Avoiding Financial Mistakes When Purchasing Apparatus

We’ve all heard the horror stories of the department that specified their new apparatus wrong or bought from a disreputable dealer or manufacturer or just had a lemon of a fire truck.

But we’ve rarely heard the stories about the financial mistakes made when buying fire apparatus. As a result most departments haven’t learned why bad financial things happen to good departments that make some major mistakes. Mistakes can cost tens of thousands of dollars, cause major problems within the department and its stakeholders and can even jeopardize safety when the department attempts to buy the next truck and learns it cannot afford it.

There are three characteristics of financial mistakes in apparatus purchasing that every department can avoid.

The first is not addressing financial issues up front.

In every municipality in the U.S., you have a group that buys and uses fire apparatus, and then there is a group that pays for fire apparatus, whether it’s the treasurer of a small volunteer fire department or the finance department of a major city.

Consulting The Payers

The users are excited about buying a new truck, and the payers are trying to figure out how to balance the books with this large purchase looming over the budget. These groups are usually diametrically opposed in their viewpoint about buying new apparatus.

The seeds of a mistake are planted when the buyers/users work without consulting the payers to create the perfect truck. The payer is not involved to guide the development of the truck spec within an acceptable budget. The end result is that a tug-of-war develops between the users, saying they need a truck (for safety or reliability or a host of other acceptable reasons), and the payers, saying they need to spend less. Some compromise is reached to buy the truck and get it paid for some way.  

Getting Together Early

The problem is that this compromise scenario is usually never a big-picture decision. It’s just a kind of truce to “get the guys the truck they want” and “we’ll figure out how to pay for it some way.”  What typically happens is that poor financial decisions are then made. Perhaps it’s buying too much truck for the budget, selecting a wrong loan term or even paying for the truck the wrong way.

The mistake is made when financial decisions are not adressed at the same time as truck purchase decisions. Financial decisions involve questions such as:
     • How much can the department afford?
     • What is the right way to pay for the truck – a grant or a loan?
     • What is the best financing term?

Financial decisions should not be made reactively to the idea of buying a truck. The solution is to get the two groups together early in the process.

Users should understand that payers aren’t excited to spend large sums of money without planning. Have the payers and users developed a reasonable budget together – one that provides a needed truck without breaking the bank? Give the payers the time to develop a funding strategy for the truck as part of the larger financial picture. By doing this, your department will avoid conflicts and prevent a financial mistake.

The second characteristic of a bad financial mistake involves the bidding process.

This happens every day and costs fire departments millions of dollars each year.  The fire department either sends out a request for proposals (RFP) for financing or asks for financial options as part of the apparatus RFP. And this is an extension of the first characteristic.

Financial Discovery

The mistake starts with the fact that the fire department is using the RFP or bid process to learn about financial offerings. The cost of financing a fire truck can add from one-third to one-half of the cost of the truck.

If you think of the financing cost as a component of the truck, this means financing can cost over $100,000 to $250,000 on a typical truck. It is probably one of the bigger costs of the truck. Yet some fire departments do no planning about financial costs when including it in a RFP.

Just as you don’t send out a truck RFP without a lot of discovery of the best ways to build and configure your truck, you shouldn’t send out a financing RFP (or include it in a truck RFP) without doing proper discovery of the best choice for you.  

Open-Ended Language

It’s common to see RFP finance language that asks for some terms and then also asks for any other financial offers that may benefit the fire department. This kind of open-ended language opens up a whole host of problems and makes the department entirely dependent upon the kindness and capability of the bidders. Department officials are hoping they’ll get knowledgeable and honest responses to this vague RFP request.

The solution is to treat the financial aspect of the RFP with just as much care as the truck. It is an expensive component and deserves care and attention. Just as time is spent learning and developing knowledge about the best truck configuration for the department, time should be spent understanding financing alternatives and selecting the best method for your situation.

The third characteristic of financial mistakes in apparatus purchasing is tunnel vision.

This is very common. Fire departments focus on one financing aspect and miss a whole bunch of information and choices that may cost them plenty.

Let’s explore one story of a major fire department buying a fleet of trucks. Department officials were so focused on ensuring that the first payment fell in the right budget year that they almost paid twice as much interest as necessary. Thankfully, they managed to postpone the financing and still schedule their payment according to their budget. By doing so, they saved enough money to buy one new complete truck.  

Understand Complexities

Financing is complex. When department officials focus on only one part, such as payment timing, down payment or years financed, they may miss other parts. And that can cost them dearly.

You can educate yourself about all the factors that determine total financing cost or you can get some trustworthy help to guide you. 

Let’s face it. Financing is not nearly as exciting as a new fire truck.  So, it’s easy to set the financial decisions aside until later or not take the time to understand the complexities of financing and request quality financial offerings.

When the seeds of a bad decision are not allowed to take root, your fire department will make better, informed choices, set up a financial legacy of proper equipment and save thousands of dollars.

Editor’s Note: John R. Hill, an apparatus budgeting consultant, is president of ENVIZION Financial and a nationally-recognized speaker and author regarding the issues of buying and financing fire apparatus. He lives in Indianapolis and is working on a book about how fire departments can strengthen their financial condition.

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