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INTRODUCTION

INTRODUCTION

INTRODUCTION

Determining whole of life costs is one of the most important steps of the vehicle selection process, regardless of how an organisation chooses to obtain its vehicles. In the decision making process careful consideration is needed to ensure your analysis will encourage the best purchasing decision. The loss from a poor buying decision will be multiplied by the number of vehicles you have in your fleet.

Similarly whole of life costing models can also assist with discussions regarding the optimum replacement points for vehicles, selection of alternative fuel candidates, lease versus buy, outsourcing all or some fleet functions.

Care should be taken not to de-spec a vehicle purely in order to reduce its cost. While this may be acceptable for an individual purchasing a vehicle for private use it is not the case for company provided or sanctioned vehicles or vehicles, owned by other, used for company business.

The organisation has a clear responsibility for providing a ‘safe workplace’ for its employees and those performing activities on its behalf. This requirement is outlined in legislation where the organisation is required to ‘do as much as is reasonably practical’ in meeting this requirement.

Just what is reasonably practical is, and will remain, somewhat of a moving target for fleet managers and administrators. However, removing or not including an obvious safety feature is a clear potential liability that the organisation should avoid.

IDENTIFYING POTENTIAL CHOICES

MANUAL FOR FLEET MANAGEMENT

IDENTIFYING POTENTIAL CHOICES

Although important, the whole of life costing calculation should follow a “fit for purpose” evaluation and analysis. This process will correctly categorize your fleet into the relevant vehicle definitions, i.e. Tool of Trade, Salary Packaged, Salary Sacrificed or Novated Lease, and will have identified the specific utility requirements for each vehicle.

Each of these arrangements will require the application of different assessment criteria, and different problems require the collection of different data. Concentrate on those data elements that can reasonably be expected to affect the outcome of your analysis.

While the whole of life costing model and example provided vary somewhat dependent upon whether you purchase your fleet outright or lease it, the process and basic elements are the same.

Should you lease your vehicles then the information you need should be readily available from the tenders you receive. On the other hand should you want to purchase directly then you will need to assemble the data yourself.

Some of the data you require is readily available from independent sources however some will be inexact and will require you to make estimates and assumptions.

In making assumptions ensure that you base them on the best information available and that you are conservative; as with all assumptions they can make your analysis vulnerable to error.

Document any assumptions you make and monitor actual outcomes closely in order to adjust your predictions and dependent actions where necessary.

You will need information on engine options, vehicle weight and size, legroom, storage space, estimated fuel economy, etc. to help you to identify models that meet your needs.

The problem, as always, is determining which data elements are relevant. We suggest the following points should be considered:-

  • Ownership cost. The cost of acquisition minus the residual value;
  • Fixed costs. Costs incurred for having the vehicle regardless of what distance it travels;
  • Operating costs. Those costs incurred in running the vehicle day to day;
  • Vehicle replacement analysis. Performance records from each make and model should be reviewed and analysed. Problem models should be evaluated and the cost experienced should be included in the whole of life costing analysis.  Downtime, lost productivity and the cost of alternate transport can be substantial and should not be ignored.
  • Excess charges. These are somewhat hidden costs such as any excess accident insurance costs, excessive wear and tear (damage) to the vehicle or those costs incurred from breaching any leasing contractual terms and conditions.
  • If the organisation has historically been subject to such costs then provision should be made for these in the whole of life cost calculation;
  • Special considerations, non-financial evaluation and weighted factors;
  • Soft issues, such as any value judgements that the organisation might place on any aspect of the selection process. The importance of any of these aspects may change over time depending on the service requirement or the service application of the vehicle.

When you have chosen the vehicles to be evaluated for whole of life costing you can begin the process and analysis.

IDENTIFYING POTENTIAL CHOICES

MANUAL FOR FLEET MANAGEMENT

IDENTIFYING POTENTIAL CHOICES

Although important, the whole of life costing calculation should follow a “fit for purpose” evaluation and analysis. This process will correctly categorize your fleet into the relevant vehicle definitions, i.e. Tool of Trade, Salary Packaged, Salary Sacrificed or Novated Lease, and will have identified the specific utility requirements for each vehicle.

Each of these arrangements will require the application of different assessment criteria, and different problems require the collection of different data. Concentrate on those data elements that can reasonably be expected to affect the outcome of your analysis.

While the whole of life costing model and example provided vary somewhat dependent upon whether you purchase your fleet outright or lease it, the process and basic elements are the same.

Should you lease your vehicles then the information you need should be readily available from the tenders you receive. On the other hand should you want to purchase directly then you will need to assemble the data yourself.

Some of the data you require is readily available from independent sources however some will be inexact and will require you to make estimates and assumptions.

In making assumptions ensure that you base them on the best information available and that you are conservative; as with all assumptions they can make your analysis vulnerable to error.

Document any assumptions you make and monitor actual outcomes closely in order to adjust your predictions and dependent actions where necessary.

You will need information on engine options, vehicle weight and size, legroom, storage space, estimated fuel economy, etc. to help you to identify models that meet your needs.

The problem, as always, is determining which data elements are relevant. We suggest the following points should be considered:-

  • Ownership cost. The cost of acquisition minus the residual value;
  • Fixed costs. Costs incurred for having the vehicle regardless of what distance it travels;
  • Operating costs. Those costs incurred in running the vehicle day to day;
  • Vehicle replacement analysis. Performance records from each make and model should be reviewed and analysed. Problem models should be evaluated and the cost experienced should be included in the whole of life costing analysis.  Downtime, lost productivity and the cost of alternate transport can be substantial and should not be ignored.
  • Excess charges. These are somewhat hidden costs such as any excess accident insurance costs, excessive wear and tear (damage) to the vehicle or those costs incurred from breaching any leasing contractual terms and conditions.
  • If the organisation has historically been subject to such costs then provision should be made for these in the whole of life cost calculation;
  • Special considerations, non-financial evaluation and weighted factors;
  • Soft issues, such as any value judgements that the organisation might place on any aspect of the selection process. The importance of any of these aspects may change over time depending on the service requirement or the service application of the vehicle.

When you have chosen the vehicles to be evaluated for whole of life costing you can begin the process and analysis.

STEP 1

STEP 1: OWNERSHIP COST

MANUAL FOR FLEET MANAGEMENT

STEP 1: OWNERSHIP COST

The Cost of Physical Ownership

This is a function of the cost of acquiring the vehicle minus the amount recovered at vehicle disposal (residual value).

Manufacturers Recommend Retail Price (MRRP)

Obtain the MRRP including all accessory and equipment charges that will apply to the vehicle such as additional safety options. Then deduct all discounts whether they are in the form of dealer or manufacturer incentive (factory bonus).

You may wish to add safety systems to base models for increased safety (such as electronic stability control, anti-lock brakes, traction control and side curtain airbags, etc). It may be cheaper to move up a model (if features are standard) where residual values are higher.

Calculate Effective Residual Value

Determine the projected resale price for a given holding period of months and kilometres. Resale price is an important factor in determining lifecycle costing, because a higher amount recovered at resale for certain vehicles or options may more than offset a higher initial cost. The inclusion of safety features (such as Electronic Stability Control (ESC) and side impact protection like head/torso airbags etc.), as well as providing a safer vehicle, will all enhance the vehicles resale value.

Monitoring the current return on similar vehicles at auction can provide an indication resale values. A number of published guides such as Glass’s Guide offer such information.

Although you can monitor the present resale value, you are trying to guess the future. Most likely the resale value will be different in two or three years. You need to use your best estimate for determining this value.

Remember to deduct the costs of selling/remarketing a vehicle including sales fees, detailing and refurbishment costs, removing special equipment and markings and administrative processing expenses from the projected resale price.

Calculating Ownership Cost

Subtract from the MRRP, or the actual purchase cost, the chosen residual value of the specific vehicle make and model and you will have the ownership (holding) cost for each vehicle.

STEP 2

STEP 2: FIXED COSTS

MANUAL FOR FLEET MANAGEMENT

STEP 2: FIXED COSTS

Fixed costs include those that you incur by virtue of having the vehicles, regardless of how much or how little they are used.

Registration

If your fleet is scattered in various states it may be tempting to exclude registration and any local special charges since they will vary by location. However, all costs should be included in the whole of life costing evaluation.

Be sure that where costs do vary by location you have the correct cost, and are comparing apples with apples in the analysis.

Insurance

Premium payments for fleets that are underwritten, or the administrative expense of self insurance programs, are fixed expenses. However, collision damage excess payment losses are an operating expense and should be captured in your analysis in the section for excess charges.

If there were a difference in insurance premiums it would be important to include these in the analysis. Likewise, if you were attempting to capture the entire whole of life costs of a vehicle then you should include insurance, even if it were the same for all models under consideration.

Dealer Delivery Costs

If your fleet is scattered in various states check the costs that vary from location to location.

Roadside Assistance

Are there charges for roadside assistance? Does the vehicle make and model come with this service? Don’t pay for it twice, but remember, if it is intended that the vehicle be kept beyond the manufacturers’ warranty period then a cost for this type of service will be needed.

Management Fees

If you lease, add the lessor’s management fee. Most leasing companies charge a fee of this type, and it should be included for each month the vehicle will be in service.

In capturing a vehicle’s entire whole of life costs it is appropriate in an analysis to add any internal overhead cost of managing the fleet you have as a fixed cost.

Financing Costs

Whether you buy or lease there is a cost of money used to acquire vehicles. If you lease, the interest you pay represents a direct cost of money. If you buy, you should account for the loss of interest income your organisation could have realised from investing the money instead of buying a depreciating asset.

In analysis to determine vehicle funding options, it may also be appropriate to consider opportunity costs or your organisation’s return on investment targets.

For greater accuracy, interest should be calculated on the remaining book value each month. However, applying interest to the average book value each year gives an acceptable general estimate and is much easier to calculate and budget.

Interest charges should be calculated for the entire period the vehicle is expected to remain in service. A fixed interest rate is typically used for the life of the vehicle even though most fleets utilise variable rates.

STEP 3

STEP 3: OPERATING COSTS

MANUAL FOR FLEET MANAGEMENT

STEP 3: OPERATING COSTS

Operating Costs are those incurred through the use of the vehicle. Typically, these include fuel, oil, tyres, maintenance and repairs, including collision repair expenses beyond those covered by the fixed cost of insurance. These expenses are tied to the number of kilometres/hours a vehicle is operated.

Fuel

Fuel costs are determined by estimating consumption per operating unit in litres per 100 kilometres. This information is available from manufacturers in printed form and online in fuel consumption guides and various motoring publications.

You will also need to estimate the monthly distance your drivers currently travel, and then multiply that distance by months of service.

Cost of fuel is the final variable. While you may not be able to accurately project future fuel costs, a per-litre estimate based on present costs should be suitable.

Remember, vehicles operating predominately in country and rural areas are likely to incur higher fuel pump prices.

You might take more care in estimating future costs for an analysis where this is an important matter, such as determining candidates and opportunities for alternative fuels.

Maintenance

Total maintenance costs must be estimated. Many leased fleets use the calculations provided by the lessor, which is usually a cents per kilometre estimate of all maintenance expenses. Another source for maintenance costs comparison is the motoring organisations such as the NRMA (NSW) or the RACV (VIC).

You may wish to develop your own estimate, utilising your fleet’s previous experience with similar vehicles, by considering the planned time period and distance the vehicle will be in service; calculating the number of oil changes and other routine maintenance costs; adding tyre replacements and brake service and similar anticipated costs; then allowing for non-typical repairs such as windshield replacements which normally happen in a fleet.

In developing your calculations, be certain to consider any special arrangements for maintenance that were offered by, or negotiated with, manufacturers and any repairs that are covered by extended service plans that you may have obtained.

Vehicle Replacement Analysis

Sooner or later the vehicle we use will require replacement. Equipment replacement analysis needs to be performed from the records accumulated. As part of the acquisition analysis, the performance records from each make and model should be reviewed and analysed. Problem models should be evaluated and the cost experienced should be included in the whole of life costing analysis. Downtime, lost productivity and the cost of alternate transport, can be substantial and should not be ignored.

STEP 4

STEP 4: EXCESS CHARGES

MANUAL FOR FLEET MANAGEMENT

STEP 4: EXCESS CHARGES

These are such costs as excess accident insurance or those incurred from breaching lease contractual terms and conditions. If your organisation permits employees to use vehicles for personal use, including commuting to and from work, you may be required to pay Fringe Benefit Tax (FBT).

FBT is levied as a percentage of the Vehicle Acquisition Cost and the distance the vehicle travels in the twelve months period between April 1st and March 31st each year.

When entering into arrangements with employees for Novated Lease vehicles, care should be taken to ensure the contracted FBT rate is adhered to. For example if the contracted rate is 11% (where the total distance travelled is greater than 25,000 kilometres) and the actual distance is less than 25,000 then the applicable FBT rate will be 20% or even 26% if the distance falls below 15,000 kilometres.

Should employees fail to meet the distance requirements of a Novated Lease agreement then back charging should be considered to recover the additional cost to the organisation.

Personal Use Charges

The organisation needs to clearly articulate its policy regarding the costs to be charged for employee personal use (if any). Amounts recovered through this process should be recognised in the whole of life cost calculation.

Fair Wear and Tear and Excess Kilometre or Time Charges

You need to assess the likelihood of incurring these charges. If you have been liable for these in the past, it’s quite likely that they will be incurred in the future, so include a factor for anticipated excess charges.

STEP 5

STEP 5: THE BOTTOM LINE

MANUAL OF FLEET MANAGEMENT

STEP 5: THE BOTTOM LINE

Your analysis is almost finished; simply add the fixed costs and operating costs. You may find it useful to break the total lifecycle cost into kilometres/hours.

The following examples depict a lifecycle cost analysis and can be used as an aid to decision making.

This example could just as easily be designed to compare light commercial vehicles or trucks to be operated for much longer than the three-year period depicted here.

Vehicle replacement analysis

Costs associated with any outcome from this analysis are not included in the sample calculations shown however performance records for vehicles in service should be analysed before purchasing similar vehicles. Problem models should be identified and the additional costs experienced with ownership should be included. Downtime, lost productivity and the cost of alternate transport can be substantial and should not be ignored.

Costs associated with vehicle replacement analysis are not included in the above sample calculations.

How to determine the cents per kilometre costs.

Take the Estimated Lifecycle cost divided by the total lifetime kilometres travelled.

How to determine dollars per month costs.

Take the Estimated Lifecycle cost and divide by the total number of months of actual vehicle service.

TERMINOLOGY

MANUAL OF FLEET MANAGEMENT

TERMINOLOGY

(Glossary of terms used to calculate lifecycle costs).

Lifecycle Cost

This is the cost of holding a vehicle, including operating expenses, from its acquisition to its disposal.

Net Acquisition Cost

This is a vehicle Manufacturers Recommended Retail Price (MRRP), minus any manufacturer incentives or lease agreement adjustments.

Operating Costs

These costs include all expenses directly related to running a vehicle, namely fuel, oil, tires, repairs, and maintenance.

Fixed Costs

These are expenses that have little or no direct relationship to the distance a vehicle is driven. These include vehicle registration/insurance, RACV membership, insurance costs, and management fees and we include Fringe Benefits Tax (FBT) in this section.

Ownership costs

The cost of physical ownership calculated as the difference between the purchase price and the expected sale or auction value of the vehicle on disposal.

Step 6: Special Considerations and Non-Financial Evaluation

These are structural and soft issues requiring consideration.

Open-End Leases

(Where the residual value responsibility rests with the lessee)

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eet Managers, whose fleets are operated on open-ended leases, where they retain the residual value responsibility, must ensure that their monthly lease payment utilises a realistic residual value.

A rate that is too high will reduce the monthly lease payment but will most likely result in a end of lease liability (balloon payment) that is greater than the actual disposal return (residual value) from the vehicle.

Where this occurs the fleet manager will have to pay the difference between the contract residual value and the actual residual (sale) value.

Closed-End Leases

(Where the residual value responsibility rests with the lessor)

If you are using a closed-end lease, the lease cost consists of a fixed monthly payment determined at the initiation of the lease by the lessor. This payment includes charges for maintenance, depreciation, interest and administrative overhead.

Because the lessor assumes the residual value risk, resale value is not a principal consideration for the lessee, nor is net acquisition cost, except to the extent that it influences the amount of the monthly lease payment.

Safety

Seek out the results of the NCAP crash tests and be aware of your legal responsibility for the provision of a safe working place.

Availability of Unit

Not all vehicles are readily available from manufacturers. Some vehicles are very popular with the public, or produced in very limited quantities. There are often incremental expenses incurred in providing transportation while awaiting the delivery of new vehicles.

This can take the form of having to reimburse a driver for the use of their personal vehicle, vehicle rental, or paying higher maintenance costs on a vehicle past its optimum replacement point, or you may run over existing contract time and distance agreements.

A build-time delay is a method to penalise those options with longer delivery times by assigning a monetary value to this incremental expense. All options must first be normalised to the shortest delivery time, and the incremental expense charged to those with longer delivery times.

Always be open to seeking alternative models if there is short supply for your first choice of vehicle.

Serviceability

Is there an adequate dealer network or other source of reliable warranty service? Is the vehicle designed for ease of repair?

Company Image and Prestige

Many employers recognise that their vehicles are highly visible signs of the company’s image or prestige. This importance is obvious when the employer’s name is displayed on the vehicle; however, such factors also are important when customers will see or be transported in vehicles used by executives, sales personnel or service technicians.

Whole of Life Costing Calculator

Having gathered all of the required information you can then utilise the AfMA Whole of Life Costing Calculator available via the website at www.afma.net.au. This will identify such costs as the total lifecycle, cents per kilom

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