Whole Life Cost distortions – how to avoid the pitfalls
For any company that operates cars on its fleet, there are many more costs to consider than just the initial purchase price of the vehicles.
Throughout a vehicle’s operational life there are a wide range of costs that will be incurred which, in order to make comparisons between vehicles easier to understand, can be brought together under one umbrella known as Whole Life Costs (WLC).
Using whole life costs as a metric for vehicle comparison is an easy way to combine the various headline figures such as MPG, CO2 emissions and servicing costs into one meaningful and comparative figure.
What are the components of Whole Life Costs?
There are a number of factors that need to be taken into consideration for whole life cost calculations. These include.
- Purchase price Not the manufacturer list price, but the price paid for the vehicle including any discounts.
- Fuel costs Total fuel costs over the life of the vehicle. These are usually based on official figures provided by the vehicle manufacturer as a result of tests carried out under laboratory conditions.
- Service, maintenance and repair (SMR) Projected maintenance budgets include costs for the regular servicing requirements defined by the manufacturer, replacement tyres, wear and tear components forecast as likely needing replacement, such as brake pads, and, particularly for longer duration contracts, contingencies for more major items that would not be covered by any warranty provision. Most manufacturers provide the raw data needed for budgeting maintenance and several specialist data providers also provide tools and analysis to help refine those values.
- Vehicle Excise Duty (VED) Also commonly known as road tax. The first year’s tax is included within the purchase price, but VED will have to be paid in each subsequent year. The amount to pay is determined by the car’s CO2 emissions, which determines the cars VED bands.
- Finance costs Regardless of finance method there will be financing costs to consider. If the vehicle is leased then these costs will be incurred by the finance provider and costs included in the rental. If paid for in full upfront, then the internal value of that financing should be considered within the WLC.
- Insurance Whether the vehicle in question is insured on an individual model basis or on a fleet policy, insurance is an important cost to recognise within the WLC calculation.
- Residual value The proceeds from the sale of the car (its residual value), subtracted from the purchase price, equals the depreciation of the vehicle over its life. Estimated residual values are provided by data specialists; it can be dangerous to simply expect the same as an equivalent vehicle is worth today. Consideration should also be made to the costs of sale, including any fees, refurbishment charges and time to sell.
What other costs are involved?
Other costs and revenues that may need to be considered when making vehicle whole life cost calculations include:
- Benefit-in-Kind Tax This is an important element when looking at the tax owed on a company car. If the car is made available to the employee for their private use, this is deemed to be the provision of a benefit and the employee will have to pay Benefit-in-Kind tax linked to the CO2 emissions of the vehicle at their marginal rate. The percentage of a vehicle’s list price upon which tax is due will rise by 9% over the next four years and new cars should be chosen carefully with this in mind.
- Class 1A National Insurance Contributions (NICs) At the same time, the employer will have to pay Class 1A NICs on the value of the car benefit provided to the employee. Similarly, Class 1A NICs are also payable if free fuel is provided for the employee’s private use.
- Plug-in Car Grant The Government Plug-in Car Grant is designed to help buyers switch to greener, cleaner vehicles and needs to be factored into WLC calculations to make the WLC of a qualifying car more comparable with petrol or diesel equivalents. The maximum grant available for vehicles with CO2 emissions below 50g/km is £4,500, provided the range of zero emission miles is greater than 70, reducing to £2,500 for CO2 emissions of 50-75g/km or if the zero emission range is 10-69 miles.
- Options There are a number of options that can have a pronounced impact on WLC. Larger wheels normally increase the cost of replacement tyres, a significant part of the SMR cost. Options such as leather, panoramic roof and in-car technology can be of benefit to the residual value that helps offset some of the purchase price, whilst others, like tow bars, safety equipment and garage openers, typically do not.
Potential pitfalls with maintenance costs
A good fleet management specialist can help steer you through the whole life costs maze to find the optimised whole life cost profile for your fleet, taking into account all your vehicle requirements including vehicle types, length of contracts, forecast mileages and so on.
Taking service maintenance and repair (SMR) as an example, some manufacturers will specify a vehicle, especially if it is a tailored specification for fleet business, with smaller wheels and then offer a free of charge upgrade to larger wheels.
Not only does this increase the maintenance cost, as those tyres are more expensive to replace, it can also increase the CO2 output and therefore the tax bill for the employer and employee.
Service intervals that are deliberately nudged just outside typical fleet WLC benchmarks are also surprisingly commonplace. A 21,000 mile service interval, for example, is set mainly to reduce the number of scheduled services in a typical three year/60,000 mile replacement cycle, and hence reduce the stated whole life costs.
At CLM, we can help avoid these pitfalls by ensuring that careful consideration is given to all likely specification and by spreading fixed cost points across agreed mileage periods, especially as very few fleets run to exactly the forecast or benchmark mileage.
Calculating fuel cost
There is clear and compelling evidence that many manufacturers’ fuel consumption figures are on the generous side, as a result of the laboratory test conditions currently used in calculating fuel consumption and carbon dioxide emissions.
A study by the European Transport and Environment movement found that the gap between test results and real-world performance had increased from 8% in 2001 to 40% in 2014, and suggested that it was continuing to grow.
For some time now, we at CLM have, on behalf of our fleet clients, been employing methodologies to improve the accuracy of fuel consumption figures used in WLC.
Fuel makes up a significant percentage of any vehicles running cost. So it stands to reason that if the figures used are too generous, then the WLC figure itself is understated and not a true reflection of the real cost of running the vehicle.
This quickly renders any side-by-side comparisons meaningless and makes it very difficult to get a true comparative cost picture.
What we do, is to employ a percentage of the official manufacturer’s figure – typically 70-85% of the combined cycle depending on the vehicle model and journey profile – to achieve what we feel is a more accurate picture.
We then base our WLC calculations on this premise on a consistent basis across all models.
Further problems with plug-in hybrids
The picture is further complicated when looking at plug-in hybrids. Given that they are allowed to start the test cycles with a full electric charge, which is not commonly the case at the beginning of each real world journey, we believe the result is further distorted.
Again, dependent upon a client typical journey profile, and charging facilities, we may only take 50-60% of the claimed fuel consumption figures through to our WLC’s to give what we believe is a more accurate whole life cost picture.
By employing our methodology on a consistent basis, we find it is still possible to achieve reasonably accurate WLC figures, such that our client’s car selection decisions are optimised, based on robust and transparent data.
If you would like more information about the calculation of Whole Life Costs, then please get in touch.