If the paid-off truck still runs and still does the job, keep it, because equipment with no payment on it is some of the most profitable stuff a trades company owns. Buy the new one when you can show it brings in more work or saves real time, and when you do, raise your prices to cover it. Here's the math trades get wrong. The jobs were priced back when the equipment was paid for, then a $75,000 truck shows up with a payment, nobody changes the price, and the payment comes straight out of margin.
Why paid-off equipment makes you money
I use this example a lot because you see it all the time in the trades, and with farmers too. That good, trusty, old paid-off equipment makes you a lot of money because it's paid for and it still works. When it goes out on a job, the job carries the fuel and the upkeep and not much else.
The pull the other way is real, and I understand it. Business has been good, there's finally some cash around, and for some reason everybody needs the $75,000 vehicle because they own a business now. Some of that is personality and ego (gotta have the best, gotta have the nicest), and I'm not throwing stones here, because I've been very guilty of chasing the shiny thing myself, mostly with software.
Where the margin goes
It goes like this. You were making good money on your jobs with the more budget equipment, then you step it up, and if you don't raise your prices to cover it you're going to have a problem. Nothing on the job looks any different. It's the same crew, the same hours and the same bid, but the margin gets thinner and nobody can point to why.
It rarely hits all at once either. It's a truck this year, a nicer machine next year, better tools the year after, and each one seemed reasonable when you bought it. Those are the things I see that add up and create a lot of bloat right when a business is growing, and that's money that could have been funding the growth.
An example with made-up numbers
Every number in this section is invented and rounded to show how the math works. It isn't from a client, so plug in your own.
Say the paid-off truck costs about $500 a month to keep on the road. The new one runs about $1,700 a month once you add the payment and the higher insurance. That's $1,200 a month more, or $14,400 a year.
Now say the company does $3 million a year and nets 10%, so $300,000 of profit. One truck upgrade at those numbers, with no change in price, eats about 5% of that profit. Do it across a fleet of six trucks and it's $86,400 a year, close to 30% of the profit, going to payments on trucks that do the same work the old ones did.
The fix is pretty boring. If that truck works about 20 days a month, $1,200 a month comes to $60 a day. Either the jobs that truck goes out on carry about $60 a day more than they used to, or the truck brings in enough new work to cover it. If neither happens, it comes out of what you keep.
Run your own ROI before the dealer runs it for you
Any upgrade, whether it's a truck, an excavator or anything else expensive, gets the same check from me: how much more money it's going to make you, and how much time it's going to save you.
If the honest answer is "not much, but it's nicer," that's a fine thing to want, it just isn't a business case. If the new truck lets you take on work you turn down now, or keeps a crew from losing days to breakdowns, put a dollar figure on that and compare it to the added monthly cost. In the example above, that's $1,200 a month.
Let the old equipment pay for the new
The order matters. Whatever you're doing today with the equipment you have should be paying for the next upgrade. Work the old equipment hard, take the profit it brings in, and use that to fund the new stuff in a reasonable way. That's how you keep the budget from bloating while you grow.
If you flip that around and finance the upgrade first, hoping the work shows up to pay for it, you're paying for growth before it happens. That's a big part of why contractors end up profitable on paper and short on cash, which I wrote about in why profitable construction companies still run out of cash.
The year-end tax pull
It's November, so this one is coming. Late in the year owners look at how the business did and say, well, I certainly need this piece of equipment, now might be a really good time to buy it, and the tax bill comes down a little.
A big first-year write-off (bonus depreciation is the name you'll hear) is a big reason the numbers can look so different in the year you buy something. As I've said on the podcast, it doesn't necessarily give you more deductions. It gives you a say in when you take them. The truck still costs what it costs, and the payment still shows up every month long after the return is filed. What applies to your situation is a question for whoever does your taxes. My question is the one above, whether the truck pays for itself.
I'm not saying be cheap
If laptops that cost $500 more each last longer and make your people faster, buy them. Tools are the same way. Does the Harbor Freight tool get the job done and not break, just as well as a Snap-on, for a tenth of the price? It depends, and you know your trade better than I do. The point is that the nicer thing has to earn its spot like anything else.
This is a lot of what I do with skilled trades and construction companies at DAT Finance. We look at an equipment decision next to job pricing and the cash forecast, so you know what a truck does to your margin before you sign for it. If there's a truck or a machine on your mind before year-end, let's talk it through.
FAQ
Is it better to keep old equipment or buy new? Keep it as long as it still works and does the job, because equipment with no payment on it makes you money on every job it goes out on. Buy new when the upgrade brings in more work or saves real time, and build the added cost into your prices.
How do I know if new equipment will pay for itself? Ask how much more money it will make you and how much time it will save you, put a dollar figure on both, and compare that to what the new equipment adds each month in payment and insurance. If the figure is smaller than the added cost, the upgrade comes out of your margin.
Should I buy a truck at year-end for the tax deduction? Only if you'd buy it anyway. A big first-year deduction mostly changes when you take the deduction, while the payment runs for years. Ask whoever prepares your taxes what applies to you, and decide whether to buy based on whether the truck pays for itself.
Do I need to raise my prices after buying new equipment? If the new equipment doesn't bring in new work, yes. Divide the added monthly cost by the days the equipment works each month, and that's roughly what each of those days has to carry on top of what it did before.
What does a contractor need beyond a tax accountant for decisions like this? Your tax preparer tells you what a purchase does to the tax bill. Working out whether it pays for itself, and what it does to job pricing and cash over the next year, is CFO work. DAT Finance does that for trades and construction companies.