Funding: Wholelife costs

Wholelife cost – also referred to as total cost of ownership (TCO) or cost of ownership (COO) – is “the only way to capture, manage and control all of the costs associated with running a company vehicle,” according to Julie Jenner, chairman of ACFO and key solutions manager at GE Capital Fleet Services.

She believes that more and more companies are using this approach, but research suggests there is still a significant number that are not.

Only about a third (32%) of the 124 respondents to PricewaterhouseCooper’s (PwC) company car survey last year used WLC to determine the value of car choice for employees.

The most popular method was lease cost (50%) with the remainder using list price (RRP set by manufacturer) or purchase cost (net price after any discounts).

However, a recent survey by Alphabet revealed that 59% are using TCO; a quarter said they are “not concerned about total cost of ownership”.

Paul Hollick, sales and marketing director at Alphabet, puts this down to fleets not fully appreciating the benefits of using WLCs.

He also points out that it can be time consuming and challenging to change approaches as it requires buy-in from a number of stakeholders – senior management, HR, finance and fleet teams.

Why use WLC?

Two cars may appear to cost the same – they may even have identical monthly rentals – but in reality one car could end up costing significantly more over its life cycle.

Deloitte has advocated a wholelife cost approach for a number of years and Mike Moore, a director at Deloitte Car Consulting, says: “Adopting a wholelife costs approach can typically generate savings of £700 to £1,200 per car over a three year retention period.”

But it isn’t just about potential savings.

Companies that switch to wholelife costs often find they are able to enhance choice for employees.

Attractive cars that may traditionally have been restricted to senior managers – such as a BMW 3 series saloon – become available to lower grades because they have low running costs, particularly related to fuel, tax and National Insurance Contributions (NIC).

This means that a wholelife cost approach could be useful tool for staff recruitment and retention, according to John Kelly, key solutions leader at GE Capital Fleet Services.

“It’s a win-win situation,” he says. “The company wins on its tax and fuel bill and the driver gets a more attractive vehicle, a reduced private fuel bill and reduced BIK.”

Static versus real-time calculations

Companies can use static wholelife costs established at a set time to create a fixed list of cars or they can use live up-to-date wholelife cost data at the point of ordering a car.

Helen Fisk, AutoSolutions manager at ALD Automotive, describes the latter as “true TCO” and believes more companies should take this approach as it means orders are placed using “real time costs”.

Although a lot of ALD customers are analysing TCO, working to implement it or using some part of it, only 30% are using true TCO.

Fisk says the downside of true TCO is that a car which is available one week may not be the next, which could create friction among staff.

“Cars don’t drastically move in and out but there is an element of chance,” she says.

The other issue is that sophisticated technology, capable of accurately calculating real time costs, is needed.

ALD and other providers can offer this but companies that don’t use leasing or fleet management providers may face an expensive investment.

Elements of WLC

The elements that make up WLCs often vary depending on company circumstances and how WLCs are being used – for instance, whether they are being used to analyse the cost of the fleet or whether they are being used to establish the choice list for drivers (see panel right – Ways of using WLCs).

Elements will also vary depending on whether companies lease or outright purchase their vehicles as some elements will be specific to leasing.

The type of scheme the company operates will also influence what is included.

Tony Brady, fleet and travel manager at Steria, comments: “Wholelife costs mean different things to different people.

"For us the main things are the price of the vehicle and any manufacturer support, financing of that over the long term, maintenance costs, fuel, written-down allowances and National Insurance. We use a projected pence per mile based on our contracted mileage.”

Leasing or fleet management providers should discuss the pros and cons of each element and help companies to build their WLC calculation, according to GE’s Kelly. Alternatively, companies can seek advice from tax experts or fleet consultants.

ALD’s Fisk says that “as a minimum” companies should include “the big three – rental, fuel and National Insurance”.

But even fuel can be subjective.

“Some companies put fuel in and some don’t because they think it is too volatile,” Kelly says.

Pub retailer and brewer Greene King recently chose to remove fuel cost from its WLC calculation, following analysis by its funding and vehicle management provider Zenith (Fleet News, January 19).

“If fuel is taken into account at its actual cost when calculating WLC a sudden rise in fuel prices can lead to vehicles being pushed above the grade limit,” explains Ian Hughes, commercial director at Zenith.

“This would mean that a vehicle that was available one week could be unavailable the next.”

Removing fuel from the calculation should lead to a more consistent choice list.

The downside is that it may also lead to less fuel efficient/higher emission cars being included.
 

Hughes suggests that company car tax and rising fuel prices should mean drivers are still encouraged to choose low-CO2/high-mpg vehicles.

Alternatively, a company could simply implement a CO2 cap on its choice list.

However, he adds that fuel should be included if a company is using WLC to establish the true cost of their fleet or deciding between funding methods (rather than using WLC to establish benchmark grades).

If companies wish to include fuel but are concerned about fluctuating costs they could opt to use Advisory Fuel Rates (AFRs), which only change on a quarterly basis, or their own pence-per-mile rate.

Alternatively, they could base fuel costs on the combined mpg of the relevant vehicle.

Kelly believes it is essential to include fuel in the calculation.

“Fuel is a big element of cost and if you ignore that you are missing potential savings,” he says. “Mpg is different across different vehicles and you won’t be harnessing that benefit.”

Deloitte’s Moore advises clients to assume that fuel prices will increase and build that into their costs.

Companies should also take into account that not all contract mileage will be business use, unless free private fuel is provided.

Lex Autolease advises defining a percentage of contract mileage (usually 60% business, 40% private).

Insurance is the most common element left out of WLC, according to Chris Chandler, principle consultant at Lex Autolease.

He says this is because under a fleet policy the insurance is typically the same regardless of the vehicle model.

However, Lex Autolease has designed some allocation lists with insurance costs included and graduated based on the Association of British Insurers (ABI) ratings.

There are a number of different tax elements to consider, including benefit in kind, Class 1A National Insurance, VAT recovery, corporation tax relief and Vehicle Excise Duty.

David Rawlings, director of fleet consultancy firm Business Car Finance (BCF) Wessex, believes many companies make the mistake of leaving tax elements out of WLC.

“Companies think they are using wholelife costs but they’re not because they leaving tax out,” Rawlings says.

“The majority of companies leave out capital allowances or other forms of tax relief.”

The error often occurs because the person responsible for the fleet is not a tax expert and certain elements of car provision may fall to different departments within the same organisation so those which don’t fall into the fleet budget may be overlooked.

Hollick adds: “What fleets choose to include or leave out often comes down to who is making the decision.

"If it is a financial person they may be more comfortable including elements like corporation tax in order to have a more finely tuned WLC policy.

"A non-specialist may prefer to stick to the basics of rental, SMR, fuel and employers NIC.”

However, in some instances tax elements are left out because they are not relevant to the company. For example, a charity would not need to include corporation tax.
 

“Some companies are not making a profit so there is no corporation tax,” Fisk says.

“Other companies think the calculation is ‘cleaner’ without it.”

Companies that contract hire their vehicles will also need to take into consideration elements such as VED or capital allowances (referred to as lease rental restrictions).

Lease rental restriction is only relevant if drivers are allowed to choose vehicles with CO2 emissions in excess of 160g/km.

At that level, the company will only be able to write down 85% of the qualifying part of the lease against profits as there is a 15% disallowance; at or below 160g/km, they can write down 100%.

Disallowable VAT (also known as blocked VAT) should always be taken into account for companies that lease and allow employees to have private use of the car.

VAT will be added to the monthly rental, but half of it can be reclaimed.

If identified separately, the VAT on the maintenance element can be reclaimed in full.

However, if the company purchases the car, no VAT can be reclaimed unless the vehicle is used wholly for business.

Some companies like to factor in the value of money but most don’t, according to Fisk.

“It’s more important when comparing funding methods rather than one car against another,” she says.

However, companies that outright purchase should always include the cost of capital. If they don’t, they are not using wholelife costs.

Administration or management fees charged by leasing companies is another element that some fleets build in.

Other factors to consider include service and maintenance, extended warranties, accident and repairs, breakdown and recovery, residual values/depreciation and end of lease charges.

“You could look at billing on a year-by-year basis, looking at things like excess mileage charges and damage charges,” Kelly says.

“If it works out at £10 per vehicle per month then build that in and use it to budget.”

However, there will always be an element of guesswork involved in WLC and unexpected costs will occur. WLC will never be the actual cost.

It also demands regular reviews, driver education and stakeholder engagement.

“Companies have to understand what it’s all about,” Kelly says. “Some go from a lease rental basis to wholelife costs and have to increase the grade limits.

"They think that means it’s going to cost more but it’s because you have increased the elements and are capturing all the costs.”

Finally, it’s important to remember that WLCs don’t consider whether a car is ‘fit for purpose’.

“They don’t show you if the car is going to do the job,” Rawlings says. “WLCs only show you the numbers.”
 

Ways of using WLCs

• For budgeting purposes
• To compare funding methods
• To determine drivers grades/allowances
• For ‘real time’ vehicle ordering
• To compare manufacturers when negotiating solus/dual badge deals or a list of preferred manufacturers
• To define cash allowance levels

To predict future costs

Case Study: Val South, fleet manager, Xerox

South says a WLC approach encourages employees to choose greener cars and drives down the company’s costs and the cost to the employee.

She introduced WLC in 2008 as part of a new look and approach to the Xerox fleet and as a result of rising fuel prices.

“We wanted to encourage drivers to select more fuel efficient cars,” she says.

The cost of the vehicle (with manufacturer discounts factored in), VAT, leasing company administration fees, maintenance and tyre budgets, roadside recovery, business fuel, an RV calculation, an interest free loan and interest from the leasing provider are all built into the wholelife cost.

As the company operates an Employee Car Ownership scheme, national insurance and corporation tax are not included.

South worked with her leasing provider Lex Autolease to agree which elements were applicable for the Xerox fleet.

She believes that fuel should be included in WLC because “it is such an expensive part of vehicle cost and we want to deter people from choosing gas guzzlers”.

“A car may have a monthly cost of £500 but with fuel factored in it may be £700,” she says.

The price of fuel is based on an average pence per litre which is set on an quarterly basis.

South may look to include insurance in the future although she thinks it may be difficult to determine bandings.

When an employee chooses a car they are given a real-time WLC quote (except for the price of fuel, which is not ‘live’).

Drivers do not see the elements which make up the WLC quote for simplicity, though South says the fleet department will explain the process if drivers ask.

Although Lex Autolease does the quoting South says she “keeps a close eye” on costs and compares them on a quarter-by-quarter basis to see if there are any significant changes.

“We can challenge them on the quoting; we don’t just accept what they say,” she says.

She also examines every element and never focuses on the final number.

“Residual values and maintenance tend to fluctuate the most,” she says. “If the RV has gone down we consider whether it is reasonable.”

WLCs were “pretty stable” last year, according to South, but she expects fuel to increase this year.
 

What is the best alternative?

Setting choice lists using effective rental (which includes disallowable VAT), combined with CO2 restrictions, is arguably the best alternative to wholelife costs.

Chris Chandler, principal consultant at Lex Autolease, says rental rate-driven allocation lists include all of the elements such as depreciation, maintenance and funding and “provide a significant element of the overall cost”.

Other elements such as fuel, lease rental restriction and national insurance are all based on the vehicle’s CO2 emissions.

“On selecting a low-CO2 vehicle you will effectively be reducing the WLC profile of the vehicle so the rental rates and low-CO2 criteria will have a similar impact on cost control/reduction as WLC,” he says.

Paula Maxwell, car fleet manager at Longhurst Group, uses rental rates combined with a CO2 cap of 150g/km.

She believes this approach is working as fleet costs are lowering.

“The problem with wholelife costs is that they are estimated and they can’t give you a definite answer,” she says.

However, fleets that are willing to do the sums will find that WLC is the most accurate measurement.

“The more you consider the more cost-effective it becomes,” says Helen Fisk.