The Percentage Method of QUOTING FOR HIRE
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Pitfalls in Contract Work can be Avoided by Checking Carefully the Terms of Agreement and Making a Proper .Assessment of Costs RECENT references to a method of assessing rates for long-term contracts of haulage in the articles on time and mileage charges have invoked comments and queries on the subject or contract A licences.
The first came from a haulier in Peterborough who directed my attention to a circular letter which had been sent to him by the eastern area secretary of the Road Haulage Association, Mr. G. W. Irwin. The circular commenced by drawing attention to a new departure in recent issues of " Applications and Decisions" in that applications for some contract A licences are now being published. The circular proceeded to suggest that many members may wonder why some such applications are granted without publication whilst others are published and are apparently open to objection and to listing for hearing at a public inquiry.
The answer is that applicants for contract A licences have to satisfy the Licensing Authority that the vehicle will be used exclusively for the purpose of a contract entered into with another party for a period of at least 12 months. If the terms of the contract be such that there is no assurance of reasbnahly continuous work at remunera tive rates, there will be a strong temptation for the haulier to use the vehicle on work outside the contract when there is little or no work under the contract. Alternatively, if the vehicle be used only for work under the 'contract, long slack periods must eventually result in substantial loss or the bankruptcy of the haulier.
The evidence most likely to satisfy the Licensing Authority will be the production of a properly drawn up contract containing clauses setting out the financial terms, including guarantees of reasonably continuous employment, or appropriate amounts to cover the haulier's standing costs in case of idle time. Alternatively, there can be provision for an overall minimum payment per month or year. or a minimum overall tonnage or number of hours hire. Failing the production of such an agreement, the applicant must expect that his application will be published.
Representations on Applications
Actually, the objection procedure is not appropriate to applications for contract A licences, hut any haulier who desires to intervene in such an application can make representations to the Licensing Authority by letter, and, if and when the applicant be called to a public inquiry, may ' possibly be heard on the matter.
The circular concluded by recommending members of the R.H.A. who propose to apply for contract A licences that it is in their own interest to consult the Association first. Contracts in terms which are acceptable to the Licensing Authority can be drawn up in the area office as a normal service to members, and where such applications are made through the Association there is little or no delay in obtaining the grant, it is stated.
Most hauliers will recall the perturbation which arose last December when the South Wales Licensing Authority refused to grant a contract A licence. Many members of the industry thought that the Authority had gone beyond its powers in this matter and that it had no right to refuse. Some of them recalled what happened in 1937 when the Metropolitan Licensing Authority took the same course and had its decision reversed on appeal. This seemed to confirm their view that the Licensing Authority was wrong in refusing this licence. This time, however, 1114 they were confounded, for the Appeal Tribunal supported the South Wales Licensing Authority. .
Hauliers in general viewed the final decision with mixed feelings. The majority, I think, was rather pleased. There had for a long time been a feeling, to some extent justified, that many contract A licences had been obtained with the idea of using them as cloaks to cover ordinary haulage work in no way connected with that implied in the licence. In other words, many who applied for contract licences did so because they could see no other way of obtaining a licence to operate, knowing full well that art application for an A or B licence would fail. By obtaining a contract A licence they could find initial work for a vehicle and 'supplement it by obtaining traffic from other sources.
I do not entirely share that opinion. My view was rather that of the many contract A licences obtained, a considerable number was subject to Uneconomic conditions. The licensee obtained his licence in all good faith, only to discover later that there was insufficient work obtainable from the person with whom he had contracted to make operation of his vehicle profitable. Having an idle vehicle in his garage, he found himself unable to resist the temptation to take on other work when-the opportunity arose.
Unprofitable .Contracts I receive many inquiries from operators who ask for advice in quoting for contracts, the terms of which are clearly not such as to be profitable for the operator. Sometimes it is clear to me that the revenue obtainable will not pay his expenses. T do not merely mean that the rate suggested for the contract as,put to me is unfair or even uneconomical as it stands. The.conditions are such that, at any practicable rate, the operator is bound to lose because there is not enough work available, at the rate charged, during the period of contract to bring in the total annual revenue which the inquirer clearly expects will accrue. In this connection it should be borne in mind, as stated in Mr. Irwin's circular, that the minimum period of a contract which will suffice to justify an application for a contract A licence is one year.
Contracts with municipal authorities are rarely suitable subjects for contract A licences. They seldom offer certain prospects of regular profitable employment. Contracts for the haulage of agricultural products are also suspect. More often than not they are seasonal in character so that out of season the operator's vehicle is idle. Tonnage contracts with no agreement fixing the minimum tonnage and mileage contracts similarly lacking any stipulated minimum are also unsuitable.
A common failing of such contracts is that it is unlikely that work will be found for the operator's vehicles throughout the year. If, therefore, hauliers take out contract licences and are honest in their attitude towards those licences—that is if they steadfastly refrain from using the vehicles concerned for any work outside the contract—they must know it is extremely likely that the number of idle days or weeks in the year will entirely offset any profit which they would otherwise make from the contract itself.
The Licensing Authority, in refusing to grant licensees under these conditions is actually protecting the haulier. But, after all, the essence of any contract is the written word. Some form of contract must be drawn up for presentation with the application to the Licensing Authority. Therein lies the safeguard for the operator. If the contract be so .drawn as to protect the operator against the effect of fluctuations in volume Of traffic, he will have nothing to fear either in respect of financial loss or of having his application put up for public inquiry.
There are several ways in which this can be done. One, as suggested by Mr. Irwin, is open to members of the R.H,A. who may communicate with their area secretary and ask for his guidance and help. I believe that there is a standard form of contract drawn up by the R.H.A. which, if it does not fit every case, at least provides the essential safeguards. Also the haulier can refer to the article which I wrote on April 1 of this year, wherein I set out in considerable detail all the various clauses which, in my opinion, are essential. The agreement should contain a schedule embodying the following points: (a) Description of vehicle or vehicles; (6) price at which the vehicle is to be hired; (c) contracted annual mileage or tonnage; (d) excess charges per mile and/or per hour, per week beyond the stipulated mileages and hours; (e) current prices of fuel, tyres, standard rates of wages, overtime rates and payment for work on Sundays and holidays.
It should be noted that the schedule provides for the statement of the price to be paid and refers also to annual mileage or tonnage. The operator who enters into a contract of this kind must see to it that the payment is per annum, and not subject to another deduction arising from the fact that the hirer may, for any reason whatever, be unable to find work for the contractor.
The question which arose directly from the articles on time and mileage charges was: "Why do you not assess charges for contracts of haulage in the same way as the motor trade in calculating charges for repair costs by the addition of 200 per cent, on those costs ?"
My first reaction to this suggestion was that it was absurd. There are 10 items of cost involved plus that special one, establishment costs, and it seemed to me rather ridiculous to try and cover all those by a percentage on one item only, making no allowance for possible fluctuations in the others.
Second Thoughts
When, however, I gave the matter further consideration, I came to the conclusion that it was at least worthy of discussion. I recall that in the early days of basic rates for road haulage it was a practice to take the total of the 10 operating costs and add 50 per cent, to them to cover establishment costs and profit, thus arriving at the charge to be made. Comparatively recently I used to recommend the addition of 33i per cent, to those costs with the same object in view. To-day I think it might be advisable to revert to the old practice of adding 50 per cent. • I realized, too, that whereas there were in fact 10 items of operating costs they could quite reasonably be regarded as two, the standing charges and running costs, and that in that way they compare in great measure to the conditions prevailing in the motor industry in which the trader had also two items, his fixed costs, including labour, and his running costs, which are the prices he pays for the standard parts which he buys in the course of a repair job.
It should simplify explanation if I use the figures quoted in the article which appeared in " The Commercial Motor" dated December 2. They related to a five-tonner.
The standing charges were given as tax 12s. per week. wages (including insurance payments and provisions for holidays with pay) £5 12s., rent 9s., insurance 7s.. interest 6s. 6d., total 6s. 6d. The establishment charges were taken as being £3 per week, so that the total of fixed charges was £10 6s. 6d. The running costs per mile comprised petrol 1.92d„ lubricants 0.16d., tyres 0.8d., maintenance (d) 0.33d., maintenance (e) 1.22d., depreciation 1.44d., total 5.87d.
Those were the figures applicable to one of two methods which I suggested as alternative ways of calculating The charge to be made. Using the above figures and adding 20 per cent, for profit I got £12 7s. 9d. per week as the time charge and 7d. per mile for the mileage.
I then gave figures for the alternative method according to which depreciation and maintenance (d) are brought into the standing charges which then became: tax-12s., wages £5 12s.; rent 9s, insurance is., interest-6s; 6d., difituMatiotrEl t s. 10d.; maintenance 6s. 8d., total £92s. With establishment charges at £3 as before the total for fixed cost became £12 2s.
The running costs according to this new method comprised only petrol 1.92d per mile, lubricants 0.16d., tyres 0.8d.. maintenance (e) .1.22d., total 4.1d. Adding 20 per cent. profit as before I got for the time charge £14 10s. and for the mileage 4.9d.
On the basis of a 480-mile week I came to the conclusion that the charge according to the first method should be £26 7s. 9d. and for the second £24 65,
The Method in Practice
Now let us apply this new suggested method. The item for wages is £5 12s. and if that be subjected to an addition of 200 per cent. we get £16 16s. per week as the time charge. It will be sufficient, I think, if I add 15 per cent, to the mileage cost of 5.87d. which gives me a mileage charge of 60. On that basis, for a 480-mile week I should have £16 16s. plus 480 times 60., which is £13, giving a total of £29 16s. as what the operator should charge in respect of a contract for the hire of such a vehicle.
The fact that the charge arrived at in the above example appears to be somewhat excessive does not of necessity indicate that the principal involved in this system of calculating charges is incorrct. It may be that the percentage to be added to labour costs in the road haulage industry should not be so great as that in the motor trade. It is of interest to try the figures taking 150 per cent on labour costs Instead of 200 per cent. In that case the time charge would become £14, instead of £16 16s., and the total charge for a week of 480 miles is then £27.
It would therefore seem that there are possibilities in this • method of calculating rates. Intensive investigation and application to a variety of examples will, however, be necessary before judgment can be made. I-suggest that those • who are interested might consider how the theory would work out in the case of a vehicle, the operator of which demanded the services of a mate as well as a driver. I rather fancy that even if the percentage added was 150 per cent. and not 200 per cent., the rate thus calculated would be regarded by any prospective buyer as extortionate, It would at least show the operator a handsome profit, Personally I do not like the scheme. I prefer to get a little closer to actualities in assessing operating costs, establishment charges and profit; so that the operator knows to within a fraction where he is in these matters. It has one advantage-it does relieve me and the operator front the somewhat speculative business of assessing establishment costs. It does occur to me that it is possibly the difficulty of assessing establishment costs with any degree of accuracy that has brought about this rough and ready method of charges assessment which is current in the motor industry. S.T.R.