Hire purchase is used for around 85% of UK plant finance and offers flexible terms that contract hire can't match.
Consider that within the last 12 months a significant change in the manufacturer, dealer, plant hire, customer equilibrium has occurred with the acquisition of Hewden Stuart by the Caterpillar dealer — Finning International.

The thought of a manufacturer, either directly or indirectly, having its own hire fleet is anathema to most plant hirers.

June 2001 witnessed another upset in the plant hire industry with a mailshot from Caterpillar aimed squarely at the customers of the plant hirers.

Many plant hirers were upset about the mailing because the quoted weekly rates represented considerable savings over the equivalent weekly hire rates. The net result was a lot of disgruntled hire customers ringing their plant hire suppliers to ask why they were paying rates that were 47% higher than those offered by Caterpillar.

The fact is that contract hire is very different to the short term hire favoured by the construction industry. In fact JCB has publicly stated that it has no desire to compete with a major part of its customer base - the plant hirer sector. So what is contract hire and when is it appropriate?

Risk-free acquisition
Contract hire can represent the ultimate risk-free method of acquiring, running and maintaining plant, putting a ceiling on your costs and releasing additional capital to invest in your business. The administrative burden and financial risk of predicting the running costs of your plant for the next three to five years is completely removed. Contact hire usually consists of an operating lease combined with service, repair and maintenance agreements. It can even include relief machines in the event of breakdowns — all combined to become one agreed budgetary expense.

So why does contract hire only represent a very small proportion of total plant sales in the UK construction industry? The key factor is timescale. Probably 90% of all plant hires are for less than six months whilst 90% of all contract hire agreements are for three years or more.

Probably 90% of all plant hires are for less than six months whilst 90% of all contract hire agreements are form three years or more

Hire purchase remains the most popular form of funding for plant hire companies because ultimate ownership still remains high on their wish list. Hire purchase allows plant hire companies to settle early at minimal or no cost if they see an opportunity to sell the machine early or pay it off early following a lucrative contract.

With contract hire the leasing company remains the owner. Settling a contract hire or operating lease early is complicated and costly because the leasing company has factored in tax allowances for the entire period. Settling early means they will forgo these tax benefits and it is the customer that will be charged for the deficit.

The upside of contract hire is that the customer can treat 100% of the rentals as legitimate operating expenses in their profit and loss account. It means that they could write off the entire whole life costs of operating that machine within their business in as little as three years (it typically takes about nine years to write off 90% of the capital value of a machine when claiming annual writing down). This is why the Inland Revenue becomes upset if you (the customer) attempt to obtain ownership of the machine at the end of the contract — they see it as you having enjoyed an accelerated form of tax relief!

Depending on the nature of your business, ultimate ownership of your plant and its position as an asset on your balance sheet may not be very important if the plant is part of a production process and there are already other significant assets — a quarry for example. Finance products such as operating leases or contract hire allow plant to be kept off the balance sheet, dramatically improving key accounting ratios such as return on capital employed — all at the stroke of a pen!

Unfair comparison
So, the mailshot Caterpillar sent to the industry could be said not to be comparing like-for-like in making direct comparisons between typical weekly hire rates and the equivalent weekly rental on contract hire. It is easy to set a highly competitive weekly rental if you are guaranteed that income for three years or more. Obviously this is not the case for plant hirers who specialise in short term hires — having to factor in to their rentals a likely machine utilisation of only 75% over its life in their business.