance’s 29th annual Construction Industry Forecast indicated they plan to buy or lease construction equipment in 2005 and 54% of the equipment distributors predicted that their new equipment sales will increase this year.
The contractors taking part in this year’s forecast expect to acquire a mix of new and used equipment this year. Highway trucks top their list of anticipated acquisitions; 37% of contractors who plan to buy new equipment in 2005 said they would add one or more trucks to their fleet. Also on the shopping lists for many contractors are crawler dozers, cranes, asphalt pavers and other types of construction equipment used by road and bridge contractors.
This increase in the demand for heavy equipment is driven at least in part by an optimistic outlook for road and bridge construction in 2005, according to survey participants. They ranked road and bridge projects among the construction industry’s three most promising business opportunities for 2005; only residential and commercial/nonresidential construction projects were viewed by contractors as brighter opportunities in the year ahead. Compared to the 2004 forecast, 30% more contractors in this year’s survey mentioned road and bridge work when they were asked to name the construction industry’s single most promising business opportunity for 2005.
Experience shows that a willingness to invest in capital equipment is one of the most credible indicators of contractors’ confidence in the future of the construction industry and the U.S. economy as a whole. So the fact that, on average, construction companies plan to spend about twice as much on new equipment in 2005 as they anticipated spending in 2004 bodes well for everyone associated with this dynamic and fast-paced industry.
Quotient for optimism
For the third year in a row, participants in CIT’s Construction Industry Forecast said they anticipate their financing costs will rise in the coming year. Prevailing rates have, of course, started to inch up from the all-time low levels that were experienced during the recent recession. However, interest rates are still extremely favorable, especially when viewed in the context of the construction industry’s long-term rate experience. Many contractors are locking in these very affordable current rates by choosing fixed-rate rather than floating-rate options when they buy or lease new equipment.
Overall, the contractors participating in this year’s CIT Construction Industry Forecast are bullish on the prospects for their own company and the industry as a whole in 2005. They expect their company’s revenue to grow a healthy 11% on average year-over-year. Nationally, about half of the contractors surveyed said that the business outlook for 2005 is for a better year overall than 2004, compared with just 8% who foresee a gloomier business picture this year. Eighty-eight percent of contractors said construction activity in 2005 would at least equal the activity levels of 2004, and 55% said they anticipate more opportunities to bid this year than last.
Of course, contractors aren’t looking at the world through rose-colored glasses. In the 2005 forecast they expressed concerns about a number of financial factors affecting their companies including cash flow, profit margins and operating cost escalation. But overall the contractors surveyed see 2005 as a strong year for the construction industry and they’re backing up that view by investing in their companies and their equipment fleets.
Each year, the third-party researchers who compile the forecast compute an “Optimism Quotient,” which is designed to provide a snapshot of the participants’ overall view of the industry for the coming year. Using input from all participants in the 2005 survey—contractors and equipment distributors—the research team calculated Optimism Quotients of 109 for the U.S. and 106 for Canada. Not only are those numbers significantly above the 100-optimism threshold, they represent the highest ratings since Optimism Quotients were first calculated a decade ago.
Financial aid
As construction activity and the demand for heavy equipment have increased, it has become more difficult for contractors to find quality pre-owned construction equipment to buy or rent. Lead times on orders from original equipment manufacturers also have been pushed out, which means that contractors need to plan their equipment purchases well in advance and often must pay premium prices for the types of equipment that are in greatest demand.
When it comes to financing their equipment acquisitions, construction contractors have many options available to them. Obviously, contractors planning to buy new equipment will want to shop around for competitive interest rates. But choosing financial services provider based solely on the lowest quote is usually shortsighted. As with almost everything else in life, value is more important than price.
There’s no cookie-cutter approach to equipment financing. A financing plan that is perfect for one contractor may be totally wrong for another. That’s why it’s best to work with a financial services company that understands the unique characteristics of the construction industry. Contractors need to make sure their lenders have the expertise to evaluate an equipment acquisition decision, make a buy-lease comparison and design a flexible financial plan to meet the contractor’s specific needs.
It’s important for contractors to choose a financial-services partner that has demonstrated a long-term commitment to the construction industry and doesn’t view equipment financing as a sideline or a means of acquiring the rest of a contractor’s banking business. In recent years, several well-known financial services companies have stopped making equipment loans or have gone out of business altogether. Experienced contractors know that it’s usually beneficial to work with a financial-services company that has a sustained track record and will be around when they need them.
Contractors also should opt to work with a financial-services provider that understands the characteristics of the construction industry and that can offer a wide range of financial products and services that are tailored to meet the needs of contractors. For example, some finance companies offer custom equipment-financing packages that take the seasonal nature of construction work into consideration and let its best customers defer their payments during the off-season.
Many contractors also have discovered that the right finance firm can help them tap into the enormous value of the capital assets that sit, literally, right in their own backyard. Road and bridge contractors usually have many thousands of dollars of equity in their existing equipment fleet. A revolving line of credit that is linked to the appraised value of depreciated assets is an extremely powerful and flexible financial tool that can help contractors conserve capital, improve cash flow and get the new equipment they need to grow their business and compete successfully.
Revolving credit lines offer contractors a number of advantages, including ready access to the cash they need to run the business or acquire new equipment. A line of credit can be used to convert costly short-term debt into longer-term liabilities. Contractors can draw on their established credit line anytime they need cash, and there are no early repayment penalties. And, since any outstanding balance on the credit line appears “below the line” on a contractor’s books, the credit line doesn’t tie up the contractor’s receivables.
Just as significantly, many contractors find that they are able to bid on bigger projects when they have access to a revolving line of credit. The credit line lets them restructure their debt in a way that allows them to secure higher bid and performance bonds from bonding agents.
To obtain a copy of the complete 2005 CIT Construction Industry Forecast, visit www.cit.com or call 480/379-3449.
About The Author: Russell is senior vice president, western region, CIT Equipment Finance.
