Contract hire takes off

Jamin Robertson takes a look at the booming popularity of contract hire funding of fleets and finds like any other method it won’t suit all organisations

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The internet provides a cost-effective tendering method, with the growth of electronic ‘reverse auction’ tendering offering cheap procurement.

Contract hire best suits organisations with predictable mileage and those placing a high importance on cash flow.

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Contract hire agreements supply hired cars for an agreed period at a contracted monthly rate. With a surge in the number of firms taking up this option – 47% of employers now opt to fund company cars through contract hire according to a survey by Fleet World and Daimler Chrsyler Services Fleet Management (DCSFM) – fleet providers are lining up, pens at the ready.

But before that paper is inked, employers first need to ascertain how much rubber they expect to burn, in order to avoid excess mileage charges. Contract hire firms will not appreciate the return of a thrashed motor at the end of the lease. With potential mileage pinned down, the search begins. The internet offers great buyer power, and cars should be no exception.

But Adam Trevaskus, head of Whitechapel Corporate, part of Lloyd’s TSB Autolease, explains that employers should take time to uncover a provider’s service and system capabilities as well as negotiating a good price. "Some companies are offering a stripped-out product without the service.

You can’t just ring half-a-dozen companies and say ‘give me the price of a Ford Focus’." Robert Pieczka, director of marketing at provider Arval, concurs, adding an employer must first determine their needs: "The best deal is going to be a combination of price, service, and outsourcing [demands]," he adds. In the search for a good buy, lowest-bid online auctions are a popular method of procuring a contract hire arrangement. Dean Woodward, consulting and risk manager for DCSFM, outlines the hot competition: "The electronic tender process is quite popular these days. You’ve got to walk away from some deals, as some people will purely base it on price and the prestige of having that customer.

It may actually be a loss-leader." Given the large number of employers using contract hire, its appeal is now across the board. "The cost is spread evenly across the life of the car, they know exactly how much it’s going to cost, whether they have 20 or 2,000 cars," says Trevaskus. Despite the large customer base, however, contract hire is unlikely to appeal to every employer.

Organisations with varying travel needs will prefer to avoid excess mileage charges, while the restriction of corporate tax relief on expensive vehicles and early termination penalties may turn others off. Some organisations also prefer listing cars as an asset on the balance sheet, while big fleets may retain outright purchase agreements for ultimate control.

These large employers may strike a better deal going straight to the maker. Gary Hull, director of human resource services at consultants PricewaterhouseCoopers, says: "Employers will often go to a manufacturer if they have a sizeable fleet. At the end of the day, who’s going to provide the metal in the cheapest way?

It’s usually the manufacturers." But contract hire will continue to appeal to organisations looking to outsource fleet administration and concentrate on their core business. "More often than not, companies are looking to expand and exonerate themselves from the risk element. They know the fleet is a fixed cost for the next three years, and are able to invest that capital into their core business," adds Woodward.