10/7/2019 Should You Repair, Rebuild, or Replace Equipment - MacAllister Machinery

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IS IT BETTER TO REPAIR, REBUILD OR REPLACE HEAVY EQUIPMENT?

December 11, 2017

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.

Jump to Sections:

Is the repair covered?

Priorities Lead the Process
Finances Shape the Decisions
Use Cost Analysis to Get to Details
Pick and Employ a Method
Pros and Cons Influence Choice
Brands, Dealers Make a Difference
Rentals Fill Gaps, Offer Benefits
Maintenance Prolongs Life
Partner with the Professionals

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.

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Typically, replacement means buying a new or used machine .

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

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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
Graders
Harvesters
Lift trucks and forklifts
Loaders (tracked and wheeled)
Planers
Power systems
Spreaders
Tractors
Trucks

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

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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.

1. Is the machine in question paid for, or is money still owed on it?

2. How much is the asset worth in a resale, trade or salvage deal?
3. How much will the repair cost affect the balance sheet, income statement and cash flow?
4. Have regular maintenance and service costs been factored in?
5. What is the cost of taxes on a new unit?
6. Are reliable estimates of the cost of needed repairs available?
7. Could a new machine add significant financial value, such as allowing for bids on more demanding
contracts?

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8. What disposal fees will need to be paid upon retiring a machine?

9. Do any of the machines under consideration pose a risk that could incur expense?
10. Will a rebuild or repair actually restore equipment to acceptable performance?
11. How will either option affect fuel usage and costs?
12. 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:

1. Ownership – which includes purchase

price, insurance, interest, taxes, storage,
depreciation, decommissioning and
disposal.

2. 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.

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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:

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1. Determine the cost of a new and used part.

2. Figure out how many miles or hours are
needed from the equipment.
3. Add in the labor cost for installation.
4. 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:

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:

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

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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
Taxes

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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
Taxes

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:

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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
Engine control module
Pumps (fuel, oil and water)
Transmission

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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:

1. Sustains business deadlines

2. Does not incur capital expense
3. Provides on-demand resources for a number of industries
4. Relieves worry about transportation and storage
5. Offers specialty attachments and accessories
6. Enhances a company’s capabilities
7. Eliminates responsibilities of testing, maintenance and service
8. Translates into possible tax deductions
9. Complies with all applicable codes
10. 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.

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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.

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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.

Please feel free to visit , or contact us at any time to let us know how we can help!

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