2018 Vehicle Cost Trends and Your Business
It’s well-known that economic forces have a direct impact on businesses. In fact, for businesses with mobile workers, the 2018 Vehicle Capital Costs Trend Report forecasts significant changes for this year’s automotive landscape. So, what does that mean for these companies?
It truly depends on the type of business vehicle program. From company-provided cars to flat allowances and fixed and variable rate programs, we’ll break down what impact the trends of increasing depreciation, new vehicle prices and residual value have on vehicle programs and questions companies with mobile workers should be asking themselves in the coming months.
Here’s a breakdown of how each type of vehicle program will be impacted:
With company-provided cars, this type of program supports mobile workforce with a fleet of vehicles, leased or owned, and will be most impacted by the recent trends in vehicle costs. Everyone knows that as soon as a new car hits the road, it drops in value. The residual value of a vehicle is projected to drop even lower. The cost structure of a vehicle lease is based on the cost up front and the value when it’s returned. To account for the drop in residual value, leasing costs will likely rise. In a best-case scenario, companies return leased vehicles with high residual value at a slight decrease to their original price. Over the coming years that gap will only widen.
If a company owns the vehicles outright, it’s a similar situation because the depreciation of vehicles directly impacts the residual value. The time on the road, wear on the vehicle and even stains on the seat add up. As depreciation increases, company-provided cars are losing value more rapidly than in recent years. Add in the fact that new vehicle prices are only rising, and fleet turnaround becomes even harder to manage. Rising associated costs aren’t making this easier either. Similar to returning leased vehicles that decreased in residual value, replacing an entire fleet of vehicles won’t present any advantages for businesses with mobile workers.
As companies cover the cost of fuel, they also pay for things like scratches, fender-benders and any other damage to their fleet vehicles. As the market would have it, gas prices and repair costs are on the rise. But gas and traditional repairs aren’t the only rising costs. With the rate of accidents on the rise, automotive companies are advancing their driver safety features. From adding cameras and sensors to improved safety belts, as life-saving measures have improved, the price to fix and replace them has also increased. Employees may view these fleet vehicles as a benefit, but they will only become a greater burden in years to come.
Questions to ask:
Is the investment worth the loss?
With all the fleet-related headaches a company has to account for, it might be worth reflecting on the value of a company-provided car program.
Flat allowance programs
For companies with a flat allowance program, their mobile workers drive their personally-owned cars. Generally, everyone in the mobile workforce receives the same flat amount. It’s certainly an easy way to pay someone for the use of their personal vehicle, but it also raises a number of questions about fairness.
Questions to ask:
Is the amount your mobile workers receive enough to pay for gas and depreciation?
The longer an employee stays at the company, the more their vehicle’s depreciation grows. Consider the amount they generally receive, and the tax they’ll be paying on that amount.
Are your mobile workers receiving enough based on where they live?
Geography can have a large impact on the residual cost of a vehicle and the cost of purchasing a vehicle. For example, some regions have higher vehicle registration costs and taxes, insurance rates and certain climates are harder on vehicles than others.
Are flat allowance costs predictable?
It’s easy to manage a flat allowance program, but predictable costs come at the expense of accuracy. Given the fluctuation in vehicle costs (things like residual value, gas prices and repairs) predictable costs are a lot less predictable.
Mileage reimbursement programs
As with flat allowance, with mileage reimbursement programs, mobile workers drive their own vehicles for business. But unlike flat allowances, mobile workers are reimbursed with a cents-per-mile rate for the business use of their vehicle. If the mileage reimbursement program includes IRS-compliant mileage logs and reimburses at or below 54.5 cents per mile (the 2018 IRS Safe Harbor Rate), then it’s not taxed. However, sometimes these programs fail to account for fairness and accuracy.
Questions to ask:
Is the reimbursement rate fair to the company and its employees?
There are many ways to reimburse mileage, but cents-per-mile reimbursement rates sometimes result in mobile workers getting over reimbursed for their mileage. On the other hand, depending on where and how far they drive, some mobile workers might not be reimbursed enough.
Does the reimbursement rate account for where someone drives?
Simply put, Texas doesn’t have the same gas prices as Maine. Some states and even cities that neighbor each other have noticeable differences in things like gas prices. A cents-per-mile program is only equitable when mobile workers in different areas receive reimbursements that account for these changes. Even so, these programs rarely account for depreciation’s impact on mobile workers’ personally-owned vehicles.
Fixed and Variable Rate (FAVR) reimbursement programs
The Fixed and Variable Rate (FAVR) reimbursement program gives mobile workers the freedom to drive their own vehicles for business. Unlike the other two type of programs, it reimburses a personalized rate for each employee and accounts for depreciation. The result? Fair and accurate reimbursements for every mobile worker. With a mileage reimbursement program that accounts for an individual’s specific costs of driving for work, it’s simple and accurate for both the employee and the company.
Questions to ask:
What about the total cost of ownership for my employees?
More encompassing than other programs, personalized mileage reimbursement rates account for the total cost of ownership.
Does it require changes to the reimbursement process?
With a Fixed and Variable (FAVR) reimbursement program, companies personalize reimbursement rates for each mobile worker, specific to their location and their costs.
Dealing with increasing vehicle cost
While every company will be impacted by the forecasted vehicle trends, companies with certain programs will be impacted more than others. If your business administers a fleet, flat allowance or cents-per-mile rate program, answer these important questions to learn how you can adapt your vehicle program to address emerging vehicle market trends.