Fleet costs are challenging to compute
Fleet costs are a black hole. By design, fleet management companies and lease partners make it challenging for their clients to quantify the actual cost (or financial impact) of their fleet. We’ve done some of the hard work for you and compared fleet costs to vehicle reimbursem*nt programs. But know that the buck doesn’t stop here… we’ll get into how fleet costs are a black hole below.
What does a fleet cost compared to a reimbursem*nt program?
Here’s what a fleet costs compared to areimbursem*nt program like FAVR:
Cost of a leased fleet for 50 vehicles: $780,000 per year
Cost of a mileage reimbursem*nt program for 50 vehicles: $390,000 per year
Vehicle reimbursem*nt is in this example 50% cheaper than fleet because there are:
- No personal use discrepancies with vehicle reimbursem*nt programs: companies only pay for the business use percentage, usually 71.4% of vehicle mileage (the calculation being 5/7 weekdays of business use)
- No mileage band discrepancies: fleet companies charge you for, for example, 20,000 miles per year; but that doesn’t eliminate personal use, so what looks like $0.50 per mile (a great rate) turns out to be $0.70 per mile (a terrible rate)
- You’re likely paying for 100% of the insurance on fleet, and it’s probably the most expensive insurance plan to cover corporate liability
And that’s before we get intoreconditioning and transfer costs, or idle time. When you transfer the car to a new employee, there are reconditioning fees associated with detailing the vehicle. All of these hidden costs of managing and asset can add up quickly and be quite a burden on your business, and on your balance sheet.
Case study: What does a single fleet vehicle cost per year?
For example, it could cost $14,000 per year per car to run a fleet vehicle program with Jeep Cherokees provided by the fleet management company. As it stands, that is a lot more than the cost of true business usage, but fleet management companies try to cloak the real financial burden.
They could do so by fudging the cost per mile. They’ll say, you’re paying $14k per vehicle per year, but that’s for drivers covering 30,000 miles per year. That’s only 46¢ per mile—a whole 21.5¢ cheaper thanthe 2023 IRS standard rate.
Fleet companies will say:
$14,000 per car per year (Jeep Cherokee)
30,000 miles per car per year
= 46¢ per mile per car
But they’re using the total mileage of the vehicle, not the business use of the vehicle. The business use percentage of the vehicle is most likely only 71.4%. The other 28.6% of those 30,000 miles are being driven for personal use or commuting. So… let’s look at the real cost. The real cost of a fleet vehicle is71¢ per mile!—a whole 5.5¢ more expensive than the IRS standard rate.
The real cost:
$14,000 per car per year
21,000 business miles per car per year
= 71¢ per mile per car
With these numbers in mind, let’s get into the details of why fleet costs so much, by looking at FMCs, insurance, business use percentages, and personal use chargebacks.
Fleet management companies (FMCs)
When you’re setting up your fleet program, you have to make decisions as to what system you’re going to implement. Are you going to lease a fleet, own one, outsource to a FMC?
Companies operating fleets often do not wish to be involved in the actual management of their fleet. Why? It’s time consuming and administratively heavy to manage expensive hard assets. That is why they outsource this responsibility and hire a Fleet Management Company (FMC). The FMC procures vehicles, either buying or leasing them; additionally, they often manage maintenance services as well as insurance for these cars.
Corporate risk and fleet insurance
Before you procure a fleet, it helps to understand the risks associated with running a fleet. One of the biggest risks is accidents; if your employees are involved in an accident while using the company vehicle, it could cost the company alotof money.
Since the FMC may not have sole liability, oftentimes companies are responsible for organizing their own insurance policies.
Let’s talk corporate liability. Who do you want taking on the risk associated with driving on the weekends, the individual driver, or the company they work for between 9am-5pm on weekdays? Self-insurance involves setting aside funds to cover potential accidents and other losses due to risk. By self-insuring, you’re reserving cash flow for any unexpected challenges that come towards the business.
Although self-insuring motor vehicles may seem beneficial, one of the major drawbacks is that cash won’t be used to generate revenue. Moreover, in the event of a catastrophic accident, can you be sure that you have enough funds to cover damages? What about the loss in goodwill? The impact on the company’s reputation? Relationships with partners and clients?
It costs more to insure a commercial vehicle than a personal one. A commercial insurance policy could be double a personal car insurance premium. A business use endorsem*nt on a $1500 policy can add anywhere from $60 to $100. The presumption before the pandemic was you drove your car five days a week, so insurance policies are arranged accordingly, commercial policies being set to mitigate the high risks of driving company vehicles all day long.
Companies might seriously consider obtaining catastrophic business insurance in order to be fully protected from accidents over one million dollars. This form of insurance provides outstanding coverage for any unexpected financial losses due to a major incident.
Let’s say your employee goes to the grocery store. They ding another shopper’s door. Well, who pays for that? At minimum, 28.6% of accidents have nothing with work—we’ll show you why next.
Business use percentages (BUPs)
Compared to a FAVR program, fleet has a higher business use percentage. In fact, fleets are often billed as if the BUP was 100%. Reimbursem*nt programs like FAVR, meanwhile, have a BUP of 71.4%. That’s because your employee brings their personal vehicle to work, and they are reimbursed for five out of seven days of driving.
Personal use chargebacks
The lack of industry-wide standardization regarding fleet car usage for personal purposes means that chargeback policies can vary greatly.
As it is a benefit, individuals must declare their amount of personal use. The figure usually reported is 8-12%. But this is 20% lower than the actual amount. Besides, 8-12% is the average personal use reported by employees: that’s the average because most people claim 0%.
This leaves the employer with a tax burden nearly 30% larger than it should be. Most companies should be charging 28.6% back, but very few do because of how this could be perceived by employees.
Conclusion
If your company is currently using a fleet system to provide vehicles for employees, you may be interested in transitioning to a reimbursem*nt program instead. Switching to reimbursem*nts offers many benefits, including savings, reduced risk, and increased employee satisfaction. Fleet management comes with risks, but those risks can be greatly reduced by using reimbursem*nt systems. If you’re thinking about making the switch off fleet, give Cardata a call.
Are the hidden costs giving you a headache yet?Cardata can helpyou simplify your spend, reduce the financial impact, and see all vehicle related expenses on one line of your balance sheet.
