Whole Life Cost
Doing The Sums
Whole Life Cost (WLC) is a financial model to help show the true full cost of running a vehicle, incorporating all costs rather than just monthly rentals. There are many elements to running a vehicle and by taking them all into consideration you are able to make better and more cost efficient choices for your fleet.
It is not just for the large fleets either, even if you need to replace just the one company car, WLC can show you the cheapest rental option might not be the wisest choice.
Whole Life Cost came into sharper focus when the capital allowance changes made it more cost effective to choose vehicles below 160g/km. Invariably, businesses that use WLC to choose vehicles in their company car policy will end up with Diesel, Low CO2 and high MPG models. Not necessarily the cheapest ‘on the road’ price or cheapest contract monthly rental.
Whole Life Cost Includes:
- Monthly rental – reflecting changes in Road Fund Licence and CO2 based Capital Allowances
- Disallowable VAT – allowing your business to take advantage of your true VAT position
- Fuel costs – in addition to options for fuel and diesel costs, we can customise fuel costs based on your pence per mile rate, as well as separating business and private mileage
- Employers National Insurance Contribution
- Vehicle insurance – costs can be included
- Lease rental restriction – CO2 based allowances can be factored into WLC based on the Corporation Tax rate of your business
- Fleet Administration fee – to help recognise the administration of your fleet within monthly rentals
- Your own additional manufacturer support
What are the benefits of Whole Life Cost Analysis?
Traditionally businesses have worked to reduce their fleet costs by restricting vehicle choice, negotiating better terms with their supplier or manufacturers or using a raft of suppliers and opting for the provider that offers the cheapest monthly rental for each vehicle they require.
These methods can generate initial benefits but, over time, these are eroded away and can result in other issues such as a complicated network of fleet suppliers to manage or a negative impact on staff motivation through an increasingly restricted policy or introduction of lower status vehicles.
With our help you can now look beyond the monthly rental figure in order to generate long-term cost savings through whole life cost benchmarking.
In a whole life cost approach, drivers are often given a higher monthly allowance as this budget takes into account the true running costs, not just the monthly rental. Your drivers can then choose any allowable vehicle with a whole life cost up to this figure.
Alternatively, allowable vehicles can be divided into bands with drivers able to choose any vehicle within their band. We can build tolerances into the vehicle list to ensure that vehicles remain within agreed bands. Where required, the vehicle cost can be hidden so drivers see only the vehicles to which they are entitled.
WLC is really effective because you will understand the true cost of operating a particular vehicle. Therefore, a well informed business can make considerable savings by managing the whole life costs of their vehicles.
The adoption of WLC for your quotations can provide the opportunity to review cash allowances for vehicles, or even include vehicles that you may have thought were not suitable. This can help bring cash takers back into the fleet helping you improve your work-related road safety exposure.
Because WLC gives you a fuller picture of the costs associated with running a fleet, we can offer a customised view of your fleet to help you review your current policies and/or vehicle choices.
WLC goes beyond the basic cost of funding vehicles by taking into account operating costs such as fuel, National Insurance Contributions (NIC) and vehicle insurance. It also takes into consideration any available Tax allowances.
It means that you take all the factors into account. National Insurance is often ignored if you do not use WLC. Fuel is a huge component of the cost of vehicles and should ideally be reflected when setting policy. It is often invisible to the fleet manager, rarely featuring in fleet budgets.
If you take everything into account, the employee and the company, benefit.
If your car policy does not incorporate wholelife costs there is a risk that your fleet will not operate as economically as it could, as staff will not select the most efficient vehicles. Often a vehicle with higher funding costs may be the more cost-effective option over the life of the contract, when viewed on a WLC basis.
The Contra Argument
Working to a whole life cost model may challenge your existing fleet policy. Following an in-depth cost analysis, drivers may be able to choose higher status vehicles that are currently outside of their monthly rental allowance.
Using WLC instead of just a monthly rental or a cash price may make some people uncomfortable with the fact that a premium car with very effective whole life costs, say a BMW 3 Series may end up in a lower band than they would like. It can send out the wrong status signals to employees. It is a very English phenomenon, but not to be dismissed when the emotion of company cars is affected.
So using Whole Life Costs may not fit with the car policy. Indeed, not all fleet managers are convinced. It is not the only tool you can use, there are, after all, many different ways of setting your choice list. The most common approach is using rental bands, either basic rental or effective rental (which includes non-recoverable VAT). Also a car cash price can be used, either a list price, P11D Price or an ‘on the road’, OTR price.
Fleet managers who are supporters of these approaches claim they have an advantages over WLC because they are fixed whilst WLC include values which change over the useful life of the asset. Examples are fuel costs and NIC rates.
WLC supporters say all costs can fluctuate, it reflects real life. You can build parameters in when you are using whole life costs. For instance you could choose to include an additional factor in your calculations to take account of future increases in fuel prices. It is particularly prudent in these times. Fleet managers just have to decide what works best for them. The main thing is to be consistent and to have an approach that you can measure against. We are committed to delivering savings
for our customers through Whole Life Cost analysis.