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Category Archives: Cost saving policies

Exposing Hidden Car Fleet Contract Costs

Exposing Hidden Car Fleet Contract Costs

When costing a fleet supply agreement, and choosing the right funding model and appropriate supplier, it is important to understand that the price quoted against a vehicle list is merely a price at a snapshot in time, and on a very specific configuration.

It is a price that is being provided for the purpose of comparison, either between other suppliers in a multi-bid scenario or against other suppliers in a single bid scenario. It is extremely unlikely that it will reflect the actual cost of operating the fleet over the term because of two main reasons:

Price creep
As the fleet expands and the legacy supplier is removed, the new leasing price of each type of vehicle will change over time: likely to result in an increase in the headline price that the contract was signed against.

Additional supplier margins
Although the provider may have offered significant signing-on incentives to win the business, they will always be factored into the overall contract pricing, very often with sophisticated systems to recover this investment.

And it is these margins that the supplier can apply to consumables and services that need to be understood, so they can be managed.

It is a common misconception that the only revenue elements that can be negotiated are the management fee and the margin on the financing interest.

Most fleet stakeholders assume that focusing on these means they are in control of the contract costs, however, that is, unfortunately not the case. There are in fact six cost categories within a typical leasing contract that are used to generate revenue for the lessor.

To understand these six commercial trapdoors Download the fleetworx e-book “Fleet Contracts: Avoiding Commercial Trapdoors – A Practical Guide for Procurement Departments” .

 

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The Great Cash or Car Conundrum

The Great Cash or Car Conundrum

Although the offer of a cash allowance as an alternative to company cars may be considered a fairly ubiquitous option for company car users, it is, in fact, not as widespread as expected.

A recent major report on Global Company Car Policies suggests that only 34% of companies across Europe allow all their employees the choice of cash allowance rather than car; whilst 66% of companies restrict the choice to certain employees or don’t provide the choice at all. Nowhere is the situation more polarised than the UK, with only 17% of companies allowing all employees the option of cash allowance.

This suggests quite clearly that car ownership, rather then the provision of an allowance, remains the preferred choice across Europe.

So why is it the company car is still the preferred route?

  • Employee wellbeing
    • Most fleet owners manage their car selection design quite tightly so they can exert some control over their fleet and the type of vehicles driven by their employees. A well organised and correctly specified car fleet provides a more controlled environment for the employee; assisting safety, comfort and productivity. As the fleet supply chain exists to manage the vehicle, and support the driver, it also removes the personal burden of responsibility for the upkeep of the vehicle, allowing the employee to be free from the distractions and compromises of personal car ownership.
  • Image
    • Driving the right type of vehicle adds to the strategic value of the brand building efforts of the business. The vehicle needs to reflect the brand image and personality that the business is projecting. Sports cars may be desirable to the employee but if they contradict the understated, professional and level brand image that is being communicated then the customer may be left confused about the brand and its real values.
  • Recruitment and retention tool
    • A well-defined company car policy can be a major attraction to new recruits and can be used by the employer to create a point of difference between themselves and their competitive set. If a company decides to offer car allowances then that amount is fixed by policy and has a defined value in the mind of the employee. However a company offering cars can use this to their advantage and employ smart policies such as these to provide higher value vehicles, and hence an increased package, at no extra cost to the business.
  • Tax Position
    • Once a cash alternative is made available to employees it triggers the new tax regulation that means the employee will be taxed on the higher of the BiK or the cash allowance. As well as higher tax liability for the employee, it also removes the incentive to choose low emitting vehicles, as the tax benefit will be eroded.  The employer will also be subjected to higher NI contributions on those vehicles that were previously enjoying low BiK values.
  • Cost Management
    • Employers operating a cash allowance scheme need to be aware of the underlying temptation for car users to choose alternative transport options in order to reduce the mileage accrual on their private vehicle. The use of alternative transport naturally increases mobility costs, and can impact of the total mobility spend of the company.

Although advocates of cash allowances may consider it the easy option for providing cars, it is, in fact, a tactic that could erode the many benefits provided by a well-managed company car fleet.

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The Hidden Cost Threat in a Company Car Fleet

The Hidden Cost Threat in a Company Car Fleet

Creating a water-tight contract at the beginning of the supply agreement is one of the most important things any fleet stakeholder will do when dealing with fleet. We can say this with absolute confidence as we know what happens when car fleets mature and morph from their original formation.

The nature of our business means we collate and analyse heaps of data. We collect data from all areas of the car fleet supply chain and are perfectly positioned to analyse this data and see what it tells us. And one of the most startling things is the potential for massive cost creep if the initial contract is not sealed water-tight. It is quite normal to assume that there will be some degree of flux within a contracted fleet and quite natural to expect some out of contract costs to develop over time. However, our analysis tells us the extent to which unplanned, variable spend can influence the contract cost.

We looked at the data of a pan-european company operating a large car fleet across many countries. We gathered the data from the last 5 years of their car fleet operation and ran it through our systems to determine the nature of the data. We looked at nearly 20,000 invoices and over 1.6m individual cost lines. The most telling revelation was the amount of unplanned variable cost, relative to the total cost of operating the fleet: almost 1 in every 4 euros spent on the fleet was outside of the original contract.

Car fleet hidden costs

Hidden Cost Infographic

These findings are significant, as costs that are outside the original contact are, by nature, unplanned and variable. Because they are not influenced by contractual terms they can attract margin from the supply chain, contributing significantly to the cost creep of the contract. And when 25% of the total cost of operation is an unplanned cost, it reinforces the need to create contracts that capture these costs and restrain the potential for them to be manipulated to the benefit of the supply chain.

These out-of-contract costs come from a number of sources. One of which is the cost of running out-of-contract vehicles. All vehicles are introduced to the fleet under contractual terms that control the cost of operation. However, once the contractual term of a vehicle has expired, and the vehicle remains in the fleet, it becomes an out-of-contract cost that can often attract punitive charges from the supply chain. If only a small number of cars happen to be running on out-of-contract terms then it is entirely manageable, however, our research discovered a very different and worrying scenario.

View our infographic here to see the results of our research

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How to mitigate April’s company car tax increases

How to mitigate April’s company car tax increases

There has been a lot of coverage about the latest round of tax amends from the Autumn budget. And although the dust may not quite have settled on some of them, such as salary sacrifice, we do know there is a host of tax increases coming over the horizon in April.

Managing a company car fleet is difficult. We know that. It is difficult to manage it operationally, difficult to manage it strategically and it is certainly difficult to manage it financially. And this latest rounds of tax increases does not make the task any easier.

Tax changes for 2017 and 2018 are adding cost to an already costly category. With uncertainty around Brexit and increasing inflation, containing cost is challenging enough, without losing the impact of any hard-won savings at the stroke of the chancellor’s pen.

In case you were unaware, or simply haven’t had the time to consolidate the new taxes, this is our list of what is coming your way:

Vehicle tax rate (VED)

We think this one has slid under the radar a little. Only cars with zero emissions will benefit from zero tax. All cars above zero will move to a flat rate of £140, unless the list price is over £40,000, when there will be an additional supplement of £310 for each of the first 5 years. This could be quite a shock for fleet managers as previously VED was based on emissions and low-emitting, not just ULEV, vehicles were rewarded for being so. Alas, no longer the case.

Capital allowance changes

From 2018 the threshold for claiming capital allowances at the lower rate of 8% instead of standard rate of 18% is being lowered from 130 g/km to 110g/km, bringing way more company cars into this bracket and having an impact on monthly cost

Insurance premium tax 

This is increasing from 10% to 12%, resulting in an increase to vehicle insurance premiums

Company car tax rate 

Up to 2021, the rates at which cars are taxed for BiK are all increasing by at least 2% per year, up to a maximum of 37%. The diesel supplement of 3% that was due to be removed in April 2016 is now remaining until 2021. The combined impact being an increase in employee tax liability and employers NI contributions.

Cash allowance changes

If a cash alternative is offered as part of company policy, then the tax on a new car will be paid on the higher of the BiK or cash alternative, potentially increasing the employees tax liability and the employers NI contributions. It may also result in drivers opting for less environmentally friendly cars rather than employing a green approach to their car selection. As they are paying the cash allowance tax anyway there is no opportunity to reduce their tax liability by selecting low-emitting vehicles, therefore pushing up the cost of the overall fleet (larger cars will push up fuel bills and insurance premiums in addition to the increases in company NI contributions)

Faced with these tax hikes, cost avoidance becomes ever more important for fleet owners. Depending on the sensitivities of a business, there are numerous cost-saving initiatives that, when implemented effectively, can make quite a significant impact on the cost of operation. Deciding on what to focus and how much saving it may return is part of the challenge of managing an expensive category. Should you be looking at streamlining the number of car manufacturers on your choice list and benefit from enhanced terms, or what about removing private mileage benefit from your employees?

Choices like these need to be considered in light of the internal and external pressures on a business, and chosen based on variable such as timescales, internal expertise and employee impact.

Fleetworx has developed an online interactive tool that will suggest cost-saving initiatives based on business circumstances. A company’s time pressures, their level of knowledge and expertise, and how much employee impact they are willing to accept will dictate the initiatives that will be recommended: all presented in a downloadable pdf.

To access the cost-saving tool and drive cost from your car fleet visit https://www.fleetworx.com/cost-saving-tool/

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