Most contract hire packages today come with a maintenance-inclusive element, but many companies that use contract hire to fund their company cars this way don’t realise that there may well be a more cost-effective alternative.
Maintenance-inclusive contract hire packages are widespread and undoubtedly profitable for contract hirers, some of whom are prepared to share these profits with fleet clients, while others are reluctant to do so.
This year’s FN50 survey of the country’s largest leasing companies showed that, of 31 respondents amongst the top 50, some 15 shared the profits they made on vehicle maintenance with their clients, while 16 preferred to retain it for themselves.
How do maintenance-inclusive contracts work?
Fixed-cost, maintenance-inclusive contract hire packages charge a regular amount per month per vehicle to cover all routine SMR (service, maintenance and repair) costs whether required or not, and also include a level of built-in contingency for any ad hoc work that may be required.
This arrangement continues to the end of the contract life of the vehicle, typically three years, and can accrue considerable profits for contract hirers in terms of cash-flow and end-of-term surplus.
Many companies opt for maintenance-inclusive contract hire packages to simplify their budgeting process and operational procedures, since they offer a tidy, no-risk package, providing one known price.
When might a maintenance-inclusive plan be the best option?
For companies that want to know exactly what their future costs are going to be, with no nasty or hidden surprises, maintenance-inclusive contracts can undoubtedly provide peace of mind.
Maintenance-inclusive contracts remove all future uncertainty and the chance that, around the corner, some major items of vehicle expenditure might be lurking. What you see is what you get – and for some companies that’s a very comforting thought.
Some companies are also traditionally very risk-averse and don’t want to ‘self-insure’ against some future eventuality and, for these organisations, maintenance-inclusive contracts can be a viable and sensible option.
However, the latest figures from our specialist fleet management arm, CLM, show that such companies could be missing out on significant cost savings by choosing maintenance-inclusive contracts instead of electing for pay-as-you-go (PAYG) maintenance instead, a system that only allocates maintenance costs as and when they occur.
Why is PAYG fleet maintenance cost effective?
There are several reasons why PAYG maintenance can be the more cost-effective option. Cars have become increasingly more reliable; warranties and service intervals are longer, and dependability is much improved.
If the average company car replacement cycle is three years/60,000 miles, it is quite conceivable that, with careful management, some low-mileage vehicles could only require two or three scheduled services during their lifetimes.
CLM’s figures show that savings of 10%-20% are possible by switching from fixed cost maintenance to PAYG. Even at the lower limit of predicted savings, a 200-vehicle fleet paying an average of £40 per vehicle per month for maintenance can save nearly £30,000 over a three-year term.
Furthermore, a fleet management specialist can proactively manage PAYG maintenance costs on the client’s behalf and even provide this as a stand-alone service for clients.
What are the benefits of PAYG?
PAYG maintenance offers a number of benefits including:
1Improved cash flow
Cash that isn’t tied up in a maintenance agreement can be used for other business purposes. Perhaps it can be re-invested in the company for business development.
Under PAYG, maintenance bills are paid as they are incurred so business decision-makers can clearly see the costs, leading to better, more informed decisions. This translates into significant cost savings and efficiency gains.
Armed with better information, decision-makers can select vehicles that fulfil company requirements but have lower maintenance costs and longer-lasting components when compared to rival models.
As each item of maintenance is carefully reviewed before works begins, business decision-makers have complete transparency and can account more accurately for driver impact on their vehicles.
With PAYG maintenance, a specialist fleet management provider can help set accurate maintenance cost accruals and then proactively manage the fleet to ensure that all vehicles fall within budget, thereby ‘smoothing-out’ any spikes in fleet maintenance spend.
Pro-activity increases with PAYG
At the same time, pro-activity can be increased. Mileage information can be captured from a variety of sources including fuel cards, expenses feeds and third party data, to show with more certainty when vehicles are nearing their service mileage.
This way, servicing and maintenance can be planned in advance to ensure that work is carried out in a timely manner and avoids the risk of invalidating manufacturer warranties.
Also, there are no reasons why company car drivers should receive inferior customer service under PAYG maintenance. They can be provided with the exactly same benefits they would receive within a maintenance-inclusive offering, including a collection and delivery service or courtesy car, and vehicle cleaning prior to return.
If you would like more details regarding the suitability of a maintenance-inclusive contract hire package or a PAYG maintenance strategy for your fleet, please get in touch.