Negotiating Your Way to a Fleet Management Agreement
September 2007, Automotive Fleet - Feature
A fleet management agreement is the recipe for a successful fleet program. It contains the terms and conditions under which the fleet and its vendor do business. It should include a service level agreement outlining the expectations of both parties and the means to measure them. The fleet management agreement is the framework of the entire relationship, and, if not well structured, limits the effectiveness of not only the programs it covers, but also the success of the fleet operation.
Management Agreement Covers Key Programs
A fleet management agreement (for these purposes, we'll assume it is a "bundled" agreement, which includes all major fleet services) covers several key fleet management programs:
- Accident management.
- Fuel card program.
Leasing is usually an open-end, terminal rental adjustment clause (TRAC) arrangement. Maintenance most often takes the form of a management program, wherein the vendor provides procurement, technical assistance, reporting, and data. Accident management covers accident reporting, report distribution, repair management, and subrogation recovery.
Fleet fuel card programs provide a card with which drivers purchase fuel and a data warehouse with which the fleet manager administers the program. The fleet manager also can mine the data for cost reporting and savings. Administrative services may include a number of individual programs:
- Registration renewal services.
- Payment of parking tickets.
- "Fleet desk" (a call center for drivers).
These fleet programs, chosen by the fleet manager, determine the success of his or her efforts to provide services to drivers as well as cost control and savings to the company.
Agreement Based on Lease Arrangement
The foundation of a bundled fleet management agreement is the lease. It usually takes the form of a master lease agreement, under which vehicles can be leased, with the terms and conditions governing the lease.
The basic terms of an open-end, master lease agreement include:
- Minimum lease term.
- Lease rate calculation.
- Vehicle capitalization.
- Terminal rental adjustment clause (TRAC).
The agreement also includes boilerplate language, but primary negotiating points are found in the five listed areas.
Here's what to focus on in negotiating each of these portions of the agreement:
Minimum Lease Term. Most open-end lease agreements call for a minimum term of 12 months; sometimes, 24 months or longer. The key here is the shorter the minimum term, the more flexibility the fleet manager has in replacing vehicles and the more likely the lease passes audit muster as an operating lease. If the minimum term is more than 12 months, ask that it be reduced.
Lease Rate Calculation. An openend TRAC lease contains three components:
- Depreciation reserve.
- Administrative or lease fee.
Depreciation reserve is that portion of the lease payment placed into reserve to cover anticipated depreciation (sometimes called amortization). The key negotiating point is maximum flexibility. Make certain the lessor allows different reserve rates for different vehicles. Lowmileage vehicles, for example, usually stay in service longer, and a lower reserve rate can be used. High-mileage vehicles are replaced more often, and a faster rate of reserve can be used.
The administrative fee is usually expressed as a percentage of the capitalized cost, i.e., 0.05 percent. The fee is part of the overall lease rate multiplier which, when applied to the capitalized cost, determines the monthly lease payment. Naturally, this fee can be negotiated downward, as with any fee. Better still, if a flat dollar fee can be negotiated, substantial savings will be realized.
Technically, a lease rate factor contains no interest; in reality, the interest is very much there. Most fleet leases use floating rates. Make sure the floating rates can be fixed at some point, should rates begin to rise. Interest rates are derived from a rate instrument, such as LIBOR, commercial paper, or treasury issues. Try to negotiate some flexibility in the instruments used, so the most advantageous rates can be achieved.
Vehicle Capitalization. The capitalized cost of vehicles leased under a master agreement is a determinant of lease payments. Many agreements call for some discount off factory invoice cost as the lessee participates in the holdback. If this is the case, negotiate the maximum discount possible. Better yet, vehicle capitalization, which takes "net-net" - factory invoice less holdback - plus some amount is even better. In this scenario, the fleet benefits since vehicle prices increase along with holdback. Further, look closely at the capitalization for specialty vehicles (higher line or exotics and some imports) and vehicles purchased from dealer stock.
Some agreements call for a different capitalization schedule and a higher interest portion for the lease payment. Try to negotiate this away and secure a flexibility to find emergency orders yourself.
Terminal Rental Adjustment Clause. Due to the nature of the openend fleet agreement, the TRAC clause must contain specific language for the lease to be accepted as an operating lease. Make certain the lessor's responsibilities for prompt pickup, sale, and application of proceeds to the billing are clearly outlined.
Payment terms. Payment terms are difficult to negotiate away from the lessor's standard. However, the terms should include some prompt payment incentive. Make certain that timing of the vehicle's first billing and its removal upon remarketing are clear.
With possible accounting changes for open-end TRAC leases in the future, the lease portions that impact the treatment may well become moot. For the time being, however, all issues discussed here should be negotiated carefully.
Maintenance Covers Key Points Maintenance management programs consist of several key elements.
Procurement. The means by which drivers arrange for maintenance, repair, and tires. Purchase orders, coupon books, and restricted maintenance cards are the most common methods.
Technical assistance. Vendors provide 24-hour, toll-free access to certified auto technicians, who assist drivers and manage the repair process with the shop. They also ensure work orders aren't padded, and service under warranty is properly handled.
Reporting. Standard and exception reports track maintenance costs, as well as custom reporting capabilities, for benchmarking and tracking abuse.
"Extended" warranty. For repairs done beyond the new-vehicle warranty, manufacturers may consider reimbursing fleets for repair costs. The maintenance management vendor usually applies for, tracks, and applies such credits for the customer.
The means by which drivers purchase maintenance and repairs is generally not negotiable. Fleet managers can survey the marketplace and choose the vendor that provides the means best suited for the fleet. Make certain, however, the vendor offers maximum flexibility in preventive maintenance scheduling and maintenance card limits.
Most maintenance management programs encourage, even funnel, drivers to national account shops.They also include local independent shops in their networks and will add local shops at the customer's request.
However, if unable to negotiate a discount with these locations, the management programs charge a fee or surcharge on the invoice. Make sure this charge is clearly shown in the agreement and negotiate it to the lowest level possible. Local shops often provide services that national chains do not, i.e., pickup and drop-off, and loaner cars. These are an important part of a fleet maintenance program. Negotiating better terms to use local shops is an important advantage.
Toll-free maintenance help is fairly uniform across the vendor spectrum. Make sure calls aren't outsourced after hours and the technicians are ASE-certified.
Determine the criteria for initiating an extended warranty claim, how such claims are tracked, and how successful claims are credited to the billing. If a status report is unavailable, ask the vendor if one can be provided and make sure the capability is in the agreement.
Accident Management Important
Accident management (AM) is an important part of any fleet management agreement. It consists of three primary components: accident reporting, repair management, and subrogation recovery.
Accident reporting. AM programs provide 24-hour, tollfree reporting for drivers involved in an accident. The report is usually generated electronically, and a standard number of copies (usually three) is distributed to parties designated by the customer. If your required recipients number more than the program's standard allotment, negotiate the number. The fee is usually a flat reroccurrence fee and may be negotiated down or eliminated altogether.
Repair management. Once the vehicle is in the shop, the AM provider begins the repair management process. A repair estimate is forwarded, with pictures if needed, and a certified body technician at the management company reviews it for accuracy and to ensure the estimate isn't padded.
Examine the agreement for details on how supplements are handled and make certain the process is outlined. Find out how long the vendor (not the shop) guarantees repairs; most do so for the vehicle's fleet life. If this isn't the case in the standard agreement, make certain it is included.
Subrogation recovery. Subrogation recovery services involve initial contact with a third party and the ongoing attempt to obtain payment. Determine how often each file is "worked." Just as with accounts receivable, the older a file gets, the lower the chances for success. Regular status reports should be provided so the fleet can track program success. Make certain contact with adverse parties is made immediately, even before repairs are finished, and find out if nonrepair damages are pursued.
Accident management programs also include reports regarding not only the progress of ongoing files, but also the program's success rate. Criteria for success include:
- Average repair time (downtime).
- Average rental days. (For replacement rentals, it should be within a day of the average repair time.)
- Average cost of repair.
- Percentage of files subject to subrogation recovery.
- Subrogation recovery success.
It is important that the criteria for success are clearly stated since standard statistics for subrogation do not exist. Laws differ among states for determining physical damage liability.
Fuel Car Program Critical
Fuel has always been the largest variable expense in every fleet. However, in recent years, the percentage has increased, sometimes dramatically. A successful fuel card program is more critical than ever in controlling overall fleet costs.
Fuel card programs are simple. The vendor provides a card, which may be proprietary, or uses a major credit card platform with which the driver can purchase fuel and other items within the merchant network. The fleet usually can establish both purchase controls (at point of sale) as well as exception controls, with exceptions to fleet policy flagged. However, exception reports don't prevent the driver from making a nonapproved purchase.
A bundled fleet management program often carries a monthly fee for fuel cards. With adequate volume, this fee may be negotiated away. In rare cases, a rebate based upon volume can be negotiated as well, though the cost of administering the program makes it difficult for all but the largest fleets.
Fuel expense reporting should be robust and flexible enough that the fleet manager not only can track transactions, but also create exception and benchmarking reports. Do not accept additional fees levied for these (or any other) reports.
Fuel cards should have near-universal coverage, so drivers don't waste time finding a participating merchant. Determine how the agreement handles situations in which the driver happens upon an out-of-network merchant. A process to pay the merchant so a driver isn't stranded should be included in the fuel card program. Provided such instances are the rare exception, there should be no surcharge for the transaction.
The potential for fraud and abuse of a fleet fuel card is considerable. Much can be controlled via card and exception controls, but drivers can be very creative in seeking ways around them. The provider should have a formal process for detecting evidence of fraud, and the criteria for contacting the fleet must be outlined in the agreement. The liability for fraudulent use must also be clear.
Negotiate Administration Terms
Fleet administrative services can run the gamut from registration renewal to so-called "fleet desk" programs. It would seem few terms can be negotiated for programs essentially clerical and administrative in nature. Although such services generally do not impact overall fleet operation to the same extent leasing or maintenance might, some terms should be negotiated.
Registration renewal. Each year, tags/registrations must be renewed with the state department of motor vehicles. It is a time-consuming, annoying process for drivers, and many fleet managers contract with the fleet management provider to handle the task.
A key negotiating point is the consequence when a registration isn't renewed on time and the driver is cited, resulting in a fine. The simplest way to handle this situation is to hold the company responsible if the nonrenewal is a result of some action by the driver or the fleet department. If a violation and fine result from a vendor action or lack of action, the vendor should pick up the tab.
Parking ticket payment. Some fleets consider parking tickets a cost of doing business; others take action against the driver when such citations are received. Either way, tickets must be paid; non-payment can have serious consequences, from towing the vehicle to denying the vehicle's registration renewal.
Fleet management companies sometimes offer a service in which they take control of paying tickets. It is a valuable service, and the negotiating point is similar to that for registration renewal. Fines and penalties are usually added if the ticket isn't paid on time. The solution is also similar. If a fine is the fault of the driver or the fleet, they pay. If the vendor is culpable, it does.
Fleet desk. Fleet desk programs essentially provide a toll-free number for drivers to call for most fleet issues, such as questions about policy or procedure, new-vehicle ordering, and the purchase of vehicles coming out of service. Fleet desk programs (sometimes called "total fleet management") relieve the fleet department of many day-to-day administrative and clerical tasks and can enable the fleet manager to concentrate on strategic and tactical management of fleet expense.
Fleet desk terms and conditions should be outlined in the fleet agreement. The company must provide the vendor with fleet policies and procedures, including updates as changes are made. Calls should be answered promptly, with accuracy a key performance indicator.
Clearly Define Service Levels
Regardless of the terms and conditions negotiated for specific services under a fleet management agreement, the document should contain clearly defined service levels so that both parties know and understand their responsibilities, how they are measured, and the consequences of not meeting them. Here are tips on what to include in a service level agreement (SLA):
- Maintenance. Claims of cost savings in a vendor's program presentation should be documented in the SLA. Communication targets, such as speed of answer and hold times, can also be included.
- Accident management. Performance criteria statistics as previously described (average repair time, cost of repair, and average replacement rental time) can be included.
- Fuel card. The simplicity of a fuel card program limits performance criteria to generic customer service targets. Cost savings claims, as with a maintenance management program, should be included.
- Performance targets. No matter what service is measured, performance targets must be clearly and specifically defined, and the methods for documenting and measuring them agreed upon.
- Consequences. Service level agreements are of little use without consequences. Both parties must agree upon these before going forward.
All in all, fleet management agreements are the blueprint for fleet management success. That success cannot be achieved if the relationship between the fleet and the vendor is adversarial. Approaching these negotiations as partners, rather than adversaries, facilitates the process and helps ensure its success..