Contract hire schemes help transfer risk

Contract hire schemes can help employers to predict the cost of funding their fleet over a set period of time and remove the hassle of having to dispose of vehicles, says Nick Golding

As the future of cash-based employee car ownership plans (Ecops) continues to hang in the balance, while the government debates possible changes to approved mileage allowance payments, many fleet managers are undecided about whether to invest in company cars or offer cash instead. Those who opt to stay with, or who contemplate a move to, company cars may wish to consider a contract hire scheme, which can be a straightforward, low-risk method of funding company cars, particularly for larger fleets.

Through contract hire schemes, employers agree a monthly cost for a vehicle with a leasing company, which is calculated by deducting a depreciation figure, based on expected mileage for the lease period, from the initial monthly cost of the car. Cars are typically leased over a period of three years, although many leasing firms are flexible, so employers may be able to negotiate lease periods from 12 months up to seven years. At the end of the agreed period, the cars are returned to the leasing firm. Robert Kingdom, head of marketing at Masterlease, explains: “This is about the transfer of risk from the employer to the leasing company. You don’t have to worry about sale, resale or depreciation.”

To forecast the depreciation of the vehicle over a given period, employers must commit to a certain number of miles that the car will cover in this time, which will give the leasing firm a good idea of what shape the car will be in when it is returned. Mike Relph, sales consultant at Aztec Vehicle Solutions, says: “It is a way of paying for a vehicle with a guaranteed residual value. This is opposed to buying a car now and then realising in three years’ time how much it has cost you.”

Flexible on mileage
However, leasing firms can be flexible on payment costs depending on the number of miles drivers cover. If the initial agreed mileage is exceeded in the duration of the leasing agreement, this can be altered to reflect the higher predicted level of depreciation. If the mileage is lower than expected, the monthly payment can be also reduced.

“The company should always try and match the mileage to the driver, but I suppose that is not always possible. If, for instance, a sales representative changes territory and is driving 100 miles more a week, we can re-set the rate. The contract is quite open,” says Kingdom.

Employers that find employees regularly change the number of miles they drive also have the option of waiting until the end of the leasing period to alter their agreed mileage limits. Cars that exceeded the original level can then be offset against those that did not reach the agreed number of miles. “We can offer a pooling arrangement whereby cars that are sent back over the set mileage rate are offset against the cars that are sent back under the mileage, and we divvy up the balance,” says Kingdom.

Knowing exactly how much a fleet of cars is going to cost a business up to seven years in advance is the key advantage for employers funding a company car scheme through contract hire. “You can write off your commitments to company cars for three years, or however long the deal is, and this is the main advantage of contract hire,” says Relph.

Contract hire schemes may perhaps be more advantageous to larger fleets, as employers may not want the hassle of having to re-sell hundreds of company cars after they have been driven for, say, three years.

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Large fleets also often require a high level of administration and maintenance, which, again, contract hire schemes can deal with for employers. “We can remove the administration burden for the employer, leave them to get on doing what they do best, and let us do what we do best,” explains Kingdom.

Cadbury Schweppes, which operates a contract hire scheme, has found the reduced administrative burden to be a definite plus, says Suzanne Laverick, UK employee benefits manager.”We know how much the car will cost [and] there is no problem with what we will do with the vehicles afterwards, so it is so much easier from an administrative point of view,” she explains.

If you read nothing else read this…

  • Contact hire is a popular method of funding a company car scheme as it reduces administration levels and risk, while relieving employers of the hassle of reselling fleet vehicles
  • Through contract hire schemes, employers and a leasing company agree a depreciation figure for a car, which is calculated by the number of miles it is expected to cover in a set period of time. This value is incorporated into the car’s monthly leasing cost.†
  • After the agreed contract period, which is usually three years, employers return cars to the leasing company.
  • Some contract hire providers allow drivers to exceed the original agrees mileage level, and then offset the excess miles against other cars in the fleet that have not reached the set level when they are returned.†