SFS gives an overview of the benefits of contract hire over outright purchase, in particular for local authorities dealing with the after-effects of lock-down and ongoing uncertainty about the future.
The recent pandemic has led to mounting pressure on frontline services with many local authorities struggling to meet increased demands for additional support from the communities they serve. Capital is urgently needed across many service areas and budgetary requirements are changing. As a result, more councils are looking at ways to divert capital spend to those areas that need it the most.
An area that provides an opportunity to do just that is fleet provision, especially for those councils who usually purchase their vehicles outright. By choosing to contract hire when they renew their fleet, local authorities can divert capital to benefit other service areas that are in dire need of a cash injection.
A framework for a safe path
To clients who have not Contract Hired before, moving away from outright purchase and entering a long-term vehicle supply contract instead can feel daunting. There is however support and advice available from the Contract Hire companies themselves but crucially also through some of the Procurement Framework Agreement providers.
Framework arrangements are increasing in popularity as they provide a compliant and time efficient means to conduct procurement projects when in-house expertise is unavailable. There are a wide range of framework providers to choose from who offer fleet support and we often encourage customers who are new to contract hire to use them for guidance.
Such frameworks offer a safe and reliable way for councils to go out to the marketplace and find the best solution. They help to remove a lot of the uncertainty by providing tried and tested benchmarking, pricing structures, standardised contract terms and advice on how to run a competitive tender. In terms of due diligence, suppliers are evaluated before being appointed a position on a framework, which typically runs for four years.
When working with a framework provider don’t be afraid to go out to the market with both Outright Purchase and Contract Hire agreement options (as most offer solutions for each option). Before going ahead with a tender, consider the evaluation criteria and make sure the Quality: Price ratio is appropriate for your particular circumstances. Also, check the standard terms and specifications and remove any items that you do not require e.g. replacement vehicles etc as this will inevitably save money.
Specialist vehicles such as refuse vehicles, sweepers and gritters, are complex assets that require a significant amount of maintenance and care in order to run at their optimum efficiency. Therefore, to compare outright purchase with contract hire we need to also look at the costs of owning and maintaining assets over the course of their lifetime.
There is a common misconception that it is cheaper to fund vehicles through borrowing from the Public Works Loan Board than via a contract hire company; the assumption being that they will have a higher cost base but that isn’t strictly true. For example, SFS is owned by a FTSE 250 Banking Group and as such we can offer very competitive funding solutions. Borrowing rates are just one piece of the jigsaw when looking at the cost of owning vehicle assets; to get the most value we need to look at whole-life costs.
With outright purchase the council is alone responsible for the operational and maintenance costs of running the fleet. In many cases councils sub-contract to a third-party maintenance provider who is not necessarily incentivised to provide maximum vehicle availability and uptime. Conversely, contract hire providers share the same objectives as the fleet operator i.e. to minimise vehicle downtime, run an efficient service and keep costs under control.
In the same way, when councils purchase vehicles, they alone bear the responsibility and risk for the disposal of those vehicles at the end of their life. A contract hire agreement is in place throughout the term and manages the disposal at the back end when vehicles need to be replaced.
Vehicle technology is developing quickly and there are new regulations regarding emissions, weight restrictions and safety being introduced all the time. What will those vehicles be worth in 5 -10 years’ time? Contract hire passes that risk to the fleet provider.
In addition to the maintenance and disposal of the vehicles there are the additional factors that can add to an organisation’s fleet costs such as the purchase and implementation of a fleet management system, and contingency support e.g. spare vehicles, to deal with both planned and unplanned vehicle downtime. With contract hire, these features are often provided as part of the contract.
This is particularly pertinent given the recent lockdown and the additional strain on council fleets with waste and recycling volumes up by two thirds in many districts, and collections being carried out using the same number of vehicles. Those councils with contract hire agreements were able to share that burden with their fleet providers whether that involved carrying out increased repairs and maintenance on vehicles, supplementing with additional vehicles and helping with risk assessments.
SFS hasn’t lost a single day of operation across the whole business during the COVID-19 crisis. Our parent company delivered a robust strategy and we put hugely detailed risk assessments in place very quickly to keep people working, plus well-being support, flexible working arrangements and all the necessary technology requirements for home working.
Choose the right partner!
As mentioned previously, another barrier to contract hire can be the providers themselves and choosing the right partner is key. In recent years there have been notable examples of contract hire companies that have gone into administration leaving customers without vehicles in the aftermath as their funders have repossessed assets.
Short-term focused business practices in order to sustain and grow volume is another trend in the contract hire sector that has perpetuated negative reputations. Continual changes of senior personnel and ownership structures have magnified the sense of uncertainty within the marketplace.
Thankfully not all contract hire companies are made the same. By contrast SFS has only had 2 changes of ownership in over 25 years, both banks, and the company has had the same Managing Director throughout. In addition, SFS owns outright all of its vehicles, and nobody has any claim or charge over the company’s assets.
The best advice we can offer is to check out each provider at the most basic level via Companies House and services such as Experian. Make sure any potential supplier has their accounts up to date, look at the Directors’ current and previous appointments and take references from other customers.
Due diligence is another area where framework arrangements are very helpful, by vetting suppliers’ credentials and financial stability; however, this is only at the outset. A lot can change within businesses over a four-year period, and notably in the last 12 months with COVID-19 and Brexit, and hence we would recommend undertaking basic financial checks routinely.
Also remember, one size doesn’t fit all. If you want a specialist vehicle or service, it’s probably best to team up with a specialist provider who has in-depth knowledge and experience of such assets and is equipped to provide support for the long-term.
Finally, our recommendation is to take the time to consider these points early and thoroughly before going to procurement. Do not close out your options too early and allow the market to bid back solutions either through formal tender or market engagement. Time invested at the front end is paid back multiple times over at the back by minimising compromises, problems and disputes.
For more information, you can get in tough with our Fleet Team via [email protected] or view our Specialist Vehicle Hire framework here.