Cost Adjustment

A cost adjustment is a modification to a driver’s calculated reimbursement rate under a Fixed and Variable Rate (FAVR) program. It changes either the fixed or variable portion of the reimbursement to account for specific vehicle costs or business-driving conditions.

In a FAVR program, reimbursements are separated into two categories:

• Fixed costs, which include ownership-related expenses such as insurance, depreciation, registration, taxes, and licensing
• Variable costs, which include operating expenses such as fuel, maintenance, and tires that change as employees drive more

A Fixed Cost Adjustment (FCA) modifies the fixed-cost portion of a FAVR reimbursement. A Variable Cost Adjustment (VCA) modifies the variable portion.

Under FAVR rules, there needs to be strong defensibility behind any fixed or variable cost adjustment. An adjustment should have a clear business rationale and be supported by legitimate business-driving requirements, relevant cost data, or current cost conditions.

For example, a condition-based adjustment could account for higher depreciation, tire wear, or maintenance costs for employees who regularly drive in regions with extreme weather.

Cost adjustments can create compliance and program management concerns when there is not a clear, supportable basis for the change. For example, concerns may arise when a program:

• Applies flat percentage or dollar increases without a clear rationale
• Continues using outdated vehicle profiles or cost assumptions
• Uses adjustments to preserve reimbursement amounts rather than reflect current vehicle costs
• Cannot clearly document why an adjustment was made

Cost adjustments are only one way a FAVR reimbursement rate can change. Rates can also be affected by updates to standard vehicle assumptions, Business Use Percentage (BUP), retention cycles, insurance requirements, mileage bands, and localized cost data.