Switching van funding methods

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Changing the way you fund your vans can lead to significant savings, as these two companies show. Ben Rooth reports. 

Switching from outright purchase to contract hire

Over the past six months, Duncan MacBain has started funding his company’s vehicles through contract hire with Ogilvie Fleet instead of purchasing them outright.

“I wanted a fleet of more reliable vans that would appeal to new and existing employees while also presenting the right image to our customers,” he says.

“We’re also saving on large upfront capital outlays on purchasing the vehicles outright at a time when we’re expanding rapidly.

“We currently operate a fleet of 70 vans and it’s projected that we’ll be operating 100 vans within 18 months – all of them hired.”
MacBain founded Hydraquip Group in 1989 and today the multi-million pound business consists of two independent companies – Hyrdaquip Hose and Hydraulics as well as the Hydraquip Braided Hose Division.
All the group’s vans possess fully-equipped workshops which are capable of manufacturing hydraulic hoses – among other kinds – on-site to meet the needs of customers operating across many different sectors.
The average price of purchasing one of Hydraquip Group’s  Mercedes-Benz Sprinter vans was previously around £22,000, while the costs associated with installing racking and on-board workshop equipment were £10,000.

MacBain had bought vans outright since establishing the company and previously ran them until they reached the end of their useful life.

He realised the potential benefits of switching to contract hire after deciding to expand Hydraquip’s 24-hour service by adding a fleet of fully-equipped Mercedes-Benz Sprinter vans previously operated by a collapsed rival in February last year.

He says: “I was getting fed-up with increasingly large and unpredictable maintenance bills for our fleet of owned vehicles and then we acquired a fleet of 16 new vans on a lease from Ogilvie Fleet, which also provided a fleet management service.

“This was a light-bulb moment for me. The benefits are fixed monthly costs, reduced maintenance bills and improved vehicle downtime.”

The collapse of a rival company last summer led to a decision to take in its fleet of 20 Volkswagen Crafter vans, which were also leased from Ogilvie Fleet.

Today, Hydraquip Group has 58 vans – 38 Sprinters and 20 Volkswagen Crafters – on lease from Ogilvie Fleet.

In recent months, the company has identified that Sprinters best meet its needs and a further 12 of these vans are currently on order to replace older vehicles that are currently owned.

MacBain anticipates that when current renewal or replacement cycles conclude, Hydraquip’s entire fleet will consist of Mercedes-Benz Sprinter 313 CDI hi-roof models operated on three-year/120,000-mile replacement cycles.

Each vehicle is fitted with racking and storage solutions by Bott.

MacBain says: “One of the things that impressed me about Ogilvie Fleet was that it operates a pooled mileage arrangement across the van fleet to limit the risk of penalty charges for breaking contracted mileage parameters.

“Furthermore, a comprehensive suite of driver and fleet decision-maker online tools are now available to us through the MiFleet dashboard.

“This offering impressed us and caused us to stick with Ogilvie.”

The van fleet has continued working highly efficiently since he took the decision to switch to contract hire in June last year and he has yet to encounter any challenges with this decision.

He adds: “My advice to anyone considering switching to contract hire is to examine the costs closely in the first place and take reassurance from the fact that they are fixed monthly costs.

“Also consider the many intangible benefits that could result.

“Apart from avoiding the downtime that occurs with older vans, employees like having new vehicles and this helps with staff retention.

“And for any rapidly-growing business like ours, contract hire also means that you can ensure your cash reserves remain strong, which is always a bonus in business.”

Switching from contract hire to outright purchase

The main factor influencing Yorkshire Housing’s decision to switch from contract hire to outright purchase was the potential to make savings of £1.5 million over a five-year period.

The organisation had historically funded its van fleet through contract hire, but the arrival of an experienced fleet manager in August 2010 caused it to reassess this policy.

Stuart Wiseman quickly identified that it was possible to “get more for less money” across Yorkshire Housing’s fleet of vans which are used to carry out repair and maintenance work on 16,000 properties countywide.

Wiseman says: “My previous experience working for a large council in Yorkshire had already taught me that outright purchase can work well if you’ve got the money in place.

“But when I took up the job here, I came in with an open mind. The contract hire agreement had been in place for several years and I quickly realised that it was simply not giving us best value.”
At that point, 150 light commercial vehicles were on a three-year contract.

But Wiseman discovered that Yorkshire Housing was paying for three months more than it needed – three months upfront followed by 36 monthly payments. He subsequently calculated that by switching to outright purchase, it would be possible to save £1.5m over five years.

Consequently, since April 2012 the organisation has been purchasing all its 152 Fords outright and it now runs them for five years or 100,000 miles.

Of these, 98 are short wheelbase, low roof Transits while a further 20 are long wheelbase Transits. The remaining 34 are also Fords and consist of chassis cabs, crew cab tippers, caged tippers, Connect vans, and two Fiesta Vans.

Yorkshire Housing has purchased these vehicles through the Government Procurement Service (GPS) framework agreements since making the decision to switch in December 2011.

Wiseman has calculated that in the first full year alone, Yorkshire Housing made savings of £250,000 and this total is set to increase to £600,000 by April this year.

He adds: “The average hire and maintenance cost per van was previously £47 a month. I’ve calculated that this figure has fallen to £13.50 per vehicle since we’ve purchased them outright.
“These savings are simply down to the fact that it’s more cost-effective for us to source vans and service, maintenance and repair (SMR)  options in the way we’re now doing it.

“I initially approached our previous provider in summer 2011 and said that we wanted some terms and conditions, but when this didn’t happen, I went to our finance director with details of the projected savings from outright purchase. He reassured me that we had the cash in place.

“The change in funding for our fleet subsequently went before the departmental heads as well as the chief executive before it was taken to the board of directors. This whole process took around four months to complete and by December 2011 we’d notified our previous provider that we were phasing out the contract.”

After assessing the options available through seven different manufacturers through the GPS, Yorkshire Housing chose Ford as a result of its vehicles’ versatility, endurance and strong residual values, as well as the discounts offered.

Wiseman also highlights the fact that the manufacturer offered him reassurance that he would have back-up from the Polar Ford dealership for the vans’ SMR needs.

The only challenge arose when there was a hiatus between the delivery of Ford’s new range of Transits and the terms of previous vans under contract hire expiring. Wiseman says: “To overcome it we briefly went down the flexi-rent route for a short period – it hasn’t proved an issue.”

He adds: “My advice to anyone considering outright purchase is to ensure initially that you know precisely what your organisation needs the vehicles for and then work carefully through the costs of that option – and others.

“At that point, speak to the manufacturers directly if you’re going to buy the vans before going to the dealers and asking them for further discounts – you get the best deal that way.”

This article appeared in Fleet Van in February 2014.

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