Fleet special: lowering costs

A company accountant is asked to help choose a company vehicle and is shown
two cars.

One has a list price of £18,000, the other is £20,000. Which is cheapest?

Although it seems like a question designed for a primary school pupil,
nothing is as it seems in the world of company vehicles. When it comes to
creating choice lists – or deciding which car is right for your fleet, it is
always worth taking two steps back before making a decision, so you get a wider
view of the factors affecting fleet choices.

Just because a car seems to cost less, in the long run the opposite could be
true when factors like depreciation, insurance, maintenance, fuel economy,
reliability and the attitude of drivers to each vehicle are taken into account.
These ‘wholelife costs’ can help a fleet operator identify how much each vehicle
costs on a pence-per-mile basis.

For example, take the company accountant faced with a seemingly obvious
choice.

If the cars were a Ford Mondeo 1.8 Ghia Sci costing £18,097 and an Audi A4
1.8T costing £20,577, then at first glance the decision would be simple. But
over the benchmark three years/60,000 miles of a normal fleet car’s life, the
Ford loses 77% of its new value, equivalent to 22p per mile, while the Audi
sheds 61%, or 19p per mile, according to fleet car running cost guide The Cost.

The Audi is more expensive to service, at almost 4ppm, compared to the Ford’s
2.5ppm, and the German brand uses more fuel too (11ppm against 10ppm). But
overall, because of its stronger used values, the Audi comes out at 34ppm
against the Ford’s 35ppm, equivalent to about £594 saving over a three-year
lifecycle by choosing the ‘more expensive’ model. The company can then take this
information into account when asking for discounts from company car providers.

From this, it is pretty easy to understand why depreciation is such a big
issue and needs to be watched closely, but very few fleets realise the importa
nce of monitoring fuel costs. Depending on the car, about 20% of its wholelife
costs are fuel-related, yet in terms of management time, it barely even
registers for many companies.

Fuel costs are seen as a necessary evil that have to be accepted because
nothing can be done about them, unlike areas such as funding and maintenance.

Yet for most companies, this couldn’t be further from the truth. Effectively
monitoring and managing fuel costs can wipe millions of pounds a year from the
fleet costs of large companies – savings that have a direct impact on the bottom
line.

Rocketing fuel prices in recent years have seen some firms’ fuel budgets
soar. But fleets can easily avoid future hikes by installing strong,
well-ordered policies on fuel use and a regime for managing costs.

‘For many businesses, fuel can be the second-highest cost in the fleet after
depreciation, and recent high prices have added thousands of pounds to fleet
running costs,’ says Mike Waters, head of market analysis at fleet and fuel
management group Arval. ‘By saving just 2p per litre on a fleet of 50 vehicles,
a firm could save £3,000 per year, so the incentives to reduce cost are
significant.’

Research conducted by Arval shows that the fuel bill for a fleet of 50 cars
could be equivalent to the salaries of two senior managers, so it needs to be
managed correctly.

Waters adds: ‘A robust fuel policy ensures that everyone in the business
fully understands the organisation’s rules for buying and using fuel. The policy
can include fuel pence-per litre targets and set ceilings for consumption and
emissions.’

There are several fleet management techniques that fleets of all sizes can
employ to keep their costs under control, but all policies need to be tailored
to meet the specific needs of a company. Managing fuel use requires a
comprehensive system, which has to be updated regularly with current data, such
as who is filling up which vehicle, what with, where and when.

Fleet consultant Stewart Whyte says: ‘Pump price rises are a fact of life but
through pro-active management, fuel bills can be significantly reduced. Each
case calls for individual consideration, but measures available include the use
of fuel management reports to target uneconomic vehicles and/or drivers, advice
on driving styles to eliminate the heavy right foot and reviewing vehicle choice
lists.’

Reports to management should include information on fuel expenditure,
mileage, consumption and price-per-mile from drivers. This can be collated
manually, but it often results in mistakes or misinterpreted data.

In addition, according to estimates from the Institute of Purchasing and
Supply, with a manual processing system just one monthly expense claim can cost
a business up to £28.

For many companies, some form of purchasing card may be the answer, either in
the form of a company credit card or a fuel card. There are different arguments
for using each one. Company credit cards, such as those offering the backing of
Mastercard and Visa, are accepted throughout the world and can easily be managed
online. There is also significant fraud protection and firms can purchase any
goods and services they choose, subject to company limitations.

But a fuel card, while often restricted to a couple of products such as
petrol/diesel and oil, offers much more in-depth management information on fuel
use. This in turn enables detailed study of fuel economy by vehicles and also by
employee.

‘Ultimately, only a fuel management system that utilises a fuel card can
capture reliable, detailed information about a driver’s fuel statistics,’ Whyte
says.

‘A fuel card captures information for each transaction at the point-of-sale
and therefore, comprehensive management reports can be compiled and supplied at
regular intervals and delivered to customers online or in paper-based format.’

The argument for using some form of corporate purchasing to manage fuel spend
is set to become even stronger following a recent European ruling. The European
sixth directive ensures that, if companies are going to reclaim VAT on fuel
purchases, purchase must have been made by a VAT-registered company. Therefore,
if an individual bought the fuel, using a private card or cash, then the
employer can’t reclaim the VAT.

If companies use pay and reclaim – reimbursing employees on a pence-per-mile
basis for mileage – then that is affected and the company will not in future be
able to reclaim VAT on the cost, if the ruling is introduced in the UK.

The current system of reclaiming VAT based on mileage allowances has been in
place since 1991, but it fails to comply with EU law because it does not ensure
that the fuel is supplied to the company and not the driver. Normally, the
company does not hold a VAT invoice made out in its name, but a long-standing
agreement meant that, so long as firms showed they had a robust system for
checking mileage and they a fair mileage rate, a VAT reclaim could be made.

The European Commission first announced its intention to challenge the
validity of the UK law back in 1998. Customs & Excise said the UK would
resist any challenge, but added that, if the worst happened, it would not allow
any change to be retrospective. The UK government refused to accept the
commission’s challenge, but a similar case brought against the Netherlands in
November 2001 was successful.

The commission commenced formal infringement proceedings against the UK at
the start of 2003. By the end of 2004, the advocate general issued an opinion
strongly in favour of the commission’s challenge.

If the changes are forced through, businesses that normally reclaim VAT based
on mileage allowances will be forced, either to revise the way that business
mileage claims are handled, or to stop claiming VAT on mileage rate payments
altogether.

Estimates on the cost to business vary, but under a worst-case scenario, it
could be about £1.2bn. Early suggestions from Bank of Scotland Vehicle Finance
suggest the number of fuel cards being used by companies has doubled already,
partly in anticipation of the change.

But good fuel management isn’t just about legislation and major European
issues. Simple initiatives on the ground can help too. For example, companies
could only allow vehicles on choice lists that can achieve a certain level of
fuel economy.

Alternatively, they could offer a reward to drivers who meet – or even beat –
their fuel economy targets. One of the biggest savings can come from educating
drivers who have moved from petrol into diesel vehicles that they must never put
in the wrong fuel by accident.

A single misfuelling incident can cause as much as £3,000 damage to a
vehicle’s engine and just a handful of errors could have massive effect. Lex
Vehicle Leasing, which runs a fleet of 123,000 vehicles, records 20 misfuelling
incidents among its customers every month.

Such basic errors could take the results of months of hard work preparing
wholelife cost comparisons of vehicles and turn them on their head, as drivers
who should be running the cheapest vehicles, suddenly make them the most
expensive.

John Maslen is editor of Fleet News