The Hidden Costs of Fleet Programs

Fleet management is often viewed as a necessary evil for businesses that require employees to drive. While offering company cars may seem like a simple, one size fits all solution, the reality is far more complex. The total cost of ownership (TCO) for a fleet of vehicles stretches well beyond the initial procurement and sourcing, with hidden expenses lurking in everything from depreciation and maintenance costs to fuel management and insurance premiums. 

When you break down these fleet costs, you’ll see that running a company fleet can quickly become a financial black hole. Most fleet management companies, whether through leasing from third parties or other contracts, hide the real price you’re paying to keep your fleet vehicles on the road. But there is an alternative: vehicle reimbursement programs (VRPs) like FAVR (fixed and variable rate) and Cents per Mile (CPM) models, which allow companies to simplify vehicle operations and cut costs significantly.

Fleet costs are a black hole

The expenses tied to a fleet program are not as transparent as you might think. While companies often focus on upfront costs like vehicle leasing or purchasing, they tend to overlook the hidden and ongoing expenses that accumulate over time. 

Fleet management software, for example, is often an added cost that isn’t factored into the original budget. Companies are also responsible for handling maintenance costs, fuel prices, and downtime, all of which add layers of complexity and unpredictability to the budget. Depreciation is another significant factor that quickly eats into the value of each company vehicle. In fact, a new vehicle can lose as much as 23.5% of its value within the first year alone. This depreciation hits your bottom line, as you’re constantly cycling through vehicles to maintain an efficient fleet. 

On top of that, there’s insurance, which is typically much higher for fleet vehicles than for personal vehicles. A company car needs a commercial insurance policy, which can be double what you would pay for a personal insurance policy. This inflated premium is often designed to cover the higher risk associated with fleet operations, but the business is ultimately the one bearing the financial burden.

Personal use of fleet vehicles is another area where hidden costs creep in. Companies often assume a higher business use percentage than reality, resulting in overpayment on everything from fuel to maintenance. If an employee is driving a company vehicle on weekends or for personal errands, those miles are not being captured accurately, and the business ends up paying for non-work related expenses. In truth, the average business use percentage for a fleet vehicle is closer to 71.4%, meaning you’re unknowingly covering 28.6% of personal use, significantly more than employees usually report.

What does a fleet cost compared to a VRP?

The numbers don’t lie that vehicle reimbursement programs are far more cost-effective than a company fleet. Take the case of leasing a fleet of 50 vehicles, which could easily run a company around $780,000 per year. That’s just the leasing cost. When you factor in fuel costs, maintenance, and insurance premiums, the total skyrockets. 

Compare that to a mileage reimbursement program for the same 50 vehicles, which would cost approximately $390,000 per year. In this model, you’re only reimbursing employees for actual business use, making it far more efficient. This is because with a FAVR (Fixed and Variable Rate) program or cents per mile reimbursement, businesses only cover the miles driven for work purposes. 

For example, the IRS recognizes that business use generally makes up 71.4% of an employee’s total vehicle usage. The remaining 28.6% is personal use, which companies often end up paying for under a fleet program. With a vehicle reimbursement program, however, you can eliminate this discrepancy, only paying for business related mileage and saving the company thousands in hidden costs. 

Additionally, fleet programs often come with built-in inefficiencies, like mileage band discrepancies. For example, if you’re paying for 20,000 miles per year on a fleet vehicle, but only 14,000 of those miles are business related, you’re left paying an inflated cost per mile. What might at first appear to be a reasonable 50¢ per mile can balloon to as much as 70¢ per mile once you account for personal use and underreported mileage. 

With vehicle reimbursement programs, companies also avoid the fixed costs tied to fleet management, like new vehicle procurement, reconditioning for transfers between employees, and administrative fees for managing a fleet program. These hidden costs, which are often absorbed by the business with little visibility, can be avoided altogether by shifting to a mileage reimbursement model, where employees are responsible for maintaining their own vehicles.

This approach not only saves money but also reduces the admin burden on your team. With fewer vehicles to manage, you can focus on business needs, improve operational efficiency, and ultimately boost your company’s bottom line.

Insurance, downtime, and maintenance

When businesses think about fleet costs, they often consider only the upfront expenses like vehicle procurement and leasing. However, the costs of maintaining a company fleet are significant and often overlooked. One of the biggest hidden expenses is insurance premiums, which can be double that of personal vehicles. Commercial insurance policies are designed to cover the higher risk of fleet operations, but they add a substantial financial burden. Additionally, fleet management companies often offer insurance packages that seem cost effective on paper but end up being much more expensive in reality.

Another major cost is downtime. Whenever a fleet vehicle is out of commission, whether for maintenance, repairs, or accidents, your business loses money. The lost productivity and delays associated with downtime can significantly impact your operations. For example, if a vehicle requires routine maintenance like oil changes or tire replacements, it’s not just the maintenance costs that add up, it’s the lost hours of work that cost you, as well.

Fleet management software can help track these ongoing operating costs, but the complexity and expense of these systems are often not considered when budgeting for a fleet. Over time, costs like fuel management, insurance premiums, and vehicle repairs create a substantial drain on your resources, all of which can be avoided by shifting to a vehicle reimbursement program (VRP). In a VRP, your employees take responsibility for their own vehicle maintenance and insurance, allowing your company to eliminate these ongoing financial obligations.

Depreciation

One of the costliest and less appreciated aspects of running a fleet program is depreciation. Every new vehicle you put on the road starts losing value the moment it leaves the lot. On average, a fleet vehicle can lose up to 23.5% of its value within the first year. That’s a significant portion of your investment gone without providing any additional ROI. 

The constant procurement and replacement of vehicles to maintain a functional fleet is a cycle that eats into your bottom line. Depreciation is unavoidable, but the financial impact is exacerbated by the fact that companies often replace vehicles prematurely because of fleet management policies or because of unnecessary downtime. Moreover, when you transfer fleet cars between employees, there are reconditioning costs to get the vehicle cleaned and back into shape, adding another hidden expense to your balance sheet.

In comparison, a vehicle reimbursement program or mileage reimbursement model eliminates the problem of depreciation altogether. Instead of dealing with the constant financial drain of replacing or reconditioning vehicles, businesses can shift this responsibility to employees who use their own vehicles for business purposes. By adopting a FAVR or cents per mile program, you only pay for the business use of a car, with no worry about its declining value over time.

Case studies have shown that businesses can cut their fleet related expenses in half by transitioning — either fully or partially — from a fleet model to a VRP. For instance, a company operating a fleet of 50 vehicles could save $390,000 annually by switching from a fleet model to a mileage reimbursement program, effectively bypassing the costs associated with depreciation, insurance, and vehicle maintenance.

The benefits of Vehicle Reimbursement Programs

Beyond cost savings, transitioning from a fleet program to a vehicle reimbursement program can also promote sustainability and unlock significant tax benefits. Operating a fleet of vehicles means managing fuel consumption and the environmental impact of your fleet’s carbon footprint. With fuel prices fluctuating and the push toward greener business practices growing, managing sustainability within a fleet can be a challenge. Reimbursement programs, on the other hand, offer an opportunity to reduce your environmental impact by encouraging employees to use fuel efficient or sustainable personal vehicles.

From a tax perspective, fleet vehicles are a pretty heavy burden. While you may receive some tax incentives for purchasing or leasing certain company cars, you’re still on the hook for high operating costs and insurance premiums. With vehicle reimbursement programs, however, many of these costs can be treated as tax free for the company, especially when implementing a FAVR program, which is designed to meet IRS guidelines for business use of personal vehicles.

By paying employees only for the variable costs of their business related mileage, companies can significantly reduce their taxable expenses. Mileage tracking becomes more straightforward, as you’re only reimbursing employees for the miles they actually drive for work, rather than assuming a business use percentage for an entire fleet vehicle. This allows for greater accuracy in your financial reporting and minimizes the risk of overpaying for non business related expenses.

Moving from a company fleet to a vehicle reimbursement program isn’t just a cost effective solution, it’s a more sustainable and tax efficient one, as well. You reduce your company’s exposure to fixed costs, depreciation, and unpredictable fuel costs, while gaining more control over your bottom line and improving your environmental footprint.

Personal use of company cars

One of the most significant factors driving up fleet costs is the personal use of company vehicles. Fleet vehicles are often billed as if 100% of the mileage driven is for business use, but that’s rarely the case. In reality, a significant portion of the miles on a company car comes from personal use or commuting. Studies show that approximately 28.6% of miles driven by employees are not related to business at all, which means you’re paying for mileage that doesn’t benefit your company.

While some companies attempt to recoup the cost of personal use through chargebacks, these efforts often fall short. Employees typically underreport their personal mileage—many claim as little as 812%—which leads to an inaccurate calculation of personal use expenses. The result is a much larger tax burden for your business, as well as higher costs for fuel, insurance premiums, and maintenance. 

Switching to a vehicle reimbursement program (VRP), like  FAVR or cents per mile model, allows businesses to reimburse only for the actual business use of a car. This eliminates the gray area surrounding personal use, as employees cover their own personal driving expenses. With a reimbursement program, you have clear mileage tracking and only pay for what truly benefits your company.

Fleet maintenance and fuel management

Managing the maintenance costs of a fleet of vehicles is a never-ending and expensive undertaking. Regular oil changes, tire replacements, repairs, and fuel management add up quickly, creating an unpredictable and ongoing financial burden. Even with the most efficient fleet management software, the costs of maintaining a fleet can skyrocket, especially as vehicles age and require more frequent repairs.

Additionally, fuel costs are a significant factor. With fuel prices skyrocketing, budgeting for fleet fuel becomes a challenge, and mismanagement can lead to unnecessary expenses. Fleet management companies often mark up fuel costs or bundle them into a broader service package, masking the true financial impact. These variable costs can make managing a fleet unpredictable, leaving businesses vulnerable to rising prices.

A vehicle reimbursement program shifts the responsibility for maintenance and fuel management to the employees, who use their own vehicles for work. In this model, you only reimburse employees for the business related portion of their driving. This reduces your exposure to fluctuating fuel prices and the ongoing need for costly repairs, as employees are motivated to take better care of their vehicles to avoid personal expenses. The savings on maintenance and fuel alone make reimbursement programs a much more cost effective solution for many companies.

The future of fleets

As businesses become more focused on sustainability, traditional fleet management models are increasingly seen as outdated. Running a company fleet not only incurs high operating costs, but it also contributes to your company’s carbon footprint through fuel consumption and vehicle wear and tear. Transitioning to a vehicle reimbursement program – either fully or partially – can be a smart move in promoting sustainability while also achieving significant financial benefits.

Beyond sustainability, vehicle reimbursement programs also offer greater flexibility. As the workforce becomes more mobile and remote work becomes more common, owning and maintaining a large fleet of vehicles is less necessary. Fully or partially offloading your fleet for a reimbursement program allows your business to scale up or down with ease. You can keep a smaller fleet for those essential tasks, and opt for employee owned vehicles for tasks that require more flexibility. It’s a cost effective solution that meets the needs of modern businesses, offering savings on fixed costs, fuel management, and vehicle procurement.

In conclusion, as businesses continue to evolve, so must their approach to fleet management. The future lies in cost effective, sustainable, and flexible solutions like vehicle reimbursement programs, which eliminate many of the hidden costs and burdens associated with traditional fleet models. Transitioning to a FAVR or cents per mile program not only benefits your bottom line but also aligns with modern trends in sustainability and business efficiency.

Comparing fleet costs to VRPs

To paint the picture of the financial difference between maintaining a company fleet and adopting a vehicle reimbursement program, let’s explore a real world case study.

Consider a company that operates a fleet of 50 vehicles. These vehicles are used for a combination of business use and personal use, and the company covers all associated fleet costs, including fuel, maintenance, insurance premiums, and depreciation. The annual costs per vehicle, including mileage reimbursement, are estimated at:

Fuel costs: $4,000

Maintenance: $1,500

Insurance: $1,200

Depreciation: $3,000

This totals approximately $9,700 per vehicle annually. With 50 vehicles, the company’s annual fleet costs are nearly $485,000.

Now, compare that to a FAVR program where employees use their own vehicles and are reimbursed for their business miles. By reimbursing employees at the IRS approved rate or using a variable rate structure based on local fuel prices, the company eliminates most of the fixed costs. The average reimbursement for an employee using a vehicle reimbursement program might be closer to $7,000 annually, depending on miles driven. For 50 employees, this amounts to $350,000, which is a savings of $135,000 compared to maintaining a fleet.

Fleet downtime

Research shows that the average fleet vehicle spends 5% of its life in the shop for repairs or routine maintenance, which equates to about 13 days of downtime per year. While this may not seem like much, the financial impact can be significant when multiplied across a large fleet. Fleet downtime leads to direct losses in revenue, delayed deliveries, and disruptions to business operations.

By contrast, a vehicle reimbursement program shifts the responsibility of vehicle maintenance and repair to employees, who use their personal vehicles for business purposes. Since employees are more likely to maintain their own cars efficiently to avoid downtime, businesses can enjoy greater continuity and reduce the costs associated with vehicle repair and rental replacements. The total cost of ownership (TCO) is significantly lowered, and your business benefits from increased uptime and productivity.

Conclusion

Transitioning to a VRP helps businesses avoid the costly disruptions caused by fleet downtime and ensures smoother daytoday operations. With employees managing their own vehicles, your company can focus on driving results instead of managing vehicle repairs and maintenance schedules.

These sections further outline the often hidden costs of fleet management, emphasizing how vehicle reimbursement programs like FAVR provide significant savings in areas like depreciation, fleet downtime, and overall operational efficiency. By adopting a reimbursement model – either fully or partially – companies can reduce their financial burden and streamline operations, offering a cost effective alternative to the traditional fleet approach.