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Planning for Profit

16th June 1961, Page 72
16th June 1961
Page 72
Page 75
Page 72, 16th June 1961 — Planning for Profit
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Which of the following most accurately describes the problem?

Who Pays for What?

Though the Basic Principles of Commercial Vehicle Costing Remain the Same, the Proportion of' Expenses Included in Contract Hire Tenders Will Vary

LAST week reference. was made in this series to some of the points to be considered by traders and industrialists when determining whether to operate their own vehicles or hire out their transport. It was emphasized that the time, responsibility and experience necessary to run a fleet of commercial vehicles efficiently and economically must not be underrated. Because of the exacting demands Made on most transport services their operation is not an undertaking to be assumed lightly, or relegated to the role of a part-time job for a junior official.

Though less common, the other extreme is also undesirable, namely a transport department of such size and relative importance within the overall organization of manufacture or retailing, that it ceases to be auxiliary to the trade or industry it was set up to serve.

Whilst. undoubtedly many C-licence fleets are run successfully by maintaining a balance between these two possible extremes, the opportunity to maintain this state of affairs is probably more readily available, particularly to the smaller user, when vehicles are hired.

Irrespective of whether goods or passengers are carried, or whether the vehicles are privately or publicly owned, there is always a functional demarcation between the engineering and traffic aspects of transport. This is most clearly seen in the largest operating companies where departments are specifically designated with these or similar terms. But even when operating only a few vehicles this demarcation of function still remains, although the respective duties may be carried out by the same personnel. This underlying principle of transport operation is one of the basic reasons for the popularity and success of operating vehicles under contract hire. That this practice is undoubtedly increasing is revealed by repeated inquiries that are received for advice on the legal and costing aspects of this type of operation. .

ONE of the advantages of contract hire is that the type of vehicle and the extent of the service provided can be adjusted to each individual customer's precise needs. It consequently follows that the amount of each tender and terms of agreement must also be particular to each contract. Nevertheless, some general guidance can be given on both these aspects of contract

hire. '

Before a haulier submits a contract for the hiring out of one or more of his vehicles, he .must obviously be fully conversant with the basic principles of commercial vehicle costing. Whatever arrangement is agreed between haulier and customer as to the extent of the service provided, the haulier should.check that all 10 items of operating costs are accounted for, irrespective of whether they are to be met by him or his customer.

At an early stage in the discussion , between haulier and prospective customer it should be determined which party is to provide the driver. In the majority of cases where small vehicles are concerned these would normally be engaged on retail delivery. As a result, the sales aspect of the driver's duties would be of special importance, and, in some instances, would involve the handling of cash. In such circumstances it would invariably be advisable for the customer to employ the driver.. In that event it would be necessary for the customer to hold a C licence, and for the vehicle supplied by the haulier to be operated under a C-hiring margin, to comply with the requirements of the Road Traffic Act.

When the hiring of larger vehicles is concerned, possibly engaged on mediumor long-distance journeys in the movement n38

of basic or semi-processed materials, it is common practice for the driver to be employed by the haulier, in which event it would be necessary fdt him to apply for a contract-A licence.

Whichever licence was appropriate, however, the overall costing of thc operation of the vehicle concerned would remain the same, although differing in the segregation of the several items. These comprise five items of standing costs, namely licences, wages, rent and rates, insurance and interest. Similarly there are five items of running costs, which are fuel, lubricants, tyres, maintenance and depreciation.

ALTHOUGH the carrier's licence must be held by either the haulier or the customer appropriate to the type of operation, it will probably be largely a matter of administrative convenience as to which party is responsible for payment of the lee. The driver's wages must be paid by the customer when the vehicle is running under his C licence, or by the haulier when it is operated under contract-A licence.

Irrespective of the type of licence, the arrangements made regarding the garaging of the vehicle will be individual to each contract and may, to some extent, be determined by the proximity of the haulier's and customer's premises.

As with other aspects of vehicle acquisition and subsequent maintenance, the haulier will probably be in a more favourable position than his customer to obtain competitive quotations for the insurance cover of a vehicle. Should the occasion arise he would, in all probability, also have more experience when dealing with claims for either damage or loss of use following an accident. For these reasons the hauliet would, in a majority of cases, be responsible for insuring the vehicle.

As a main purpose of hiring a commercial vehicle, as distinct from owning it, is to limit responsibility both financially and administratively, the fifth item of standing costs, namely interest charges on the additional outlay, would usually be met by the haulier.

The cost of fuel accounts for a substantial proportion of the total operating cost of running a vehicle, and there must obviously be no doubt by either party as to who is responsible for the payment of this item. Here again the proximity of the premises of the customer and those of the haulier may have some bearing on the matter Where the distance was considerable, the dead mileage involved, in addition to the inconvenience and loss of time spent journeying to refuel might be so disadvantageous as to offset any reduced cost per gallon by way of fleet or bulk discounts which the haulier may enjoy.

In other circumstances it might subsequently be found that, in practice, a substantial amount of paper work could be avoided by the customer being responsible for the supply of fuel, and so avoiding having to pass enumerable receipts to the haulier certifying the quantity of fuel issued to every vehicle day by day.

The next item of running costs, namely lubricants, can be considered along with maintenance relative to hired vehicles. Where it is clearly understood that the haulier is responsible for the whole of the maintenance of a vehicle inclusive of washing, servicing and all major repairs, then no problem arises as to the division of responsibility for these two items. There are, however, many circumstances where this set of conditions may not apply. When, for example, the customer's premises are some distance from those of the haulier it may be found more economical for the customer to do his own washing and greasing, leaving the more comprehensive maintenance tasks and repairs to the haulier. Just where this division was drawn would obviously be a matter for individual negotiations in each case and might well have to be adjusted in the light of subsequent practical experience. At the same time it might be found convenient to arrange for the customer to be responsible for the topping-up of engine oil and for the haulier to meet the cost of a complete oil change when other repairs were being undertaken.

In the majority of cases the cost of providing and maintaining tyres would be the haulier's responsibility; since here again he would be more favourably placed to derive benefit from fleet discounts. As with interest charges, the cost of depreciation would also be the responsibility of the haulier. Incidentally, whilst depreciation is normally calculated for the purpose of The Commercial Motor Tables of Operating Costs" on a mileage basis, it is appreciated that inclusion of this item in the standing costs might be more appropriate to some contract hire arrangements.

But whether this item is included as a standing or running cost, it should be borne in mind that the more specialized the type of vehicle required by the customer, the longer the period of hire should be. and the lower the estimate of ultimate residual value, because the resale market must inevitably be substantially restricted in such circumstances.

In addition to determining the division as between customer and haulier for responsibility for the 10 items of operating costs, the haulier would also have to assess the proportion of his own overhead or establishment costs which could be fairly set against the supply of the contract vehicle. Whilst these would obviously not be as extensive as with general haulage, since the haulier will no longer be responsible for obtaining and moving traffic, it would nevertheless be incorrect to ignore their inclusion in the total cost of supplying a vehicle on contraet by a haulier.

A further advantage of hiring commercial vehicles on contract is the enhanced possibility of providing a reliable and continuous service economically. Particularly where small users are concerned, say with four or five vehicles, it would prove

expensive to have available a spare vehicle in ,the event of breakdown. But unless this is done there will inevitably be occasions when services are disrupted because of the withdrawal of a vehicle undergoing major repairs, or possibly as the result of an accident. This could be a serious handicap to a retail distributor, for example, engaged in the sale of foodstuffs.

in many contract-hire arringements the haulier will undertake to supply a spare vehicle in the event of the unavoidable withdrawal of one of the vehicles originally specified. This provision could be of substantial benefit to the customer and the reassurance thereby given would still further limit his responsibility in the overall problem of distribution.

SUCH provisions, however, must be accounted for when preparing the estimate of cost to be tendered to the customer. and the expense of having the spare vehicle available would have to be proportioned relative to the number and size of the several contracts fott which a haulier may be responsible. In 'fairness to the haulier, however, some limit would have to be placed as to the extent and occasion on which he was expected to supply a spare vehicle, and this should be set out accordingly in the contract agreement.

Relative to the operation of vehicles under contract-A licence, the ideal method of submitting a tender would vary according to circumstances and could be set out in the form of a charge per hour, per mile or a combination of both time and mileage.

But in any event, where a vehicle has been supplied for the exclusive use of one customer, the haulier should insist on a minimum charge, irrespective of subsequent use or mileage involved, so as to ensure that his own initial expenses have at least been covered. When part or the whole of the charge is based on mileage, it should.be clearly determined at the outset whether such mileage should be calculated from the haulier's premises or those of the customer. Even where this distance is relatively small, by day to day repetition, the amount involved could be substantial over a lengthy period. S.B.

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