BUSINESSES that extended their contract hire agreement beyond its formal term have saved money.

A survey of its European SMEs by leasing company GE Capital found that companies saved almost Euro 1.5 billion in 2009 by lengthening company car contracts for their employees.

The average contract increased by four months between 2007 and 2009; extending the duration of an operating lease (contract hire agreement) from 36 to 48 months saved a company an average of 12.5% per month on the leasing cost, said GE Capital.

“Over the last two years, extending contracts to control company car costs has been prevalent throughout the industry. Extending a lease by 12 months can drive down the monthly cost of a company car by 10 to 15%, and our research demonstrates the it has been a high priority for companies looking to control costs in response to the downturn,” said Peter Stroem, pan-European fleet commercial leader, GE Capital.

According to GE Capital’s study, the average contract duration, or amount of time a car is leased before a replacement is provided, increased from 36.7 months in 2007 to 40.5 months in 2009 across the seven markets studied.

French companies achieved the highest levels of cost reduction via contract extensions, said GE. Companies in the UK extended contract duration less. In the UK, companies increased the average length of time a company car was leased from 35 to 36 months.

However, while extending contracts can be beneficial in a downturn, there are drawbacks that companies should consider – such as increased maintenance – particularly if your business owns its company cars and wants to keep the cars longer to avoid capital expenditure.

The downsides of contract extensions

Software company CFC Solutions suggests that additional vigilance is required to ensure company cars remain fit for use. CFC says many companies which operated cars into year four and 80,000 miles are starting to renew their vehicles in 2010 but that some are opting to keep cars well into a fifth year as they face ongoing financial uncertainty.

Neville Briggs, managing director at CFC, said: “We are seeing a few customers run cars into a fifth year and getting close to, or exceeding, 100,000 miles. For most business car managers in the fleet industry, this kind of lifecycle is pretty much unchartered territory.

“There are concerns, the biggest of which is maintenance. Vehicles at this stage in their lives are becoming more susceptible to major component failure. Companies need to ensure that each vehicle’s servicing is carried out to manufacturer standards.”

Mr Briggs also pointed out that companies under financial pressure to extend vehicle lives could be also under a pressure to minimise maintenance spend.

He explained: “It is an obvious enough point but companies where managers feel that they cannot afford to acquire new vehicles are more likely to be ones where spending the larger sums that are needed to keeper older vehicles on the road is questioned,” he warned.

Growing confidence for new business car sales

Nevertheless, it appears that businesses have started ordering new cars again as the need for contract extensions lessen. Business Car Manager associate partner Fleet Alliance reports that fleet and business sales are on the rise with orders up 27% up for the first quarter of 2010.

According to Fleet Alliance managing director, Martin Brown, the supply of finance to businesses is starting to become freer and is evidenced by more companies looking to buy new cars again.

“Overall credit seems to have eased and the credit underwriting process is a little smoother than in 2009. All in all, the signs for the first half of 2010 are encouraging, and certainly more positive than 12 months ago,” Mr Brown suggested.

Mr Brown advised, though, that businesses in the market for new company cars should not be persuaded to place all their eggs in one supplier’s basket or to select vehicles purely on their monthly rentals.

“The more sensible and cost efficient solution is modern competitive tendering which compares real time prices from a panel of different suppliers and then selects the most competitive on behalf of the fleet customer,” said Mr Brown, whose company works with a panel of seven different vehicle funders.

“This process is time as well as cost efficient, and managed effectively, has been shown to drive down fleet funding costs by as much as 8-10%,” he added.

“Modern competitive tendering is slick, measurable and auditable and is based on prices that are valid today, rather than yesterday. It is by far the most effective method of sourcing new vehicles for business.”

Adding additional months to a lease brings lower costs, says GE