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Getting Down to Terms
Page 127
Page 128
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IN past weeks in this series conditions under which the provision of commercial vehicles on contract hire could be advantageous have been considered. Particularly where ancillary users and many municipal fleets are conzerned, by definition, such operators' main preoccupation is of prime importance. For that reason it should receive priority in both capital outlay and administrative organization. If an ancillary fleet of commercial vehicles is operated, however, the inherent urgency of transport can .tasily result in a reversal of priorities unless positive action is taken to prevent this. But even when that is avoided ancillary operators invariably must be more experienced in their own business than that of running transport. However, an exception would apply where the transport department was large enough to justify the employment of a manager and possibly other personnel specializing in such work.
When the possibility of obtaining.vehicles on contract Lure is under consideration the addition of overhead costs and profit margin which the contract hire specialists will add to his own operating costs (as compared with the :..laimed cost of running an ancillary fleet) may well appear a major disadvantage of such an arrangement.
The difference between the charges submitted by a con:ract hire specialist and the operating costs which the ancillary operator thinks he is already incurring (or which le estimates would be the cost if he is not already running a fleet) must obviously vary in individual cases. But the followingcomments generally would be applicable. Many of the organizations providing commercial vehicles on contract hire are relatively large. Some of those set up primarily for that purpose may have fleets of several hundred on hire to a wide range of customers. Alternatively they may be associated with the manufacturers of particular makes of vehicles or with the distributors or agents. In all cases they would therefore be in a much better position than the small ancillary user as regards the discount they could obtain on prices of both vehicles and all equipment used on their maintenance.
Likewise, because of the size of fleets operated and their close contacts with manufacturers or agents, they should be able to achieve a much higher utilization of expensive though essential maintenance equipment and stores, including, of course, the premises in which such work is undertaken. Because they are specialists in vehicles and their maintenance, as distinct from the use of such vehicles, they should be able to achieve that even flow of work which is essential to efficiencv and economy.
This would be in marked contrast to the conditions often applying with a small ancillary fleet, when even if the experience is available which is not always the case, the very ratio of skilled personnel to both the number and availability (for maintenance) of vehicles prohibits the achieving of anything approaching an acceptable standard of efficiency.
Mistaken Ideas on Costs
Regarding the ancillary operator's own costs I purposely referred to the cost which the operator " thinks " he is incurring. It is by no means uncommon to find that an otherwise efficient company has mistaken ideas as to the real cost of running its fleet of vehicles. Either no proper costings are kept at all or, where an attempt is made, the claimed economy of operation is actually the result of omission rather than efficiency. To this end it is essential for such operators, when considering the opportunities of contract hire, to check whether, in fact, they have included all the actual costs in their claimed total expenditure.
Beginning with standing costs these consist of five items: licences, wages, rent and rates, insurance and interest. Similarly, there are five items of running costs consisting of fuel, lubricants. tyres, maintenance and depreciation (assuming that depreciation is being calculated on a mileage basis).
Even where records are kept of the operation of an ancillary fleet, at least two items of standing costs and a further two of running costs are likely to be underestimated or omitted altogether from the claimed total expenditure.. Thus the garaging of ancillary vehicles is often done in buildings forming part of the main premises of the operator and for which it is not considered worthwhile to make a specific charge. Such a position may well be allowed to continue until the need for expansion in the main line of business transfers such premises from latent value to real value. Admittedly, however, there will be many contract hire arrangements where the customer will garage the
vehicles obtained on hire in his own premises so that this factor would not apply.
Similarly, some ancillary users do not trouble to charge separately the interest on the capital outlay incurred on commercial vehicles from such expenditure on the rest of the business. Where this does apply the main business is providing a hidden subsidy to the transport department.
Maintenance is one of the 10 items of operating costs which is likely to give most trouble when the initial estimates are being prepared. Subsequent operating experience may well show just how much this item had been underestimated. But even where that does not occur, if the premises in which such maintenance is being undertaken are not allowed for in the total costing then once again there is an element of cross-subsidization.
Even for experienced operators of large fleets one of the most difficult problems to resolve is determining the right replacement policy, stemming largely from the most economic life of a vehicle. Only with the assistance of accurate and comprehensive records over an appreciable period and sufficiently large sample of vehicles to iron out the exceptional, can the right decisions be made. For the small operator with perhaps only two or three vehicles and correspondingly limited experience, the size of the last repair bill rather than a balanced judgment is more likely to be the criteria. In such an event, whether the operator changes too soon or too late he must inevitably lose on the deal. But, pertinent to the comparison of contract hire charges and so-called operator's costs, such loss would seldom if ever be revealed in the limited costings maintained by many ancillary users.
Manner and Period As stated previously in this series the effect of the carrier's licensing procedure does influence the manner and period of hiring commercial vehicles. In contrast with general haulage which may be hired per consignment, per mile, per hour or some similar arrangement, contract hire implies the exclusive use for a relatively tong period. In the case of a vehicle hired on a Contract A arrangement the statutory minimum period would be 12 months. Whilst this condition does not apply to a vehicle supplied under a C-hiring arrangement (with the customer providing the driver) the economics of so providing a vehicle, often painted in the customer's own livery, dictates that the period of hire must be of sufficient duration, to make it an economic proposition.
Because of this major distinction between shortand long-term hire it is important for both parties entering into a long-term hiring arrangement to draw up a mutually agreed form of contract. Admittedly a considerable volume of freight is moved daily by road to the satisfaction of both haulier and customer solely on the basis of verbal instruction and agreement over a telephone. In the vast majority of cases subsequent confirmation by the issue of appropriate notes is virtually a formality presenting no difficulties to either party. Indeed, one of the important assets of road transport is the ability to give spot quotations and accept urgent instructions immediately or at short notice.
Nevertheless, if in providing such an immediate service a haulier makes an error of judgment in the pricing and acceptance of a particular consignment, he is at least limited in the extent of his loss which can be rectified should the need for similar quotation subsequently arise.
A very different set of circumstances, however, would apply for both hirer and customer after an agreement was entered into for a comparatively long period. Any errors would be accumulative and would persist throughout the length of the contract. It is therefore imperative for both parties to consider and agree in detail not only on the
a54 charge to be arranged for the hire of a vehicle, but Ms( as to the conditions which would apply in the event o several circumstances which could arise in the subsequen operation of the vehicles.
But whilst there is this greater need for both parties it a contract hire arrangement to be in mutual agreement a to the precise service being provided, under what condition and at what price, the fact that it is an individual arrange ment between two parties allows it to be "tailor made ' to their precise requirements. This is in contrast, of course to general haulage where in the majority of cases the con signee benefits from the consolidation of loads at thl expense of some compromise in delivery times.
Difference in Charges For this reason, although the overall form of a contrac hire agreement may be similar, there may be substantia differences in the requirements of individual customers Accordingly the amount of charges and the number o items making up such charges could vary substantially.
Exemplifying such differences the small shop in the loca High Street might find difficulty in garaging the vehicle ii the immediate vicinity and as a result it might be house( in the hirer's premises. In other cases the revehe woulc apply with obvious effect on costs and charges.
Additionally, where the customer did in fact garage till hired vehicle on his own premises, the distance from du contract hirer might be such as to make it uneconomical ti return daily for refuelling or even, in some cases, for mino servicing. Here again costs would have to be acljuste( accordingly and the accepted practice embodied in tho conditions of the contract.
Similarly, dependent upon the type of trade in whicl the customer was engaged, the exclusiveness of a particula livery and the extent of specialized body work would agaii be reflected in ultimate costs and charges.
As with all forms of agreement having legal implication the basic advice remains valid: that is, consult a solicitor However, next week, comment will be made on the severa eventualities which could arise, provision for which shoulâ– be embodied in the conditions of a contract hire agreement