Contract Hiring Machinery - good or bad

[leemsutton]

Any views out there about this option of purchase. It basically allows you to hire a machine over a shorter period of time (1-3 years) and then have the option to buy at the end.

All maintenance is covered by the manufacturer and you pay a set price per acre for the machine. Which allows very accurate accounting to do with machinery which normally is very difficult to allocate costs to.

This was a post on fwi that caught my eye. Any opinions would be welcomed.

Lee

[Woodbeef]

Hey Lee,

Can you guys Long Term Lease(1 to 5 years) machines over there? We can here. It sorta sounds like your Contract Hire,but with a few differences. Over here you get a set number of hours per year,and the maintenance is up to you.

[leemsutton]

Woodbeef,

Yep its the same thing by the sounds of it. On tractors there is a restriction on hours but other bits of kit theres not. I think anything with an engine your restricted. However we do get a full maintenance package in with it. So you basically dont touch it apart from if you rip a tyre off.

An example is a JCB Fastrac 185-65 - which is a 180hp high speed tractor, cab suspension etc etc (not sure whether you get them in canada) (www.jcb.co.uk and then link to fastrac) for £12 per hour which is $26 canadian dollars. Your restriction is 900 hours per year but all maintenance is included in the £12.

The farmer then provides a driver and fuel - but i reckon that the max amount would be about £25/hour and you have no depreciation, no large capital amount tied up in a purchase policy and best of all no maintenance.

Lee

[Woodbeef]

So then who gets stuck with the tractor at the end of your contract? The dealer or the company?

Over here it is the dealer that gets it,in more ways than one. Deere is notorious with sticking it to the dealers on tractor and combine lease returns. I guess they all probably do it,but Deere really pushes the leases over here,especially the one and two year rolls!!

Speaking of the green ones......Do they offer color bounties in Europe to sway other color customers with one or two year old tractors and combines to switch to JD? The loyal customers do not get these deals,only the ones they are trying to convert to the cult. I've heard of the bounties being as high as $25,000 USD or more.
Depends on how desperate they are,once something new comes out from the competition.

[Si]

Lee I've done a few of these deals before, this is an example of how I get my figures.
Net price of tractor £30,000
period of Hire 3 years
Hours per year 1000
estimated value of 2 year old tracator @ 300hrs £15,000
Maintenance over 3000 hrs £1,500
Total cost £16,500
Cost £16.50 per hour (+ interest cost - Manufacturers subsidised finance)
This is only an example, with figures for illistration only but dealers generaly don't offer something for a loss,
Cheers
Simon

[leemsutton]

Simon,

So the JCB deal would be somthing along the lines of:

Net price of tractor £55,500 (25% off retail)
2 years hire
Hours per year 900
Value of 2 year old tracator @ 1800hrs £40,000
Maintenance over 1800 hrs £1,500
Total cost £16,500

Or £9.16/hour.

JCB charge us £12/hour thus making £2.84/hour (£5,112) and then sell it for £40,000 + profit of £5,112 = £45,112.

Which means they only lost £9,888 off the initial purchase!

Good idea really but a risk with JCB's as they are known for poor reliability. Makes you think though as from a farmers point of view as you dont have the initial outlay of £55,000 leaving the bank account. That can stay in there gaining interest and you pay £10,800 per year.

Even if the farmer bought it with a loan over five years it would cost:

Purchase £55,000
Selling after 5years (4,500hrs) £20,000
Balance to finance £35,000
Over 5 years @ 6% interest = £7,420

BUT - farmer has to maintain it (could be costly with JCB) and he has to risk the selling value.

Perhaps contract hiring does have a future?