You've gone through the entire process: RFI, RFP, analyzing responses, interviewing candidates, and now you've made your choice....and the fun really begins. Contracts for the provision of fleet leasing and management services can be a major contributor to the success of the relationship if both parties actively participate, and fleets are careful in negotiating them. Amidst legal boilerplate language, many items can be negotiated and can go far in ensuring that success.
Two Major Items
In the largest sense, there are two major areas covered in a fleet management agreement: leasing (or purchase/disposal) and services. The former is a financial transaction, the latter an operating one. Both involve processes and cost factors that aren't usually negotiable, and also some that are. Within these two broad categories, three issues are covered by the contract:
Cost: The factors that make up the lease payment, along with any other fees involved in the transaction.
Contract Service: The vendor's responsibilities under the contract.
Contract: The legal ramifications of entering into the agreement.
Price, performance, legal. These three issues are part and parcel of every fleet management agreement, and both vendors and their customers will benefit if they are addressed, clearly outlined, and understood.
Although any number of vehicle lease variations exists, this article will address the typical, open end "TRAC" lease most often used in the fleet industry. Simply explained, a fleet TRAC (an acronym for "terminal rental adjustment clause") lease provides for a vehicle's original cost to be amortized in equal monthly installments. After a minimum required term, the lessee may terminate the lease at any time.
Upon termination, the lessor causes the vehicle to be sold; the proceeds are applied to the unamortized balance of the original cost, with any excess returned to the lessee, any shortfall covered by the lessee. Lease payments consist of the monthly amortization (or reserve for depreciation), a charge for the cost of money used, and an administrative fee. The lease payment is determined by applying a rate factor to the capitalized cost of the vehicle.
What is negotiable. The first step in negotiations should be capitalized cost. Most master fleet lease contracts provide a capitalization schedule, which outlines how vehicles leased under the contract will be capitalized. Usually, this schedule is expressed as a function of "factory invoice cost," that cost which the dealer pays to the manufacturer for the vehicle, and includes "holdback," an amount usually equal to 3 percent of MSRP. The holdback should be the focus of the negotiations. Pricing is most often expressed as "factory invoice less $X," the "X" coming out of holdback.
Sometimes, a lessor may be willing to capitalize vehicles at net cost (i.e., factory invoice less holdback) plus some dollar amount. This form of capitalization is more advantageous to the lessee since inflationary increases in cost will be covered. Other minor factors included in capitalization negotiations can be dealer advertising and factory floor plan support monies. The lease rate factor, expressed as a percentage applied to the cap cost, consists of three parts: depreciation reserve, money cost, and administrative fee.
Depreciation reserve should be a flexible, mutually agreed-upon amount. Lessees should have the flexibility to amortize different vehicles at different rates (rates which most accurately reflect the actual market). They should avoid a contract that stipulates a single amortization rate. Money cost charges can be either fixed or floating; again, flexibility is the key. Most fleets will benefit from a floating rate, with the option of fixing money cost at some time of their choosing during the vehicle's term in service. Various rate bases are available, including prime rate, commercial paper, treasury issues, and LIBOR (London Interbank Offering Rate).
The contract adds some small markup over the basis chosen. Research these options carefully, choose the one least costly, and negotiate the lowest markup possible. Finally, the lessor's administrative fee is added to the rate factor. It is most important to be familiar with the fleet market and know what level of fee is available to your size fleet. The administrative fee is expressed either as a percentage applied to the cap cost, or as $X per thousand dollars of cap cost.
What is not negotiable. Fleet lease contracts require that the lessee keep the vehicle in service for a minimum number of months, usually either 12 or 24. This requirement is not subject to negotiation, as it determines the tax and accounting treatment of the lease. Fleet leases are billed in advance, that is, the lease is billed on the first of the month for the following month. Vehicles, of course, do not always go into service so conveniently, and most fleet agreements "trigger" billings around the 15th of the month.
Vehicles delivered prior to the 15th are billed for that entire month; those delivered after the 15th are billed beginning the ensuing month. The same holds true when the lease is terminated; the final billing is also structured around the 15th of the month. Again, not negotiable. Because fleet lease payments are level (in annual increments), while at the same time interest is charged on a declining balance, there will always be a difference between the interest charged and the actual interest accumulated. This is sometimes called "deficit interest." A legitimate charge, enabling the lessor to achieve a return or yield as permitted by the contract, it is not negotiable.
Lease Contract Service
A lease contract requires the lessor to provide various services connected to the lease transaction. Determine the details of each.
Ordering. How and in what form is the lessee able to place and track the status of new vehicle orders?
Delivery. Select a delivering dealer. How much will be charged for drop shipping the vehicle? What is the flow of documents required for tax/title/registration and delivery confirmation?
Billings. How is the lease billing "parsed" and distributed? What are the payment terms?
Lease Documentation. Because vehicles are leased under a master lease contract, each vehicle leased will require documentation of capitalized cost and the application of the rate in a payment schedule, as well as documentation of the final accounting for vehicles sold (the so-called "schedule A/schedule B").
Sale of Off-Lease Units. How are vehicles relinquished for sale; how are condition reports handled; and when is the billing stopped? Most lessors can be flexible in negotiating contract service. Some key areas to consider include:
Ordering. In recent years, lessors have provided lessees with the ability to place new vehicle orders online. Be sure it is understood who is responsible for any errors in order placement.
Delivery. The lessor should provide a delivery receipt, with the date of delivery, serial and unit numbers, and driver's name. A process should be in place to handle errors, such as vehicles coming in the wrong color, dropped to the wrong dealer, and missing equipment.
Sale. The lessor should provide a full accounting for every sale, including date of sale, proceeds, deductions for mileage/condition, and, upon request, a copy of the buyer's check.
Billings. Make certain that the contract specifies a date that billings will stop when a vehicle is taken out of service. Don't allow billings to continue until the vehicle is sold, since this can result in 1-2 two months' billings after turn-in. Billings should cease the month the vehicle is turned in.
A master fleet lease agreement is a legally binding contract. However, unless agreed upon in advance, the lessee is not required to lease vehicles. The contract merely outlines the parties' responsibilities if a vehicle or vehicles are leased thereunder. Naturally, much legal boilerplate is found in any lease agreement. Some are negotiable; some is not:
"Force Majeur." A standard clause in most every legal contract, it merely states that the lessor cannot be responsible for events beyond its control and isn't negotiable. This is why it is important to specify, in as much detail as practical, exactly how various common situations will be handled.
Cancellation. Since a master lease generally does not require the lessee to actually lease a vehicle, cancellation isn't often a factor. Most master leases specify a minimum period (this can range anywhere from 90 days to a year), and then provide for continuation until one party or the other cancels. The lessee cannot cancel the contract if any vehicles are still under its terms, which includes sold vehicles whose proceeds have not yet been applied. Cancellation usually requires some period of notification, for example, 30 days.
State Law. This can sometimes become an issue between the two parties' legal staffs. All contracts contain language that specifies which state's laws govern the contract. Lawyers research the appropriate statutes in both states (if different), and can often make a concession to the other.
Fleet Management Services
Though not always the case, a master contract commonly covers various fleet management and administrative services provided by the vendor. These can include maintenance management, accident management/subrogation, registration renewal, MVRs, fuel, and safety programs, among others. Though many items are negotiable in fleet services contracts, this article addresses only major issues and how they may or may not be negotiable.
Maintenance management programs provide the fleet a means by which drivers can obtain preventive maintenance according to a schedule, purchase minor services, have major repairs performed, and take advantage of expert assistance in authorizing the work. Some items that should be negotiated are:
Invoice Disputes. Most commonly, vendors have a process by which customers can dispute invoices. While this process sometimes can be covered administratively, it may also be outlined in the contract. Make certain that once an invoice has been disputed, it is removed from your billing until the matter has been settled. This would include disputes on pricing, proper authorization, or work done to company vehicles.
Responsibility for Services Purchased. The vendor provides drivers a means to acquire preventive maintenance and minor repairs (within a dollar cap, such as $50). Most commonly, this takes the form of a coupon book for preventive maintenance at regular mileage intervals with the required PM's listed. These coupons can be used without authorization. In addition, a restricted maintenance card, with a stated dollar limit, can be provided to allow for simple services, such as flat tire repairs.
Your company will be responsible for paying all invoices generated (unless disputed) by the use of these items, even after the contract has been canceled. Sometimes the card is a magnetic strip, swipe card activated via a PIN. Individual cards can be canceled. Make certain that you will not be responsible for purchases made after a card has been canceled, or that your exposure is limited.
Warranties. Specific parts, tires, and batteries installed under the program, as well as labor costs, carry a warranty from the manufacturer. Some vendors provide an umbrella warranty to customers and deal with the service provider separately. It is important to know and understand who will be responsible for adjustments done under these warranties.
Fees. Maintenance management fees are usually charged on a per vehicle, per month fee, and are always (as with all pricing and fees) negotiable. Know what the market will bear for a fleet of your size. Sometimes, however, a contract will propose to charge the fee as part of the lease rate factor. This arrangement is not advantageous, as fees will then vary with the cost of the vehicle and increase whenever vehicle prices increase. If this is the method your vendor proposes to use for charges, you should counter with a per vehicle, per month fee. Most vendors maintain a network of shops through which services are performed and will charge a fee or surcharge if the customer goes out of network for servicing or repairs. These fees are also negotiable. A flat fee is preferable to a surcharge. As with all items in a master agreement, you should enter negotiations with clear and up-to-date knowledge of where your fleet stands in the marketplace and what levels of costs you should be able to access.
Accident management covers accident reporting (first notice of loss), repair management, and subrogation recovery. Reporting is fairly straightforward, and there is little of importance to negotiate. Simply make certain that you know how many reports will be made available. Many of the same issues come into play in an accident management program as with maintenance management. The vendor will direct the driver to a shop in their network (or arrange a tow to that shop), receive an estimate from the shop (usually with photos of the damage), review and negotiate the final price, follow up with the shop as repairs are performed, and provide a purchase order to the shop for release of the vehicle when repairs are completed. As with maintenance management, issues covering invoice disputes, out-of-network repairs, and warranty should be outlined. Accident management fees are usually transaction fees, rather than per vehicle, per month fees, and are negotiable. Subrogation recovery is the process by which the vendor pursues recovery of damages from the other party (if any) to the accident. Vendors retain a percentage of these recoveries. You should be certain that you have right of approval before any settlement is accepted.
One area often neglected in contracts is performance. The standard fleet management agreement usually does not contain performance requirements. You should make certain that yours does. Inserting performance benchmarks not only ensures that the programs will be successful, but they also benefit the vendor. On the leasing side, performance benchmarks are most applicable to the resale of off-lease units, while several items lend themselves to performance targets in services. Benchmarks can be established for a number of areas including:
Resale Proceeds. In their initial proposals, vendors often tout their used-vehicle sale performance, usually as a percentage of AMR (Automotive Market Report), which tracks used-vehicle values at auction. Their own percentages can be used as a benchmark for performance.
Resale Timing. This defines the number of days from pickup to sale. The shorter the period, the sooner proceeds are applied to the billing.
Maintenance Cost Per Mile. Again, service providers often publish the CPM averages, which can be used to measure performance. Collision Repair. It is more difficult to hold a vendor to a benchmark of average cost per repair. However, performance in minimizing supplemental repairs, the average time of repair, and instances of re-repair under warranty are fair game.
Customer service. Overall customer service performance goals can include average call answer time, dropped calls, number of representative visits, etc. Once benchmarks are codified in the contract, a client review should be scheduled at the end of each year, during which these benchmarks and performance goals are analyzed, and penalties for unsatisfactory results can be discussed.
Administrative services are relatively simple, and most fees are negotiable. Some areas that should be negotiated include: Registration Renewals. Fines and penalties incurred by drivers due to the vendors' failure to renew registrations on a timely basis should be the responsibility of that vendor.
MVRs. Other than negotiating fees, there is little to discuss vis-a-vis the contract.
Fleet Management. A driver call center service, where the vendor fields all phone calls from drivers is sometimes chosen. In a manner similar to maintenance management, telephone performance, i.e., promptness in answer, callback times, and dropped calls can be tracked and benchmarked.
Negotiating fleet management contracts is, above all else, a matter of common sense. Simply keep in mind that all fees and costs are negotiable, that the contract should outline the responsibilities of each party, and the performance targets should be included.
Originally posted on Automotive Fleet