Fleet TCO Elements

Depreciation

Depreciation represents the loss in a vehicle’s value over time as it ages and is used. Key factors influencing depreciation include:

• Vehicle type – Different vehicles retain value differently. For example, electric vehicles may have lower depreciation due to rising demand, while luxury vehicles might depreciate faster.
• Resale market conditions – The health of the second-hand vehicle market can affect the residual value of vehicles.
• Usage levels – High mileage or rough usage will accelerate depreciation, reducing the resale value of the vehicle.

Depreciation is often the largest cost in TCO, making it essential to choose vehicles that retain value in your fleet’s specific use case.

Funding or Finance Cost

Fleet vehicles can be acquired through outright purchase, loans, or leasing agreements. Each option has its cost implications:

• Cash purchases involve opportunity costs, such as lost interest that could have been earned if the money was invested elsewhere,
• Loans or leases come with borrowing costs or lease payments, which should be carefully analysed to determine the best financing structure for your fleet.

An effective TCO analysis includes a comparison of these options to identify the most cost-efficient funding method.

Vehicle Maintenance

Vehicles require regular maintenance to ensure their reliability, safety, and longevity. Maintenance costs include:

• Scheduled services according to the manufacturer’s recommendations.
• Predictable wear and tear items, such as tyres, glass, and batteries.
• Unplanned repairs, which can arise due to accidents or unexpected failures.

Accurately forecasting maintenance costs is vital, particularly for fleet with diverse vehicle types. Using telematics or fleet management software can help predict maintenance needs and optimise costs.

Fuel or Mileage Costs

Fuel is one of the most variable components of TCO, it heavily depends on the following:

• Vehicle type and fuel type: Electric, hybrid and plug-in hybrid vehicles have unique fuel consumption patterns that vary significantly from conventional internal combustion engine vehicles.
• Real-world usage: Manufacturer fuel efficiency claims often differ from actual performance. Operational conditions, such as stop-and-go traffic versus motorway driving, heavily influence fuel consumption.

For organisations using the HMRC advisory fuel rates to reimburse drivers, these rates should be incorporated into TCO calculations as they directly reflect organisational fuel costs. For fleets transitioning to electric vehicles, it is important to include costs associated with charging infrastructure and electricity tariffs.

Taxation

Taxation costs depend on the vehicle type, its environmental credentials, and the funding structure. These include:

• Vehicle excise duty (VED): Traditional vehicles may attract higher VED costs compared to low-emission or zero-emission alternatives.
• Benefit-in-kind (BIK) taxes: For company cars, these can significantly influence costs, particularly with incentives available for electric and hybrid vehicles.
• Corporate tax implications: Leasing versus purchasing can have different impacts on corporate tax calculations.

Electric and low-emission vehicles often come with attractive tax benefits, making them an increasingly popular choice for fleet looking to optimise TCO.

Insurance

Insurance should be included in TCO calculations as long as it is an incremental cost. This includes:

• Per-vehicle policies: costs incurred for adding vehicles to the fleet.
• Group insurance policies: If the fleet has blanket coverage, the proportion of costs attributable to specific vehicles should be considered.

Insurance costs are influenced by the vehicle type, driver profile, and usage patterns, and can vary significantly across the fleet.

Administration

The cost of managing a fleet is often overlooked but is an important component of TCO. These costs include:

• Fleet management personnel: Salaried for fleet managers, administrators, or other staff involved in fleet operations.
• Fleet management systems: Costs for software or tools used to track, analyse, and manage fleet operations.
• Regulatory compliance: Expenses related to maintaining compliance with local laws and regulations, such as audits and certifications.

Modern fleet management tools can help to reduce administrative costs by automating processes such as maintenance scheduling, fuel tracking, and compliance reporting.

How to Calculate TCO

Calculating TCO requires summing up all of the above elements over a defined period, typically the expected lifecycle of the vehicle in the fleet. Here’s a step-by-step guide:

1. Identify all costs elements as outlined above, ensuring that nothing is overlooked.
2. Use real-world data whenever possible. For example, use actual fuel usage data or maintenance records instead of relying solely on manufacturer estimates,
3. Factor in time value of money: Future costs such as maintenance or resale value should be adjusted using an appropriate discount rate.
4. Compare options: Run TCO calculations for different vehicle models, funding methods, or operational scenarios to identify the best choices.
5. Review regularly: Fleet dynamics and market conditions change, so periodically revisit TCO calculations to ensure that they remain accurate and relevant.

By adopting a detailed and systematic approach to TCO, fleet managers can make well-informed decisions, align their strategies with business objectives, and drive long-term value.

At EVP Solutions, we can help you formulate an effective policy based on fleet total cost of ownership criteria.

If you would like some assistance with your vehicle selections then please contact us or look at our fleet case studies.