CLM Guide to Acquiring Company Cars
The company car fleet is the second largest overhead that companies face after wages and salaries. But there are many different ways of acquiring the company fleet that can reduce its cost to the company and enhance its impact on company profitability.
This guide attempts to provide a clear and transparent picture of the methods involved in acquiring a company fleet and suggests ways of improving its efficiency.
- Fleet Procurement Methods
- Whole Life Cost Analysis
- Choosing Replacement Cycles
- Negotiating Buying Terms
- Benefits of Competitive Tendering
- Setting Vehicle Policy
1Fleet Procurement Methods
The cost of acquiring vehicles is the greatest spend associated with running a fleet. Most businesses have two major options when it comes to funding their vehicles, either to purchase the vehicles outright or to lease them.
Purchasing vehicles outright requires a high outlay of capital upfront. This may mean tying up funds that could be better used elsewhere in your business, or sourcing a bank or other loan to cover the costs.
If you purchase your vehicles outright, you should regularly review whether this is still the best option for your business.
Remember that any vehicles you own outright are a depreciating asset and your business is exposed to fluctuating residual values. You will be responsible for the disposal of the vehicles – which is a complex skill in its own right.
You should also be aware that vehicles that are purchased outright by a business are not VAT recoverable, unless it can be shown that they will never be used for private use.
Contract hire and leasing
There has been a definite shift towards contract hire and leasing, not least because it provides known, easily budgeted costs with no hidden surprises.
The most popular type of vehicle leasing is contract hire which allows a lessee or user to hire a car for a set period of time and pre-determined mileage, in return for a fixed monthly rental. There is no option for the lessee to purchase the vehicle and, at the end of the contract, it is returned to the leasing company.
The monthly rental or lease rate usually takes into account the cost of the car including vehicle registration fees, road tax, its period of use and agreed mileage, funding costs and forecast residual value, which is the car’s estimated value at the end of the contract.
This part of the monthly charge is often referred to as the ‘finance’ element of the rental.
Vehicle mileage will have a big impact on the lease rate because the number of miles has major implications for both service requirements and resale value. Under-estimating mileage can reduce the monthly rental rate for the lessee, but it can also result in excess charges at the end of the contract if contracted mileage is exceeded.
The choice of vehicle model can also be a major factor. Two cars can have an almost identical list price, but if one has a much higher forecast residual value, this will be reflected in a lower monthly rental rate.
The monthly rate for most contract hire agreements will also include a ‘service’ element of the rental, which can cover a range of additional services.
Examples of such services include maintenance, replacement vehicles, roadside assistance, accident management and fuel cards. Lessees are able to choose from a menu of options to meet their individual needs and level of in-house fleet support resources.
Choosing the right one for you
Making the right choice between outright purchase and the many leasing options available could deliver you considerable savings. Factors that need to be considered include cash flow, taxation, VAT and the transfer of risk.
To make the best choice, you need to have a firm grasp of the financial implications of each acquisition method and, to do so, you may need to look for outside help from the experts.
A good fleet management provider, like CLM, should be able to take you through the pros and cons of each acquisition method and help you make the right choice.
2Whole Life Cost Analysis
To get this true cost you must also look at the additional, extra-contract costs such as insurance, fuel, National Insurance and tax. This is called whole life cost analysis. You can read our blog post on this topic here.
By looking at the whole life cost, you can make smarter vehicle choices that will generate cost savings, as those vehicles with the lowest rentals do not necessarily have the lowest whole life costs.
CLM is committed to delivering cost savings to customers through whole life costs analysis, and we are able to independently forecast the cost of acquiring, operating and disposing of company cars and light commercial vehicles.
The key benefit of utilising a whole life cost model is that you can select vehicles safe in the knowledge that this is based on their actual cost to you, and not just their monthly cost.
3Choosing Replacement Cycles
Around 70% of fleets currently use a replacement cycle in excess of three years. Whatever acquisition method you use, extending the replacement cycle will deliver immediate and considerable savings by reducing monthly lease rates or vehicle holding costs.
Balanced against this are the possible extra service, maintenance and repair costs that may be incurred as the vehicles get older and their mileages increase.
Many manufacturers have extended the service intervals for their vehicles as vehicle reliability in general has improved considerably in recent years. And, the durability and reliability of modern vehicles usually means that a four year cycle can often be adopted with no discernible impact on operational capability.
However, there are human resources aspects to consider – most employees like to drive newer cars and there may be objections to running older cars as a result of longer replacement cycles. It may also be seen as a barrier to recruitment.
A possible way to balance HR considerations is to trade back some of the saving made by adopting a longer replacement cycle to drivers in the form of an improved model when they next renew their car.
This can be a simple cost win that, with managerial backing, can be achieved with the minimum impact on your organisation.
4Negotiating Buying Terms
There are definite savings to be found by renegotiating your vehicle sourcing terms, but you may need to call in support from your fleet management company.
By regularly reviewing the manufacturers that you have on your vehicle policy, you may be able to improve on any manufacturer discounts that you currently receive, thus reducing the cost of acquisition to you.
As part of this process, you may look at reducing the number of manufacturers who appear on your choice list in order to maximise your spending power. Also, depending on your needs, an excellent way of creating savings is to access one-off batch deals for a large number of vehicles or take advantage of short term special offers.
You could also consider restricting the choice to only one or two manufacturers. By doing this you may be able to negotiate favourable terms with the manufacturers involved, but you need to be aware of the possible impact on drivers and their reaction to having their vehicle choice curtailed.
Negotiating deals of this size can be difficult and, if you don’t have the right purchasing skills, it may be worth looking for support from your fleet management provider for whom this should be a specialism.
CLM has many years of expertise in negotiating with vehicle manufacturers on behalf of its corporate clients and has saved many thousands of pounds as a result.
By using a carefully selected panel of lessors, as CLM does with its Smartpanel Funding solution, rather than a single leasing company, it is possible to create competition around each new car to be added to the fleet and then to select only the most cost-effective rates available.
Why is competitive tendering in this way necessary? Leasing rates for every new car in the market invariably differ from supplier to supplier. There are a number of reasons for this, but typically they revolve around the perceptions of each individual leasing company to:
- The future residual value of the vehicle involved
- Its servicing and maintenance costs over its life
- The rebates and financial support they can achieve from the supplying vehicle manufacturer/ motor retailer
This results in a wide range of differing rates from leasing companies for the same vehicle, and provides the opportunity to identify the most competitive rates for each new vehicle from a number of different suppliers.
However, this can be very difficult to achieve for those companies which rely on just a single leasing supplier. By selecting a single supplier, companies are buying into the supplier’s view of all available vehicles, and can also be taken in by initial, pre-contract quotes that have been set at an artificially low level just to secure the contract.
CLM has many years’ expertise in providing competitive tendering for our fleet clients, and with our Smartpanel Funding solution you’ll get the best price on every fleet vehicle.
We go to a panel of different contract hire companies to get the best, unbiased pricing for you. We then work with the most competitive quote providers to source the best all-round solution for your fleet procurement needs. You are free to include or exclude any contract hire providers if you have any particular preferences.
It means you get the administrative and financial benefit of only using one supplier, but the peace of mind of knowing that you are saving money. We save an average of £870 per vehicle contract by using our Smartpanel Funding solution, rather than a single leasing company.
6Setting Vehicle Policy
The environmental impact of your fleet is important to consider on many levels, not least because an environmentally friendly fleet is also a cost efficient one.
Your business benefits from lower CO2 emissions which is positive from a Corporate Social Responsibility perspective and from lower fuel costs. Your business also incurs lower Class 1A NIC charges and lower road fund licence costs on fuel efficient models, while your drivers pay less in Benefit-in-Kind taxation.
Where vehicles are provided to employees to enable them to carry out their job, the most suitable vehicles for this task should be provided, and larger or more powerful vehicles should only be provided where they are genuinely required. Smaller vehicles have smaller engines and so use less fuel, saving you money.
It is important to regularly review the vehicles available, in conjunction with your fleet management provider, to ensure you are selecting those that perform best in their class.
Where employees are eligible for “perk” vehicles, it is still advantageous to encourage drivers into more fuel efficient cars for tax and environmental considerations.
Your fleet management provider can help you to select vehicles with the best fuel economy and you could also consider offering staff incentives for opting to take low CO2 models.
Capping CO2 emission levels on the fleet to say 110-120g/km, and selecting vehicles with fuel consumption of 55mpg or better, could create major savings for the business in National Insurance, Benefit-in-Kind tax and fuel costs.
And it could also help future-proof against forthcoming changes in legislation which will make ever more stringent emissions demands and will ultimately see the disappearance of conventional powertrains.
With current Government announcements in mind that petrol and diesel engines will be phased out by 2040 – just 23 years from now – it is not too soon to start considering the alternatives and planning for the future.
There are now some well-established hybrid models on the market, with rising numbers of electric vehicles and plug-in hybrids from the mainstream manufacturers. Choice has never been wider – and it is only set to increase.
There is clearly a strong environmental argument to this approach that may help to create enthusiasm within your organisation, and it may never have been easier to get buy-in from staff react as they react to greener driving initiatives in both their business and personal lives.
To discuss any aspects of your fleet vehicle acquisition, contact the team at CLM Fleet Management