By Ross Moody, IPWEA National Executive Officer
When it comes to funding plant and vehicle replacement, there’s nothing like a healthy reserve fund to help a fleet manager sleep peacefully at night.
Those who rely solely on annual budget allocations may well have nightmares – especially when times are tough!
That’s because even though fleets play a key role in every council’s primary mission, a sleek new vehicle with all its perceived bells and whistles, is often viewed by those who dole out the cash as a discretionary expense which can be deferred for year, or perhaps even longer. 
And as any fleet manager knows, the rot can set in seriously when a vehicle is forced to work beyond its optimal replacement date. Maintenance costs can rise, efficiency can dive and downtime can start causing frustration.
So make no mistake, a replacement reserve fund will trump capital budget allocation in practically every instance.
But the key is to make sure that your replacement reserve fund is run super efficiently.
In that respect it’s paramount that your internal charge rates are properly calculated and applied to ensure you are constantly accumulating sufficient funds to pay for replacement units as and when they reach the end of their useful lives.
And don’t forget to factor major maintenance into your reserve fund as well – otherwise you may tear your hair out down the track!
Establishing internal hire rates
To ensure your internal hire rates generate sufficient funds to afford replacements, it is critical to establish whole of life costs right at the outset.
The elements of whole of life costs include purchase price, resale value, opportunity costs, fuel, repairs, maintenance, insurance, oil, registration, and administration costs.
When establishing whole of life costs, budget items need to be allocated directly to either operational or capital expenditure.
Operational expenditure
Operational costs (both fixed and variable) such as fuel, repairs, maintenance, insurance, oil, registration, and administration are added for each vehicle. The total cost is then divided by the timesheet hours if recovery of the annual operational cost is required.
Capital Expenditure
Annual replacement provision is actual depreciation (i.e. the purchase cost, less anticipated residual, divided by the projected years of ownership) plus opportunity cost.
The sum of these items is then again divided by the timesheet hours, or annualised, to identify an annual replacement provision.
The annual operational costs, plus the annual replacement provision, divided by the anticipated timesheet hours where applicable, allows for an accurate internal hire rate. These hire rates can then be applied to operator timesheet hours or used just as an annual charge out rate, to recover operational costs and also to develop a suitable plant replacement fund.
Fleet maintenance costs should also be recovered from internal plant hire charges, which form part of the fleet management budget.
Also, bear in mind that hire charges should be adjusted annually to meet expected expenditure levels in the forthcoming year.
The other option: operating leases
Leasing is an option available to reduce the capital required to fund the plant replacement program.
Lease payments are funded through operations as a direct cost to departments.
There are two types of operating lease available to fund plant, namely a fully maintained operating lease or one without maintenance.
A fully maintained operating lease includes all servicing in the cost of the lease payments. The finance company or supplier takes the risk on the residual value of the item and the buyer therefore pays for the risk.
The choice of whether to take a fully maintained operating lease or a non-maintenance lease will depend on the ability of the maintenance service provider (internal or external) to maintain the vehicle to the manufacturer’s requirements.
All leases are tied to a period of ownership and budgeted utilisation for the vehicle.
If the vehicle doesn’t achieve its targeted utilisation within the period of ownership, the forfeited utilisation represents a ‘lost opportunity’ to the organisation. Conversely, the organisation stands to attract additional costs if the budgeted utilisation is exceeded.
A fully maintained operating lease can provide a competitive alternative to ownership, but only provided utilisation of the item is predictable. If utilisation is not predictable and exceeds the agreement, there are likely to be cost penalties. By the same token, under-utilisation is likely to incur unnecessary overpayment.
A fully maintained operating lease for light vehicles presents greater challenges because there is a potential for vehicle users to change their roles and exceed the agreed maximum mileage limits. So to avoid the risk of penalties, strict monitoring is required.
Those fleet units best suited to leasing are high capital cost items with known utilisation rates, such as road sweepers, graders and loaders
The recommended practice when calling tenders for leasing items of heavy plant/vehicles is to specify that tenderers include the purchase price for the item to enable a comparison of lease versus buy.