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What’s the Cost?

Written by Tim Dees

Anytime a law enforcement administrator is asked to make a decision on any kind of acquisition, project, program or other item that might impact the budget, the most prominent and difficult question is usually, How much will it cost? Law enforcement budgets are never fat, and there are always more demands than there are funds to meet them. The cost of maintaining a fleet of vehicles is not different, although it can’t be avoided. Unless the agency uses only foot patrols, there will be a need to purchase, maintain and replace vehicles.

The person assigned to manage that fleet is usually called on to formulate a budget that requires a degree of prognostication. The cost of fuel, the number of collisions that require repair or replacement of vehicles, and how many years the vehicles will be driven before they will need replacement are all factors that affect the bottom line and are difficult to estimate. Moreover, these are only a few of the factors that affect the total life cycle cost of a vehicle.

The National Association of Fleet Administrators (NAFA) has produced an analysis tool that helps to quantify these decisions and bring all of the relevant factors into consideration, so the fleet manager can make a far more educated and defensible prediction as to which vehicles represent the best value to the organization, and how often they should be replaced. This process is called Lifecycle Cost Analysis (LCA). The analysis tool is a series of Excel workbooks that accept the numbers supplied by the fleet manager and crunch them to provide a side-by-side comparison of all the options and their various merits.

The LCA tool is accompanied by a series of self-running, narrated PowerPoint presentations that tutor the user on how the spreadsheets work, with exercises for new users to get comfortable with the program. Using the workbooks (sometimes called spreadsheets) requires the user to have a copy of Excel running on his computer, but a PowerPoint viewer is included with the package, so a copy of PowerPoint is not needed.

Fleet costs can be divided into three categories: fixed expenses, operating expenses and incidental expenses. Fixed expenses occur even if the vehicle spends its entire life parked in the police station lot. They include the cost of managing the vehicle, installation of specialized equipment (lights, radios, sirens) and removal of that equipment when the vehicle is retired. The owner also has to license the vehicle, pay for insurance on it and account for depreciation. This last factor represents more than half of the typical cost of owning a vehicle during its service life. The vehicle loses as much as several thousand dollars the first time it is driven, as it changes status from a new to a used car. As it ages, it will continue to lose resale value, and is commonly worth less than half of its purchase price at the time the vehicle is replaced and offered for sale.

Operating expenses are the costs for operating the car. Fuel, maintenance, repairs incurred by wear and collision, oil, tires, and other costs that mount as the vehicle is driven fall into this category. The third area of expenses are incidentals, like the cost of washing the car, paying for parking and tolls, and other costs that may be considerable with some vehicles and nonexistent with others.
Another critical factor is the “cost of money.” In the simplest situation, this is the interest rate that the bank or other financing agency is going to charge the buyer for providing the money for the purchase. Many public agencies pay cash for their vehicles, and this would seem to render the interest rate factor irrelevant to the cost calculation. However, money that is paid to a vehicle dealer is no longer available for other purposes, such as investments. There can be considerable return on investment from the time tax revenues are collected until they are spent, and this is one of the costs of money.
There is also what is sometimes called opportunity costs, which refers to the loss that occurs when there is no money available for an investment or savings opportunity. For instance, a city might have the opportunity to buy gasoline in bulk for $0.20 less per gallon than usual. If there is no money available to take advantage of this bargain, the savings that would have been realized becomes an opportunity cost.

The most common factor used to make a relatively uninformed decision on vehicle purchase is the purchase price itself. When confronted with several choices of similar vehicles that are available and suitable for fleet use, it seems to be a no-brainer to choose the one that has the lowest purchase price and be done with it. LCA demonstrates why this choice is naïve. First, the factory invoice price may not represent potential savings resulting from holdback adjustments, manufacturers’ incentives, or a fleet incentive given to purchasers of multiple vehicles. These items can represent differences of thousands of dollars, multiplied by the number of vehicles under consideration for purchase or lease.

A survey conducted by NAFA found that job suitability was the biggest criteria used in choosing a vehicle, followed closely by the initial cost of the vehicle. Other factors (listed from most important to least important) were: safety record, repair record, serviceability, delivery time, depreciation and resale cost, warranty, fuel economy, country of manufacture, the image of the owner as pertains to the vehicle, ease of administration, incentive programs driver preference, insurance cost and fringe benefit value.

The LCA takes into account about half of these: the ones easier to quantify. Other values that apply equally to all vehicles under consideration for purchase, and that impact the life cycle cost, are the number of months the vehicle is expected to be in service before it is replaced, the number of miles that the vehicle will accumulate before replacement, typical mileage per month, interest rates and management fees (for organizations that outsource their fleet management), book depreciation rate, fuel cost, percentage of personal use of the vehicle, the cost of extra miles above those on the lease agreement (for leased vehicles), and the daily cost of renting a vehicle to replace one that is out of service.

Many of these are not figures that the typical fleet manager will always have ready. The LCA isn’t a process that spits out a purchase recommendation without some effort from the user, but the end result is far easier to justify than the best guess that many fleet managers use to make these decisions.

If that “book depreciation rate” term threw you, fear not. The book value of any asset is the value that it has on the books, meaning what you would be likely to realize from it if you liquidated it. A newly delivered vehicle with a purchase price of $18,000 might have a book value of $16,000, the difference attributable to the immediate depreciation that occurs when the vehicle changes status from new to used, even if it is still in pristine condition.

The book depreciation rate is the factor used to calculate the decrease in the book value for a unit of time. A book depreciation rate of one and a half percent per month might be realistic, but this is a factor best determined by negotiation between buyer and seller, since the party acquiring the vehicle at the end of its service life is going to be the one writing the check for its agreed-on value.

It’s not hard to see that any calculation involving all of these factors would be pretty complex, and applying it to multiple vehicle models for comparison purposes would inspire buying stock in an aspirin company. This is where the spreadsheet model comes in. Electronic spreadsheets, such as those created in applications like Excel and Lotus 1-2-3, can immediately recalculate any number of formulas based on changes in variables supplied by the user. It becomes pretty easy to see the effect of a $0.05 per gallon increase in the price of gasoline, or what will happen if the agency decides to keep vehicles in service for 80,000 miles instead of 70,000. The layout of the spreadsheet makes it evident how these variables affect the end costs, and for those areas that are unclear, the self-running presentation that accompanies this package explains the process thoroughly.

As an example, let’s start with a scenario where we have a fleet of 25 cars purchased new for $20,000 each, and these cars get about 15 miles per gallon of gas, which we buy for $1.65 per gallon. The cars are driven about 25,000 miles each year. How does an increase of $.05 per gallon of gas affect our fleet operating costs, and what other issues might arise from this fuel price increase? The basic spreadsheet for Optimum Replacement intervals has blanks for all of these variables, and also for the cost of recommended service intervals for various common maintenance events.

Taking the costs and intervals for service as provided by NAFA (although this might vary from one model of vehicle and region to another), the cost of operating that fleet the first year is $203,544. The calculation for this change in fuel cost, and any change in fuel cost, is as simple as entering the new cost in the appropriate cell of the spreadsheet. In this case, the nickel increase boosts the fleet expenses to $205.628.

While the most obvious benefit of using LCA to aid in making a vehicle selection is to estimate the cost of the vehicle over its entire service life (instead of using just the base price), there are other fleet management decisions that are aided and justified by the use of this tool. The total cost of personal use is calculated from the same variables that estimate life cycle cost. For agencies that issue take-home cars, this cost is immediately apparent, and can be weighed against the benefit that the agency gains in immediate response, higher visibility and improved morale.

Another problem that is addressed by the NAFA package is optimum replacement interval. Some agencies replace vehicles on a calendar and others do so when vehicles reach a certain target mileage. Conventional wisdom dictates that keeping vehicles too long costs more than early replacement, as savings in new purchase costs are eaten up in increased maintenance and down time. One of the spreadsheets included with the LCA package takes into account annual miles driven, the maximum time and mileage that a vehicle can remain in service, and the number of vehicles in the fleet, among other variables.

Also included in the calculation are typical service and repair events (safety inspections, battery and cooling system service, brake and tire replacement, etc.), the mileage interval for each as recommended by the manufacturer and the cost of each service. All of these numbers and more render the optimum replacement interval and mileage, based on the savings that will be realized by replacing vehicles at up to 10-year intervals. These estimates are shown both in tabular form and are graphed automatically as the numbers are entered into the spreadsheet.

Some seemingly small changes in policy can have a dramatic effect. Going back to the example of the 25-car fleet of $20,000 cars, if policy dictates that no vehicle will be retained after it clocks 80,000 miles, the spreadsheet shows that it costs substantially more to keep these vehicles in service than it does to buy new ones every year. With a maximum mileage accumulation of 80,000 miles, the agency saves $10, 950 by replacing the cars every year.

If they keep the vehicles for two years before replacing (when the cars would have been driven about 50,000 miles), the savings drops to $653. At three years, when the cars are approaching their maximum accrued mileage, there are no savings to the agency. However, by increasing the mileage ceiling to 100,000 miles, the optimum replacement interval changes back to one year. This sort of change is hardly intuitive, but an examination of the spreadsheet not only shows how the replacement interval was calculated and why it makes sense.

Another dramatic change occurs if the purchase price of the car changes by only 10%. Using the same example above and a replacement mileage of 100,000, but with an increase in the purchase price to $22,000, the optimum replacement interval jumps to four years. Under this model, at one year there is no savings to the agency by replacing vehicles at one year, but the savings increases at two years to $10.764 fleet-wide, and to the maximum of $26.285 at four years.

Most changes to the variables don’t produce such dramatic results, but the big advantage of this kind of tool is that it allows the fleet manager to endlessly play “what if” with all the variables in the mix, and to immediately see the results without any heavy lifting. What is the effect of a $0.10 decrease in gas prices? How much will I save if I move oil changes to an in-house operation? How much will it cost to have officers drive an extra 5,000 miles per year? By tapping a few changes into the spreadsheet, the effect of all of these factors, or of any combination of them, is immediately evident.

Two bonus spreadsheets show the cost of using gasoline v. a number of alternative fuels, and compare the cost of using fleet vehicles as opposed to paying employees for the use of their own vehicles for business. This last topic is one of considerable interest in law enforcement, as officers frequently voice their desire to have personal cars issued to them instead of driving shared pool cars. The spreadsheet that is provided in the case, unfortunately, doesn’t resolve this conflict because of the factors that it does and doesn’t consider.

When officers have cars assigned for individual use, they are not driven as often (typically not more than one shift per day), and they are usually not driven as hard, as officers will take better care of their own vehicles. The officers are more likely to see that preventive maintenance is performed at the proper times. All of these factors add up to allow the vehicle to stay in service longer, both in terms of months and miles driven, than would be the case for a comparable pool car.

The NAFA spreadsheet used to calculate the cost of providing cars v. reimbursing employees for driving their own cars seems more slanted toward work more mundane than law enforcement. The assumption in the spreadsheet is that the employee will pay more per gallon for gas, and will pay substantially more for servicing of a personal vehicle. This seems to assume that the employer will have a dedicated service crew to maintain the vehicles, and won’t be paying shop prices, where the employee will be at the mercy of the local garage.

Although all of the costs of these products and services, as well as costs of money, insurance, number of miles driven for business and personal use, are all factors necessary to resolve the pool v. take-home-car issue. Some of these, like increased visibility and improved morale, would be difficult to quantify, anyway. Maybe NAFA can work on a spreadsheet solution for this problem in Version Two.

While it has always been possible to make these estimates scientifically, given enough quality data, most fleet managers still rely on educated guesses and informal bias as to which vehicles to buy and how long to keep them. The calculations are just too complex for most people not trained in this kind of analysis. With the Life Cycle Analysis tools from NAFA, a fleet manager can not only make a scientific decision on vehicle purchase and retention policies, but also defend those decisions to their bosses who have to sign the checks. The Life Cycle Analysis package is available from NAFA for $104.00 for NAFA members and $130.00 for non-members.

Tim Dees is a former officer who writes and consults about applications of technology in law enforcement. He can be reached at (509) 585-6704 or by e-mail at tim@timdees.com.

Published in Police Fleet Manager, Jan/Feb 2002

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