There are a number of basic processes involved in effective fleet management — acquisition, operation, maintenance and repair, accident repair and reporting, and resale. All are important; however, there is one document that, particularly in a bundled fleet, is the foundation that governs all of them.
The master lease agreement is a document that has remained surprisingly consistent over the decades. It not only codifies the terms and conditions under which vehicles are leased, but it can also contain the terms of other fleet management programs, such as accident management, fleet administration, and more. There are important parts of the agreement that smart fleet managers know are subject to negotiating terms favorable to the company. Here are a few:
An Agreement vs. a Contract
Before looking at any specifics, it is important to understand that the document is an agreement, and not a contract. There is a distinction with a difference. A contract requires both parties to act. A lease contract requires that the lessor lease to, and the lessee lease from, a specific vehicle or vehicles at specific payments.
When a consumer goes to a dealer and decides to lease a new vehicle, he or she signs a lease contract. The contract covers a specific vehicle, at a specific payment, for a specific period of time.
A fleet master lease agreement, however, is usually different. While it contains the terms and conditions under which vehicles may be leased, it seldom if ever contains a requirement that any vehicles actually be leased at all. It is not entirely unknown for a master agreement to be signed, but never come into use with vehicles never being ordered.
Defining Fleet Leases
Most mid- to large-sized fleets lease under an open-end terminal rental adjustment clause (TRAC) lease. The basics of the fleet TRAC lease are:
- The agreement establishes the basis for the lease rate factors and how vehicles leased will be capitalized.
- Vehicles are ordered (or purchased from dealer stock), and a capitalized cost is established.
- That cost is amortized (reduced) to zero at a rate agreed upon by the lessee and lessor.
- After the minimum term, the lessee may choose to terminate the vehicle at any time.
- The lessor causes terminated vehicles to be sold.
- If the proceeds exceed the unamortized capitalized cost, the excess is credited back to the lessee.
- If the proceeds are less than the unamortized capitalized cost, the lessee is billed for the difference.
Looking at these basics, there are a number of areas fleet managers should be actively negotiating for terms favorable to the company.
The master agreement, as with any legal document, contains "boilerplate" provisions, most of which have little to do with actually leasing vehicles. Some of them can be negotiable.
For example, boilerplate language establishes which states laws will govern the agreement. For instance, if the lessor is incorporated in Ohio, that state’s laws are cited. This, however, is often negotiable, where if the lessee is a Delaware corporation, that state would be substituted.
Another provision is a cancellation notice; most agreements contain boilerplate language requiring some fixed notice both parties must give to cancel. This is, to be frank, unnecessary in a fleet agreement, since the lessee is not compelled by the master agreement to lease anything.
"Cancellation" would consist of simply not doing so, or to cease doing so (with the understanding that any remaining vehicles leased would continue to be subject to the agreement). Although boilerplate language is usually a time saver in negotiations, don't ignore what can be changed to make the agreement more advantageous to the company.
Components of a Fleet Lease
The primary purpose of the master fleet lease agreement is to set forth the terms and conditions for leasing fleet vehicles. Fleet lease rates generally consist of three components:
- Depreciation reserve: This is the rate at which the original cost of the vehicles in the lease will be amortized ("paid down"). Depreciation reserve is booked each month in equal increments from the first month until the vehicle is fully amortized.
- Administrative fee: The administrative fee is the fee a lessor charges to service the lease, i.e., billing, reporting, customer service, etc.
- Lease/interest factor: This factor covers the lessor’s costs in order to fund the lease.
All three of these factors are subject to negotiation. Fleet managers first need to know what the market for these factors is, for fleets of like size and makeup, before engaging the lessor.
The purpose of depreciation reserve is to "book" depreciation in such a way that, at the point of anticipated replacement, the unamortized balance reflects the actual market value. The key to this negotiation is to achieve maximum flexibility.
Different vehicles will hit replacement criteria at different times, depending upon mileage accumulated. Trucks will generally remain in service longer than cars. Fleet managers need to be able to match the reserve rate to these differing criteria and should make certain that the master agreement allows them to do so.
In addition, fleet lessors will often "cap" the length of the reserve, that is, they will not permit amortization of longer than some maximum (e.g., six or seven years). If the fleet has vehicles that it usually keeps in service for a lengthy period of time — a very low mileage truck, for example — an extension of the cap would be helpful.
The administrative fee is simply a price negotiation, and most lessors will be aggressive with pricing. The fee is expressed in cents per thousand dollars of cap cost, i.e., an administrative factor of 0.05 would translate to 50 cents per thousand dollars. Because the admin fee is expressed (as is the full lease rate factor) as a percentage of that cap cost, as vehicle costs increase, the fee will increase as well. An alternative that a fleet manager might consider is to negotiate a fixed fee, in dollars per month.
Probably the most attractive feature of the open-end TRAC lease is its flexibility, and nowhere is that more evident than in the interest factor (technically, there is no interest in a lease; however, we'll call it that for convenience’s sake).
Lessors offer a market basket of funding options. Choosing the most cost-effective combination of funding factors isn't really the product of negotiation; however, there is a pricing element. Funding is expressed as a negotiable markup over the source chosen. For example, some basis points over 90-day Treasuries. As with the administrative fee, lessors will compete for business, and, usually, a fleet manager can negotiate terms more attractive than those initially offered.
All in all, the lease rate factors in the master lease agreement will govern the cost of all vehicles leased, and the savvy fleet manager will understand what the market will bear and be vigilant in negotiating the best rates possible.[PAGEBREAK]Understanding Capitalized Cost
Lease rate factors are only one aspect of the ultimate lease payment. The other is the capitalized cost of the vehicles. The master lease agreement will set out the pricing basis for all vehicles, which will determine the rate factor of the monthly payments.
Cap cost is usually based on the manufacturers' factory invoice price (the price billed to a dealer by the manufacturer). Vehicles leased under the agreement are usually capitalized at some fixed dollar amount below that cost — the amount will depend upon the size of the fleet and the number of orders the lessor anticipates.
Alternatively, if the customer is large enough, or a commitment of enough orders is made, the price can be expressed as "net-invoice plus," that is, factory invoice less holdback (2-3 percent of MSRP), less floor plan assistance (monies provided to the dealer to offset the cost of carrying inventory), and less advertising assistance, plus a fixed dollar amount.
Either way, this is a price negotiation. A fleet manager should negotiate the best "invoice minus" or "net-invoice plus" pricing their market position will bear.
In addition, there is the possibility of what is known as "price protection," where the lessor will protect the new model-year pricing at introduction, either for some period of time or for the full model-year. Manufacturers often institute price increases at various times during the model-year; a vehicle that prices out at $25,000 at introduction may end up costing $26,000 or more at build out. Price protection, obviously, locks in pricing for the lessee and protects them against such increases.
Pricing for so-called "domestic" manufacturers (the Big Three) will often differ from that of imports, so the negotiations will often take more than one track.
Another consideration is that for vehicles purchased from dealer inventory, variously called "emergency" or "out-of-stock" purchases, where some event (a total loss, a new hire) requires that the lessee acquire a vehicle immediately rather than via a factory order, which can take anywhere from six up to as many as 16 weeks, depending upon the make.
Such orders are clearly priced differently, since the dealer has already incurred costs in purchasing and carrying the vehicle in inventory. The price for such orders can be negotiated; it can also be advantageous if a fleet manager is able, when desired, to search for and negotiate pricing for an emergency order directly with a dealer.
Negotiating the lowest cap cost terms, both for factory and emergency orders, will combine with the negotiated lease rate factors to result in the lowest lease costs possible.
The capitalized cost and lease rate factors aren't the only negotiable items in the master agreement. There are specific terms for billing, not only for the lease payments but for the TRAC adjustment as well.
Most fleet lease agreement terms for the initiation and termination of billing use the "15th" rule: If a vehicle is delivered prior to the 15th of any month, it will be billed on the first of the following month for that and the coming months. If it is delivered after the 15th, it is billed on the first of the following month only for the ensuing month.
Lease payments are generally billed in advance, that is, billed on the first of the month for that month. For the most part, this isn't negotiable. However, what is important is that the lessor is accurate in establishing the in-service date, and more importantly, that both out of service date and the application of resale proceeds (the final TRAC adjustment) are correct.
What can be negotiated here is a service level agreement, where the lessor agrees to sell vehicles within a reasonable period of time (30 days, for example), and when the sale is completed, that the proceeds are applied immediately, the adjustment booked, and the billing is terminated.
Another factor that may be negotiable is what is known as "deficit interest" charges. In some fleet leases, the lease payments step down in annual increments. This is because each year, the interest factor is applied to an average annual balance; this is necessary since if the interest were applied to an actual balance, the payment would be different each month. When the payments are so applied, for the first six months of the year, the interest portion of the lease payment is less than the actual, and for the last six months, it is greater. Thus, the "underpayment" of interest accumulates the deficit vs. actual interest for the first six months, and this deficit is reduced each month for the last six, until after the full year when the full amount of interest has been paid.
The result of all this is that unless a vehicle is terminated at the end of a full billing year, the interest paid is less than the full, actual interest that should have been paid. Lessors then bill the customer at termination for this deficit.
Although it isn't a large amount for any single unit, in a fleet of hundreds or thousands of vehicles, the total can be a large expense. Depending on the size of the fleet and the level of competition for the business, some lessors may be willing to forego this additional payment.
Covering Other Services
Lease payment factors (depreciation, interest, administrative fee, and capitalized cost) and related billing issues are the foundation of the agreement and often contains other such management services as maintenance, fuel, and other programs.
The most widely used program (aside from leasing) is maintenance management. Under these programs, lessors provide drivers with purchasing materials (cards, coupon books, purchase orders, etc.) with which they can purchase preventive maintenance, tires, and repairs for the company vehicle. The lessor provides a consolidated billing, and both standard and exception cost reports, along with certified technicians to negotiate repairs with shops. These programs are billed either via a per vehicle per month charge, or as an additional fee built into the lease rate factor.
These fees are negotiable — they can range from as little as $1 to $2 to as much as $5 to $6 per vehicle per month and can be negotiated downward if volume and market competition permit.
Some of the activity goes beyond basic preventive maintenance and repairs to major mechanical repairs (i.e., powertrain). These repairs are done via a network of independent shops, and the lessor will sometimes charge a fee for such repairs, particularly if the lessee chooses the shop. This charge is also negotiable.
Accident management programs provide three basic services: the management and negotiation of body repairs, accident reporting, and subrogation recovery. Most accident management programs are subject to two fees: a "per-occurrence" fee and a contingency fee for subrogation recovery.
The per-occurrence fee pays for several services, including accident reporting, estimates, repair cost negotiation, and a guarantee of the repairs. This fee is negotiable. Accident management programs usually provide a fixed number of reports (one sent to the fleet manager, and one or two to others designated by the fleet manager), and it may be possible to negotiate more if required by the company (adding, say, a supervisor to the distribution).
Subrogation recovery fees are most often contingent upon success, not unlike some legal fees. The starting point can be as high as a third (33 percent), but are almost always negotiable downward.
A relative newcomer to the menu of programs that can be covered in the master agreement is the fleet fuel card. The proprietary or credit-card based cards contain purchase controls the fleet manager can activate to help limit and control usage, and the supplier provides access to a large menu of standard and exception reporting.
In the past, fuel card programs charged a "per card, per month" fee; however, in recent years, more competition has entered the marketplace so these fees are rare and can be removed.
However, depending upon volume, most fuel card programs offer a rebate, a portion of the "interchange" the card provider receives from merchants, and this is very much negotiable. Since fleet fuel volume can be substantial, well into the seven or eight figures, even a small increase in the rebate can provide tens, even hundreds of thousands of dollars to the fleet.
Many other fleet services — such as registration renewal, ticket payment, even a fleet desk where drivers may call the provider with simple questions and authorizations — result in additional fees, and all can be negotiated.
Deciding to Bundle or Stay Unbundled
There is one important item all fleet managers need to remember: When engaging lessors in master lease agreement negotiations, all pricing contained therein is based on how many programs will be purchased.
In a fully bundled program, the lessor prices all programs assuming that the customer will be using all the services. If the fleet manager decides to unbundle one or more of the programs, the lessor is perfectly justified in wanting to adjust other pricing accordingly. For example, losing income from the maintenance management program upsets their entire pricing model. Buying a sofa, love seat, and chair separately will usually cost more than buying the entire living room set, and the fleet industry is no different.
Another important thing to remember is that, just like any company, a fleet supplier is entitled to make a profit on the programs and services it offers. Demanding the elimination of or unrealistic reductions in fees, or huge rebates from volume, will get a fleet manager exactly what it paid for — excellent service, world class technology, and innovative programs all cost money, and fleet managers should focus on value, not just cost.
The most important tool any fleet manager can possess when entering into a master lease agreement negotiation is a full knowledge and understanding of the market. Know what suppliers are offering fleets of like size and makeup. Learn what the sources of income are for these programs, i.e., funding costs, vehicle acquisition costs, fuel card interchanges, and administrative fees, and focus on what value will be received at various pricing levels. Master fleet leasing agreements can govern much or all of what a fleet does, how vehicles are acquired, maintained, fixed if they're damaged, fueled, and sold. If a fleet manager is well armed going in, the agreement will be a win/win for both them and their supplier.