Contract hire issues

Published in Fleet World Confidential in October 2010

 

Contract hire; periods and mileages

 

Contract hire is by far the most popular leasing product. You can normally choose whatever lease period you require, though many contract hire companies will refuse to lease you a vehicle for less than twelve months or more than five years.

It was once normal for companies to replace their vehicles after two years. Today 66% of vehicles are leased for three years and 26% for four. Every time there is an economic downturn, fleet managers push out their leases a little longer. And with good reason; depreciation is heaviest in year one so the longer the lease the lower the average annual depreciation, and therefore the lower the rental. Yes, maintenance costs grow steadily as cars get older, but for most cars this saving in depreciation more than compensates for the extra maintenance costs.

The average mileage for a business-use car is around 20,000 miles and the average for a perk car is nearer 12,000. It’s always best to try to estimate the exact mileage each car will travel and to build that into the lease. This will ensure you do not incur excess mileage charges or pay for miles the car isn’t going to travel. If you have several (or more) cars on lease it is worthwhile building a ‘pooled mileage’ arrangement into your leases, so that under-mileage on some cars will be netted off against excess mileage on others and you only pay for the net excess mileage.

 

How to choose a supplier

The contract hire market is very healthy. You can choose from many suppliers and should be able to find the organisation that best meets your needs on service and price.

You need to decide whether to deal with just one contract hire company (sole supply), or whether you prefer dual or multi-supply.
Sole supply gives you the benefit of a close relationship with a company that will take your business seriously – they lose everything if you go elsewhere. They will give you pooled mileage and consolidated reporting across all of your vehicles; not possible with multi-supply. You may prefer instead to have several suppliers and to get them to quote for each vehicle you require. More work for you but you will find that their rentals do differ simply because their views on the residual values and maintenance costs of the vehicle differ. You can ask a broker to shop around for you and pay for this service, if you wish.
The consolidation in the market has created a small number of contract hire companies with fleets of more than 100,000 vehicles – what the press calls the ‘superleague’.
These very large companies have been able to invest in the latest computer systems to run their businesses and have striven for economies of scale to reduce their costs.
While these new systems will reduce errors, particularly those that employ ‘workflow’ technology, many customers prefer the personal service they get from a smaller supplier. Do you prefer to be a big fish in a little pond or vice versa? At the end of the day this comes down to personal choice.

 

Contract rewrites, extensions and early terminations

It is best practice to lease your vehicles for the precise periods and mileages you actually expect to run each of them. Even so, there will inevitably be situations where you may have to terminate a lease early. For example, if an employee resigns and you cannot reallocate the vehicle to another driver. Your supplier will then need to clear their books, recover the cost of breaking their own funding arrangements, recover any cost of disrupting their capital allowance flows and also (perhaps) recover some element of the profit they had hoped to make had the contract run to maturity.
To avoid later disputes, make sure your lease sets out the early termination process clearly. There are at least four methods of calculating early termination settlement figures, so check you understand how yours works.
If you expect to have a high number of early terminations, perhaps because you are in an industry with high staff turnover, consider using ex-lease or used cars for some staff to avoid early termination costs.
Normally, leasing companies will be happy to allow you to extend a lease at the end of the contract period, unless you are in arrears or the vehicle has already cost a lot to maintain and the costs are likely to mount.
If you want to extend for a short period, perhaps for up to three or four months, they will allow you to do so ‘informally’: you just continue paying the same rental.
If you want to keep the car for longer, they will prefer to extend the lease ‘formally’ and will give you a new agreement to sign. The new rental may well differ from the old one because they are, in effect, offering you a new short term lease and will want to calculate the new rentals accurately.

Management reporting

 

Even if your fleet comprises only a handful of cars you will still need to have information to allow you to manage them as efficiently and effectively as possible, and you should expect your leasing company to provide this.
Each company has different needs but the following reports are likely to be indispensable to all fleet managers:
  • · Makes, models, registration numbers and drivers of all vehicles in the fleet
  • · Leases due to terminate soon
  • · Cars operating over or under the contracted mileage. This is important as it gives an early warning of possible excess mileage charges and allows you to take remedial action, for example, swapping a high-mileage car with a low mileage car to even up the mileage.
  • · Cars that have passed the original lease termination date.
  • · Upcoming (and missed) services, MOTs, etc.
  • · P46 report, to allow you to complete the HMRC P46 tax form.
  • · Where the supplier has this info, actual maintenance cost and fuel consumption to date compared with estimates. Once again this allows you to spot problems.

You will also need more reports covering open book leasing arrangements, accidents managed by the leasing company, etc.

Almost all leasing companies now offer web-based reporting to their clients, so you should be able to get these reports and many more from your supplier’s extranet at the click of a mouse.

Maintenance inclusive or non-maintenance inclusive?

If you decide to choose a maintenance-inclusive contract hire deal the supplier will pay for all standard servicing, maintenance and repairs to the vehicle, fit an agreed number of tyres and arrange and control any non-standard work.

This reads like a simple list of tasks that any corporate manager could arrange for themselves. But if you decide to lease your vehicles and to organise your own maintenance, you will be giving yourself a huge task.

You will need to negotiate deals with garages and tyre suppliers, approve work promptly over the phone, make sure you only approve work that is really necessary, negotiate discounts, only pay the right rate for labour and parts, check the garage invoices when they arrive to ensure they’ve billed the correct amounts, keep on top of warranty claims … and so on. There are many pitfalls here for the unwary. The leasing company will have experienced in-house experts to handle all of these tasks and they will also have economies of scale that few individual fleets can match.

With a maintenance-inclusive deal the supplier also takes the maintenance risks from you. You pay a fixed price and they then pick up the actual costs. If you have a big fleet and are worried that they might make a big profit on maintaining your vehicles you can negotiate an arrangement whereby they share a proportion of any profits with you.

 

Professor Colin Tourick

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