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Are Your Construction Companies Looking for Price Caps?

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There used to be a time when discount was an ugly word… though few rental businesses claim they never give reduced rates to many of their customers, particularly the largest ones. Price capping introduces a whole new concept into the equipment rental industry.  Price caps, stem from construction companies becoming more and more price sensitive and their end customers challenging build costs at every stage of the process.

So what is a price cap? Put simply its rules built into your charging for a specific project or job site that stops all rental charges when certain criteria are met. Most often these caps are applied on smaller items of equipment, tools, small generators, smaller pumps etc. but for very long term projects even large equipment may be included in the capping structure.

After years of being hit by ongoing rental charges that continue to accrue whether or not the equipment is actually being used, and build up even though the amount paid is 10 or even 20 times the value of the piece of equipment, construction projects are becoming more and more savvy when it comes to challenge equipment charges.  This has started with their own internal equipment divisions where charges are capped for specific projects, but it is starting to spill over into their relationships with external rental companies.

It’s now common for us to discuss price capping with internal construction rental companies based on a multiple of the equipment purchase price (for example, 2.5 times the purchase price might be the point when the project will refuse to accept any further charges). Or a price cap based on a total amount of revenue achieved (example, you can bill me up to $1000, after than we keep it for free).

Price caps don’t mean that projects will stop paying for insurance, damage waivers or maintenance charges — those are all justifiable expenditures, but the actual rental amount itself is being challenged. For some companies, it’s not necessarily a case of the cap being absolute, it may just be a reduction down to 20% of the original rate potentially to cover maintenance etc.

If the internal businesses that supply the world’s largest construction companies are forced into using this model, then external equipment rental costs will start to look out of step. The market price comparison rather than being on a par, will start to diverge, pushing projects back towards their internal suppliers and away from external ones.

Will Rental companies respond? At first and even second glance there is little to recommend the model to a rental business, essentially it leaves equipment out on site generating physical utilization numbers with no corresponding dollar utilization. On the other hand, how dependent is your rental business on construction and engineering customers? Is this something you will have to deal with in the future or is it already a topic you’re discussing with some of your customers?

What do you think?  Drop me a line if you are seeing requests for cap pricing in your business.

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