Examining Reimbursement Economics from Multiple Perspectives
As financial hard times prompt companies to once again consider reimbursement, the economics of this type of program versus company-provided vehicles may not add up to perceived cost savings.
As we emerge from one of the worst recessions in most of our collective memories, it's no surprise C-level executives are taking another look at reimbursement as an alternative to company-provided vehicles. After all, reimbursement sounds a lot simpler than worrying about manufacturers, interest rates, fuel prices, regulation, taxes, etc. But beware of that which sounds simple - it usually has unintended consequences.
Rather than spend time on the myriad qualitative and quantitative reasons why reimbursement does or does not make sense, the focus of this article is purely the economics. When it comes to the economic analysis of reimbursement, four perspectives need to be accounted for:
● Direct cost of reimbursement.
● Direct cost of company-provided vehicles.
● Driver out-of-pocket expenses.
● Driver productivity.
Let's look at each in turn.
First, a word of explanation: when we discuss reimbursement, we are specifically discussing fixed and variable reimbursement, or FAVR. The IRS variable rate is a simple process, designed for infrequent or low-mileage drivers, and the economics are fairly straightforward.
Perspective 1: Reimbursement Direct Spend
Fixed and variable rate (FAVR) reimbursement is what it says: a fixed reimbursement amount based on depreciation and insurance, and a variable reimbursement based on fuel prices, maintenance spend, and other variable expenses. The majority of FAVR programs are regionalized - the programs account for regional variations in insurance rates and fuel prices.
The fixed portion of the reimbursement is largely dictated by the IRS, with pre-defined depreciation schedules and a cap on the fixed reimbursement of 71.4 percent for depreciation and insurance. The variable reimbursement is calculated as a cost-per-mile amount and is paid based on driver-reported business mileage.
Currently, the typical total reimbursement for a passenger car (program fees included) runs $750-$825 per month, depending on the region of the country and the vehicle selected. For an SUV, the reimbursement is closer to $800-$870 per month. Assuming 2,000 miles traveled monthly, this equates to a cost per mile of approximately 41 and 44 cents, respectively.