Procuring car lease contracts: mind your numbers

Procuring car lease contracts looks simple. Compare some lease rates, pick the cheapest and sign the agreement. How hard can it be? Not that simple, in any case: there are snakes in the grass, and sometimes you need to take care not to fall into a snake pit altogether.

First things first: fleet costs are determined by many factors. Your mobility policy, vehicle deployment (durations, fuel types), the quality and quantity of fleet administration and driver behaviour all play a major role. Focusing on procurement is good, but do not forget the other factors.

Leasing companies offer various contract forms: open calculation, closed calculation, financial lease, management contracts. Without going into every form in detail, there is one key distinction: risk. If you choose anything other than closed calculation, the operating risk ends up with you as the client, one way or another. Disappointing residual values, maintenance costs or extreme tyre wear are then for your account.

With financial lease you pay those costs directly; with a management contract they are passed on through the leasing company; with open calculation you pay them upfront through a higher lease rate. The underlying drawback of a management contract or open calculation: the leasing company manages your wallet and has no direct interest in the lowest costs. Shift the risks to the leasing company, and the direct interest in high residual values and low maintenance costs sits exactly where it should.

The number of leasing companies you contract matters too. Choosing one leasing company means relative peace of mind: one counterparty, one invoice, one quotation per order. Financially it is less restful, because the leasing company has no incentive to keep its prices sharp. Every new order carries the risk of a price increase.

Consider working with two leasing companies instead: for every new order you compare two quotations and order from the cheapest. This keeps the saw sharp and lets you benefit from the price difference that always exists between two leasing companies.

There are many ways to save on fleet costs. Ask the leasing company and they will point to opportunities outside the lease rate: durations, energy labels, driver behaviour. All correct, but of all savings opportunities, the potential on the lease rate itself is usually the largest.

If you tender, draw up a complete tender document. Specify what you do and do not want, which components must be included in the rate and which services you expect. Give the leasing company as much input as possible for an offer that fits your situation. Remember that a leasing company can only spend its euro once: ask for conditions that are relevant to you. High staff turnover? Ask for an arrangement to return cars at a low rate. Working with annual contracts? Ask for a favourable pre-lease rate.

Compare rates with a basket

To gauge each leasing company's price level, have them quote a 'basket' of cars, preferably cars that fit your fleet. This shows the average rate per company and whether it pays to have two companies compete. Request the quotations with insight into the calculation (which is different from 'open calculation'): that reveals the individual price components.

Specify services upfront

Also state clearly in the tender what you expect beyond the lease components. Should the leasing company assist your drivers with ordering? Do you want digital invoicing? Which reports do you expect? Should the leasing company manage surplus cars? Specify it upfront so no ambiguity arises later.

Compare at detail level

Once the quotations are in, compare them at detail level and negotiate with the parties quoting the lowest average rate. Negotiating per component produces a rate with low fixed components (such as management fee and interest). The variable components (residual value and maintenance) stay sharp by having them calculated under competition every time.

So far this resembles normal procurement: specify well, dissect the rate and negotiate. Not much different from buying office chairs and stationery. The big difference is price stability. A lease price is quoted for a given duration and annual mileage; if the mileage changes, the price changes too. Small differences are settled through excess and unused kilometres, but for larger deviations (the threshold is usually as low as 10%) a revised lease rate follows.

That 10% threshold is reached quickly: a car driving 23,000 kilometres instead of 20,000 can already trigger a recalculation. How the rate changes is usually unknown and is set unilaterally by the leasing company. Here lies one of the leasing companies' biggest margin makers. Knowing that more than 80% of all contracts are adjusted sooner or later, you understand why lease rates can sometimes be priced so aggressively: the chance that the headline rate survives is remarkably small.

Most clients unknowingly sign a blank cheque when they sign a lease contract.

Margin increases through recalculation can never be ruled out entirely, but they can largely be prevented and managed:

When you enter a framework agreement, you will mostly read what your obligations are as a client. Logical: it concerns lending out valuable objects, so the leasing company excludes as many risks as possible. It is advisable, however, to also record your rights, in other words the leasing company's obligations. The usual place is a Service and Price Level Agreement: which services have been agreed, how the price components are constructed, under which conditions recalculation takes place, and what and how the leasing company reports to you.

Operationally it is also wise to record basic agreements. How does the ordering process work? Which data does a fleet overview contain? What does the leasing company deliver to payroll? You will be tied to each other for some time, so express and record mutual expectations upfront: the more concrete the agreement, the smoother the cooperation.

Whether you place the insurance with the leasing company or with your own insurer: make agreements about price changes here too. Insurers (or leasing companies) often raise premiums every year. If your fleet has a favourable claims record, an agreement on the premium-to-claims ratio is worthwhile, also known as a PSV arrangement: premiums may only rise if claims exceed an agreed percentage of the premium, and fall when claims form a smaller share. This keeps the ratio between claims and premium healthy and gives you a direct interest in reducing claims.

With external insurance, make sure the book value is covered in case of total loss or theft, not the trade value; that prevents unexpected charges. When comparing the leasing company's premiums with your own insurer's, ask whether a surcharge on the lease rate applies for external insurance and include it in the comparison.

There are more ways to lower fleet costs through the procurement function; the purchasing of cars, fuel and hardware often holds significant savings too. A proper inventory of the savings opportunities regularly reveals surprisingly large amounts, and the time you invest pays itself back many times over.

Molthoff Fleetmanagement acts as the subject-matter expert in tenders: from tender document and basket comparison to negotiation and Service and Price Level Agreements. After procurement, Price Monitor safeguards through quarterly checks that the agreed rates and conditions actually stay sharp, precisely when recalculations occur.