True Vehicle Cost: Lifecycle Costing Made Easy

Too often, businesses focus on individual repair prices and transactions when looking at vehicle costs. Lifecycle costing is the only way to properly judge vehicle costs or, more appropriately, vehicle productivity. It is a unique characteristic of business vehicles that their ultimate cost cannot be measured until they are out of service and sold.

Many businesses with small and mid-sized fleets attempt to track and manage costs on a transactional basis, focusing solely on the price of a tire or the cost of an oil change. Although that is certainly a consideration, the fact is that there is a difference between price and cost.

The price of a transaction, or the sum total of all transactions, doesn’t tell a manager any more about true vehicle cost than it would in a manufacturing environment. The key word is productivity, and the way to measure productivity is lifecycle costing. 

What Cost Categories Matter? 

Vehicle costs can be broken down into two broad categories, fixed and variable. Both must be captured before productivity can be measured. Fixed costs include:

• Depreciation (the difference between the original cost and the proceeds from sale).
• Lease or finance costs (interest, fees, etc.).
• Insurance.

Variable costs can be broken down into five categories: fuel, maintenance/repair, tires, oil, and miscellaneous (washing, tolls, parking, etc.).

Although costs will vary by vehicle type, autos will generally range from 25 to 30 cents per mile. Of this, about 7 or 8 cents will make up variable costs; the balance will be fixed costs. Capturing all of these costs is the first step in determining lifecycle cost/vehicle productivity.

Businesses should have some means not only to capture these costs, but also to store and track them as well. You may have an expense reporting process where drivers enter variable costs, and are reimbursed by the company. Or, you may have a fleet management vendor who provides the means by which drivers obtain service, and can then exchange information with you, or a combination of both.

Fixed expenses can be captured via lease billings, or, if vehicles are owned, through internal allocation of depreciation and finance expense. All of this information should be maintained in some database, such as a computer spreadsheet, until the vehicle is taken out of service and sold. At this point, the final determination of lifecycle cost can be made, and vehicle productivity analyzed. 

Productivity 

Lifecycle cost expressed in total dollars is useless. A good analogy is fuel efficiency. Simply looking at total dollars spent, or total gallons used, is a waste of time. Fuel usage must be expressed as a cost/use ratio, in this case miles per gallon. The same thing goes for total vehicle costs.

Lifecycle costs must be expressed in a cost/use ratio in order for productivity to be determined. The most common ratio used in the fleet industry is cents per mile. This gives a business a clear picture, both individually and comparatively, how a vehicle performed during its time in service. When a vehicle has been taken out of service and sold, a business can then complete the compilation of total lifecycle costs; any depreciation reserve expense can be reconciled at that point and true depreciation determined.

Let’s say, for example, that a vehicle is sold after 36 months, with 80,000 miles on the odometer. Here is how vehicle productivity can then be calculated and expressed:

• Original Cost: $18,000
• Resale proceeds: $7,500
• Depreciation: $10,500 ($18,000 - $7,500)
• Total Finance Expense: $1,890
• Total Insurance Expense: $900
• Total Fuel Expense: $4,800
• Total Maintenance/Repair Expense: $1,440
• Total Tire Expense: $400
• Total Oil Expense: $352
• Total Miscellaneous Expense: $250 
• Grand Total, Lifecycle Cost: $20,532 

Total vehicle expenses have been determined. Now you must calculate the cost/use ratio in order to judge vehicle productivity. 

Total Expense: $20,532 X 100 = 2,053,200 cents Divided by mileage (80,000) = 25.67 cents per mile.

For each mile driven, the sample vehicle has cost the company 25.67 cents. It is obvious that simply looking at the total accumulation of expense is irrelevant to determining true vehicle cost; a different vehicle, accumulating the same or similar dollar cost, but only driven 65,000 miles would be judged to be far less productive than this one (31.58 vs. 25.67 cents per mile, almost 6 cents per mile). 

Using the Data 

Similarly, lifecycle costing cannot be looked at in a vacuum, one vehicle at a time. For example, it is useful to track this ratio for each model used, or model year, or by field location. In this manner, comparisons can be made which can be enormously helpful in choosing the right vehicle for the job, or in judging how various field locations are managing their fleet expenses.

Using the cost per mile ratio will make comparisons legitimate, as it takes into consideration the different mileage requirements various territories have. Although looking at data “after the fact,” after vehicles have been taken out of service and sold, may seem to be reactive, it is the only way that true cost can be calculated.

Keep in mind that any number that is used for depreciation during vehicle life is arbitrary; true depreciation, which is the largest expense any vehicle will incur, can only be determined after sale. Developing a history of vehicle sales, over a long period of time, will provide an important “bank” of data for forecasting. 

Key Takeaways

Lifecycle costing isn’t an overly complex process. It does, however, require a solid database to capture fixed and variable costs, a reporting mechanism to express the data in cost per mile form and, most importantly, the business acumen to interpret the information and establish sound policy as a result:

• Accumulate all fixed and variable costs
• Express the costs in a cost/use ratio - cents per mile
• Filter the results for unusual expense which might skew results
• The resulting data will reveal true vehicle productivity

Tracking lifecycle costs is the very basis for effective business vehicle management, and if done properly and regularly, can help avoid vehicle downtime, ameliorate risk to drivers, and contain costs.