What is fleet? Complete Guide to Vehicle Fleets
In this complete guide to fleet vehicles, learn everything you need to know about fleet management, cost, software and insurance; plus alternatives to and transitions off of fleet.
A fleet is a group of vehicles owned and operated by a company or organization. Fleets are useful if you need specialized vehicles like fire trucks, police cruisers, or refrigerated 18-wheelers. Companies that don’t require such unique vehicles use fleets of regular cars and vans instead. These are for employees such as sales reps, who only need basic things like transportation.
But maintaining a fleet of regular cars can be unnecessarily expensive and risky. There are alternative company vehicle programs that can be more sustainable and affordable for both businesses and employees.
We wrote this series of articles to show you what fleet is all about, so you can decide for yourself which kind of program is right for your organization.
What is a fleet vehicle?
A fleet vehicle is any vehicle that is owned and run by an organization or company. The kind of fleet vehicle used is determined by the goals of the organization and its operational requirements.
Different types of vehicles in a fleet can serve different needs:
- Specialty vehicles. These are vehicles that are built for a specific purpose. Examples include heavy-duty vehicles such as ambulances, garbage trucks, or school buses, and specially-equipped cars like police cruisers or taxi cabs. Anything with multiple axles could be classified as a specialty vehicle, or with equipment or capabilities not available to the general public.
- Medium-duty vehicles. Cargo vans, passenger vans, and pickup trucks are flexible mid-sized vehicles that can be used to transport people and materials. Some can be equipped with special attachments to perform ad hoc tasks such as plowing snow. Tradesmen like plumbers and construction contractors often use vehicles like these to carry tools, equipment, or components necessary for a job.
- Corporate fleet car. A corporate vehicle or company car is given to employees to drive for work purposes. Vehicles can either be issued to specific individuals or be drawn from a pool of cars based on availability. These can be used by salespeople or field employees who have to travel between different locations. Of all fleet vehicle types, this could be considered the most unnecessary as there are more cost-effective alternatives to operating a fleet of company cars.
Pros and cons of fleet vehicles
Fleet vehicles aren’t for everybody. There are organizations for whom fleet vehicles are a must-have, and others for whom it’s an unnecessary expense. Let’s review the positives and negatives now:
Fleet vehicle pros
Here are some reasons why a company would want to own a fleet of vehicles:
Fleets are ideal for specialized vehicles. Fleet vehicles are essential if your employees need specially-equipped vehicles to do their jobs. Fire trucks, for instance, are a vehicle with a unique purpose that can’t be fulfilled by any other means. The same goes for cement trucks, utility cranes, and tow trucks.
Fleets help maintain a standard brand image. Company-owned fleet vehicles can be decorated in company signage, which can help increase the business’ visibility. It could also serve as a potential lead generating channel by prominently displaying the company’s contact number or website.
Fleets can serve as an employee perk. Some companies use access to fleet vehicles as a perk for top-performing or high-ranking employees. If a fleet is composed of different kinds of cars, then the company could reward better-performing sales people with access to the best vehicles in the fleet.
Fleet vehicle cons
Operating a fleet can also have some significant downsides:
Fleets can be expensive. A vehicle is not a one-time purchase. When a company pays for a vehicle, they must also pay for its maintenance, fuel, and spare parts. Even leased vehicles are costly, as leasing companies require higher minimum coverage amounts compared to owned vehicles.
FMCs can be vague about costs. Fleet management companies (FMCs) that provide vehicles to companies aren’t always upfront about how much a business will spend. While the up-front price of a vehicle lease seems reasonable, they might downplay the upkeep-related expenditures like maintenance, service calls, and spare parts. Or they might misrepresent the cost per mile of leasing one of their vehicles.
Fleet costs can be hard to understand and manage. Tracking fleet expenditures can be a complex process. The cost per mile is affected by numerous factors, such as business use percentage, personal use chargebacks, and corporate risk.
Companies will claim that the effective cost per mile of owning a fleet is $0.50 per mile, but in reality they aren’t counting an employee’s personal use of the vehicle. When you factor that in, the true effective CPM could be up to $0.70 per mile or more. That’s higher than the 2023 IRS rate of $0.655 per mile.
Fleets have high insurance costs and risk exposure. Fleet vehicles tend to have high insurance costs—especially for leased vehicles. It’s not unknown for commercial insurance policies to be double that of personal insurance premiums.
One major risk that contributes to this higher cost is off-hours fleet vehicle usage. Off-hours accidents can and do occur, and while the employee might be off the clock, the company vehicle is still involved and it’s still the company’s problem.
Companies may choose to organize their own insurance policies instead of relying on the FMC, but by self-insuring, you’re reserving cash flow and setting aside funds to cover accidents and other losses due to risk. A severe enough accident could cost the company hundreds of thousands of dollars. That’s money that could’ve been reinvested into the business and generate revenue.
Managing a fleet of vehicles
Building and managing a vehicle fleet can be a complex and costly process—especially if the company is doing it from scratch.
First, the organization has to source the vehicles. Are they purchasing all the vehicles on their own, or are they leasing it from an FMC? Businesses that purchase vehicles outright will have to carefully consider the performance and reliability of each model, as well as ease of maintenance and potential resale value. Businesses that lease their vehicles will need to take into account things like insurance costs and fleet maintenance services.
Once the fleet vehicles have been arranged, the business has to either hire an experienced fleet manager or train one up. This can’t be rushed, as this person will be responsible for vehicle assets easily worth hundreds of thousands of dollars and have to be trusted to do the job properly.
The fleet manager—and whoever they hire to be on their team—will need to ensure that the company vehicles are roadworthy and safe to drive. This means frequent inspections, regular maintenance, and low-level repairs if necessary.
Before the company gives employees the keys to the vehicle, it first has to ensure that there is an insurance policy in place to cover any accidents that may arise, and protect it from liability. In addition to insurance, there has to be a company policy that the drivers have to abide by in order to ensure their safety. This policy also serves to protect the company’s reputation, as any road incidents involving a company vehicle will reflect on the business just as much as the driver.
Once in use, vehicles will often change hands between employees. These vehicles will need to be reconditioned with every transfer, and must undergo thorough inspection to ensure roadworthiness.
Finally, the business must decide what to do with vehicles that are at the end of their service life. Leased vehicles aren’t a problem, as these can just be returned to the provider and replaced with a new vehicle. Owned vehicles, however, will have to either be scrapped, sold, or stored. Scrapped vehicles are a waste, unless they are in a truly unusable condition and there is no other alternative. Selling the vehicles could earn the company back a little cash, but the vehicle has to be stripped of all company markings and propietary equipment first. Storage presents its own problems, as the vehicle will take up space on the lot and still need to be maintained (at least minimally) in case it ever needs to be used again.
Fleet outsourcing: dealerships and FMCs
Organizations that don’t want to purchase vehicles outright have the option of leasing with dealers and fleet management companies.
Dealers can provide vehicles of a specific brand and type at a reasonable cost. There are dealerships that provide either open-ended leases or closed-ended leases depending on what the company needs, and tend to have mileage limits, which can be extended for a fee.
Fleet management companies differ in that they tend to have a larger variety of vehicles compared to dealers, and some allow for vehicle customization. Most FMCs don’t have excess mileage limits, which can reduce costs for customers who use their vehicles a lot.
FMCs also provide other management services, which include care and maintenance, vehicle registration, and safety inspections. Some fleet management companies also provide vehicle monitoring services and technology in the form of fleet management software to help companies better track the usage of their fleets and manage their operation.
Fleet management software
Fleet management software is a software tool or platform that allows businesses to manage all aspects of owning a vehicle fleet.
Most fleet management software platforms include one or more of the following features:
- Vehicle inventory tracking
- Vehicle maintenance scheduling
- Vehicle insurance tracking
- Driver license management
- Driver performance tracking and management
- Telematics (vehicle tracking and diagnostics)
- Fleet management metrics and reporting
Telematics is especially valuable, as it allows fleet owners/operators to manage and monitor company fleet operations. Fleet telematics alow the vehicle and the central location to exchange information, such as location, status, and current mileage. This can help fleet managers provide roadside assistance and, if wireless-enabled, perform remote diagnostics of any linked vehicle.
Fleet management software isn’t just for regular cars and pickups, however. There are software tools for larger vehicles available such as heavy equipment fleet management software and construction fleet management software, so any organization that runs a fleet of such vehicles will be able to leverage these tech solutions.
Even a lean and highly efficient fleet is a significant capital investment. When a business owns their vehicles, they have to take into account costs beyond just sticker price.
Here are the factors that influence a fleet’s total cost:
- Depreciation. The decline of a car’s value over it’s service life. This represents the single largest expense for fleets. Some vehicles retain their value better than others.
- Fuel. Predicting fuel consumption is hard, but predicting fuel prices is next to impossible. You also have different types of fuels with their own consumption and cost calculations such as gasoline, diesel, and EV.
- Maintenance. This includes both preventive and reactive maintenance, as well as replacement parts. Some models of vehicle cost less to maintain than others and have cheaper parts.
- Insurance. Insurance costs can vary based on business’ operating territory, the provider, and the kinds of vehicles being used. But we can safely assume that the cost of insuring a fleet is quite significant.
- Administration. Procurement and disposal expenses fall under this bucket, as do salaries for fleet managers and the cost of any fleet management software being used.
Many companies try to mitigate these costs by leasing vehicles from an FMC. But the price of leasing from FMCs is more complex than simply looking at the annual cost.
Let’s say for example that a business has a fleet composed of Jeep Cherokees, which cost $14,000 per year to lease. That’s a nice, flat number that is easy to understand. It’s when you look at the cost per mile, however, that the true price comes out (and how an FMC can be misleading).
Taking our Jeep Cherokee example, let’s assume the following initial figures:
- $14,000 per car per year
- 30,000 miles per car per year
FMCs will tell you that this works out to be $0.46 per mile per car—which is a great number, considering that the 2023 standard IRS rate is $0.675 per year. So leasing from FMCs works out great from a price perspective, right?
Not really. Because when FMCs calculate cost per mile, they’re using the vehicle’s total mileage—not the vehicle’s mileage for business use. The actual business mileage would only be around 70%, while the other 30% is for personal use.
Given this information, our new premise is:
- $14,000 per car per year
- 30,000 mpy * 70% = 21,000 mpy
- CPM= $0.67 per year
The new rate works out to be roughly the same as the IRS standard rate. So is the business really saving any money at all?
Let’s try to understand where all these hidden costs may be coming from:
- Personal use. This is a blind spot for many FMCs, and the biggest factor in the above price difference. They tend to calculate total costs, forgetting that personal usage represents a significant portion of vehicle mileage. According to the IRS, driving to and from the home still constitutes “personal use,” even if it’s in a company vehicle.
- Fleet size. Fleet costs are proportional to fleet size. The more vehicles a business has (whether leased or owned), the more the business has to spend on operating costs and maintenance.
- Fleet creep. This is when a business adds cars to the fleet’s inventory without getting rid of the old ones. Instead of being sold, the old vehicles are “retired” and put in storage, in case they’re ever needed again. But surplus vehicles just add to the maintenance costs without providing any benefit whatsoever to the organization.
- Low utilization. Heavily using fleet vehicles may increase wear and maintenance costs, but at least it’s being used. Underused vehicles have a much higher cost per mile and provide way less value to the business. If they’re not needed, then why is the business paying for them?
Vehicle fleet maintenance
Have you ever ridden in a cab whose engine squeaked due to a bad fan belt? Or shuddered because of engine knocking? I doubt you enjoyed that experience, and I doubt the cab driver enjoyed it, either.
Vehicle maintenance is an unglamorous but very necessary part of owning a fleet. It can be costly (especially if you have lots of vehicles), but it can pay off in a number of important ways:
- Reliable vehicle operation. Broken-down vehicles don’t provide value to an organization. Even if the vehicle can still run, it may have performance issues that reduce its efficiency. If left alone, a malfunctioning vehicle may suffer a more serious breakdown at a crucial time later on.
- Better public brand image. When a motorist sees a rusty and poorly-maintained company-branded vehicle, they’re not going to come away with a positive opinion. Even less if the vehicle is stranded at the side of the road. Polished, well-maintained vehicles reflect better on the company as a whole.
- Driver safety. It’s an employer’s responsibility to ensure that their drivers are as safe as possible when operating company vehicles. Liability issues aside, employees will do a better job if they know that their vehicles and equipment are safe and in good condition.
Companies should always keep detailed records of vehicle maintenance activities, expenses, and supplies. One way of doing so is by keeping a fleet vehicle maintenance log. A maintenance log is a written or digital document that records the following information:
- Mileage. Mileage of each vehicle during date of service. This helps mechanics know when a vehicle is due for oil changes and track how much vehicles are being used.
- Condition. What was the condition of the vehicle at the time of service? Keeping these kinds of records may help predict future mechanical issues.
- Service description. This notes which repairs were done during a particular maintenance session.
- Service provider. Who performed the maintenance. This can be a third-party service provider, but ideally it should identify the individual mechanic for accountability purposes.
- Cost of service. This covers service fees for third-party mechanics as well as vehicle parts and consumables like oil and wiper fluid.
The fleet maintenance log will help you better manage the condition and usage of your vehicles, ensure vehicle safety and reliability, and stay compliant with local and federal regulations.
Commercial fleet insurance cost
All vehicles in a fleet need to be insured. Not only is it required by law; it also helps protect the company from liability as its employees drive around on company business. It also helps prevent the company from paying for expensive accidents.
Businesses have the freedom to choose who will be providing the insurance: insurance companies, FMCs, or self-insured. Let’s briefly review each:
Major insurance carriers like Insureon and Geico have a number of flexible insurance policies that can be tailored to any business based on considerations like:
- Size of fleet
- Types of vehicles
- How much vehicles are driven
- Vehicle history
- Claims history
According to one major insurer, a small business can pay anywhere between $100 to $200 a month per vehicle based on the above factors.
Fleet management companies can also provide insurance for their leased vehicles. Premiums for leased vehicles tend to have higher premiums than owned vehicles, however.
When FMCs bill the company for insurance premiums, it normally appears as a line item on the fleet leasing invoice at a certain amount per vehicle.
Self-insuring a vehicle fleet is possible, too. A business can create their own insurance fund by pooling a lot of cash and keeping it in reserve. This would be used to cover the cost of any accidents. Note that this option would only be practical for businesses with a enough funds to spare, as the cash held in reserve cannot be reinvested into the business.
Sharing insurance risk with employees can be done if the company uses a vehicle reimbursement program. In it, the employee brings their own vehicle to work and the company shares the insurance costs and risks with them for their on-duty car usage, but not their off-duty driving.
Cost control for fleets
There’s no sugar coating it: operating a fleet will be expensive. But there are ways to control the cost and make it more sustainable over the long term without sacrificing things like vehicle reliability and driver safety.
Firstly, a business doesn’t have to stick with one fleet management company to lease vehicles. Have relationships with multiple FMCs to see which one of them can get the best deal. In fact, it may be possible to source a specific type of vehicle from one FMC while leasing another type from a different FMC, if the price difference is significant enough.
Another way businesses can reduce fleet costs is to be as proactive and organized as possible when maintaining vehicles. It’s much less expensive to do regular and predictive maintenance on fleet cars than it is to repair vehicles that have broken down. It is also less disruptive to employee schedules and business operations, and protects the value of the vehicle for eventual resale. Well-maintained vehicles also have better fuel economy, which helps reduce fuel expenses in the long run.
Switching to an employee reimbursement program, where companies use employee-owned vehicles instead of maintaining a fleet of their own, sidesteps the issue of fleet costs entirely. In a reimbursement program, the only expenses a business would incur would be fuel reimbursement and the shared insurance cost of driving on company business.
Fleet alternatives and transitions
As we’ve discovered by now, fleets are one of the most popular means for organisations to help meet employee transportation and other specialized needs. But does that mean the fleet is the only available option?
Not so. There are other options available to companies, which we’ll review now:
Are fleets of company vehicles a good option?
As mentioned earlier in the article, fleets work best when they’re used to perform specialized tasks. But they’re not so good an option if they’re only being used for basic things like getting from one location to another. In these cases, one could easily substitute regular cars—cars that employees already own.
Vehicle reimbursement programs carry many advantages over vehicle fleets in both cost, practicality, and liability:
- Companies no longer have to buy and maintain a fleet of vehicles
- Reimbursing drivers based on business use is easier to account for than calculating business usage for fleet vehicles
- Mitigates corporate liability during personal travel
- Lighter demand on in-house managerial resources
- Reduced administrative expense for fleet management
A Fixed or Variable Rate (FAVR) program is another alternative to owning a fleet. It’s similar to the cost-reimbursement program in that employees bring their own vehicles to work.
In FAVR, however, there are two payment types. Periodic fixed payments cover fixed payments associated with driving and owning the vehicle, like insurance and registration fees. The total costs are calculated to reflect the percentage of business usage. The period variable payment covers operating costs like fuel, tires, and oil changes.
FAVR costs a business much less because of the same reasons as car reimbursement: no capital expenses for acquiring vehicles, no overhead costs associated with storing and maintaining vehicles, and reduced insurance costs.
Speaking of insurance, risk is dramatically reduced for employee-owned vehicles because the driver’s personal insurance will normally be used first before any liability gets passed on to the company.
Then there are the intangible considerations. We’ve heard from many of our customers that sales reps prefer the FAVR option because they like choosing their own vehicle and getting reimbursed for it. They tend to dislike company cars.
Another issue drivers have with company cars is that they’re often required to pay personal use chargebacks on a vehicle they didn’t choose in the first place. In an FAVR arrangement, the company reimburses them.
If a business wants to transition off a company fleet, there are a number of different ways to do it.
One approach is to sell company-owned vehicles to employees at a reduced rate. Other organizations ask employees to give up their company vehicle in exchange for a flat bonus, which is then used to purchase a new or used vehicle to be used for work. The old vehicles are then sold off en masse to a third party.
When used properly, fleets can be a crucial part of a company’s operations and an effective way for employees to provide critical services and perform specialized tasks. They require a significant investment, but with the right combination of fleet maintenance management software, proactive maintenance, and acquisition best practices, businesses can keep those costs to a minimum.
For those businesses that have more ordinary needs, however, then they may be better off with employee-owned vehicle reimbursement and FAVR programs, instead. These programs are more cost-effective, reduce company liability, and are less of a capital investment—all while still getting employees from A to B.
Book a demo with Cardata and learn how to save on fleet vehicle costs with an employee reimbursement solution.
Disclaimer: nothing contained in this blog post is legal or accounting advice. Consult your lawyer or accountant and do not rely on the information contained herein for any business or personal financial or legal decision making. While we strive to be as reliable as possible, we are neither lawyers nor accountants. Cardata’s clients should not rely on information contained herein to make decisions regarding their programs. Nothing in this or any blog post supersedes any contractual or other legal language issued to customers, prospective or actual, by Cardata. While Cardata strives to be as accurate as possible in the presentation of material on the blog, no guarantees of the veracity of the above are made.
For several citations of IRS publications, on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.