Author: Marc Demoulin, ARI
25 Apr 2013
Because fleet costs are the second-largest corporate expense (behind employees), savvy fleet managers, procurement and financial directors are drilling down into the actual composition of contract hire with maintenance packages. They are discovering they can actually save significant sums of money – 20 percent or more in some cases – by opting to unbundle vehicle maintenance from the contract hire package. The move also improves a company’s cash flow, so unbundling vehicle maintenance from funding makes financial sense.
Vehicles rolling off manufacturers’ production lines today are significantly more reliable than those of yesteryear, as demonstrated by longer warranty cover
In an age of more reliable vehicles, there is little justification for paying a £100 per year contract hire ‘risk charge’. The extended service intervals on many models and longer manufacturer warranties make pay-as-you-go maintenance a far more financially viable option for many fleets.
In Britain, the two most popular methods for organisations to fund vehicles are either by using their own money to make outright purchases or leasing them, typically via a contract hire package.
Contract hire is available in two versions – maintenance inclusive or maintenance exclusive. For organisations that opt for inclusive maintenance, the monthly contract hire charge includes an amount to cover the leasing company’s estimated cost for all standard servicing and maintenance work during the life of the vehicle. The perceived benefit of inclusive maintenance is budgetary expedience.
In today’s demanding business world, however, an increasing number of organisations are opting for maintenance exclusive contracts. Management wants to split fleet funding and vehicle maintenance by unbundling payments hence opting for pay-as-you-go maintenance.
Going the distance
Vehicles rolling off manufacturers’ production lines today are significantly more reliable than those of yesteryear, as demonstrated by longer warranty cover. Warranties can now go up to seven years and there have also been lengthening intervals between services – two years or 20,000 miles in some cases.
That reliability means that in their first year and even into a second year, many vehicles will require perhaps only an oil change and a tyre or two replaced, with no scheduled service. However, businesses choosing a contract hire with maintenance package are paying for estimated servicing and maintenance costs from day one.
Additionally, evidence from across the industry, such as auction company vehicle mileage, shows that annual fleet vehicle mileage is reducing.
Therefore, over the benchmark fleet replacement cycle of three years or 60,000 miles, it is possible that through careful management some vehicles, for example low mileage company cars, may only require one scheduled service. Yet, contract hire with maintenance leasing providers do not take this into account when calculating maintenance charges. Instead, businesses pay a fixed maintenance cost for the duration of the contract, which may far exceed the value of the maintenance actually incurred.
Businesses that opt for a contract hire with maintenance package are often surprised to discover what the package excludes. As a result, they frequently find they are paying additional sums for repairs and parts not included in the package, which can come as a major shock.
The typical agreement does not include, for example, maintenance and repair work that results from damage, negligence or so-called ‘unfair wear and tear’. This includes damage to bodywork, kerbed tyres and wheels, drivers not taking responsibility for vehicle care and maintenance or blown engines. So even with a contract hire with maintenance package, organisations end up paying additional bills for work excluded from the agreement. This can add another 20 percent onto the contracted figure over the vehicle operating term.
Additionally, this agreement includes a risk charge of typically around £100 for each year of the contract, £300 on a three-year contract or £400 on a four-year contract, even when a vehicle is under a manufacturer warranty. So, although a three-year manufacturer warranty is the norm, some producers provide a five or even seven-year warranty, which negates any need for organisations to pay a risk charge.
Leasing companies in compiling their quotes ensure that they do not make a loss on any contract hire with maintenance package. Put simply, this package puts organisations at a cash flow disadvantage and costs more than it should.
Benefits of pay-as-you-go
There are several reasons pay-as-you-go maintenance makes complete financial sense and should become best practice in both public and private sector fleets. Pay-as-you-go maintenance delivers the tightest possible cost control and also aids corporate cashflow.
Fleet management specialist ARI Fleet UK offers a zero-tolerance policy towards all maintenance expenditures. Experienced maintenance controllers authorise all work prior to commencement with no upselling or add-ons, monitor all costs and evaluate every transaction. That process helps to reduce costs by preventing unnecessary and exorbitant repairs, enabling some organisations to maintain pence per mile operating costs at the same level as they were in the 1990s.
Moreover, where appropriate, warranty costs are recovered from either the vehicle manufacturer or parts provider.
Vehicle maintenance work is undertaken by a UK-wide network of independent garages. All work is based on fixed costs that are consistent with manufacturer terms and warranties, and invoices are automatically generated and settled, giving clients further control over costs.
Although some may perceive opting for pay-as-you go maintenance as a step into the unknown, it is not. This approach provides absolute cost transparency, with no risk charges or invoice surprises; the only cost to customers is for the actual maintenance work carried out. It also provides the ability to identify component failure trends by make and model across the entire fleet, as well as individual vehicles with higher unfair wear and tear component failure rates. The ability to identify the drivers of these vehicles enables managers to reduce repair, downtime, accident and insurance costs by implementing corrective measures to help improve their behaviours.
Every transaction can be evaluated to determine if repair costs can be recovered through manufacturer or parts warranty. Even if the vehicle or part is just past its warranty period, or if there is a technical service bulletin out for the repair, it is possible to negotiate a potential warranty credit at the time of authorisation.
Choosing pay-as-you-go maintenance as opposed to a contract hire with a maintenance package can save organisations hundreds of pounds per vehicle and what is more it can deliver enormous cash flow advantages. Cash previously tied up in maintenance agreements can be utilised more immediately and beneficially and/or reinvested in to further aid business development.