Negotiating a Multi-year Fleet Management Agreement

Here are some tips on how to negotiate a contract fair to all parties and one that will serve as a building block in successful fleet management.

Master Lease Agreements Usually Anchor Contract
Fleet management agreements come in many shapes, sizes, and forms. Usually, the anchor for the agreement is the master lease agreement. For most mid-market and larger fleets, the lease in question is an open-end lease with a terminal rental adjustment clause (TRAC). The agreement then describes other services the lessor may provide, with various addenda and attachments completing the document.

A master fleet leasing agreement is a relatively generic document. Its terms and conditions cover the following key terms:

There are, of course, other terms and conditions, including standard boiler plate language that’s used in all contracts.

Here’s the usual rub, though: the master agreement essentially states that the parties agree if a vehicle is leased, the agreement’s terms and conditions govern the transaction. But the lessee isn’t required to actually lease any vehicles under the master agreement. So the term of the contract is irrelevant (i.e., the contract is for one year, and evergreened thereafter unless one of the parties terminates it, which usually requires some notice).

The same thing goes for services provided. For maintenance management, as an example, the fee structure, the basic process, and driver materials are all covered, and similar terms and conditions are covered for accident management or other fleet administrative programs.

But again, the point is that the basic agreement does not require the fleet to lease or place under a management program any vehicles at all. It only contains the terms that cover those that may be.

Multi-Year Agreements Can Offer Advantages
At first glance, there may not appear any advantage to the lessee in a multiyear agreement (nor to the lessor, for that matter). Although it is usually firmly agreed upon and clear that the lessee will indeed lease its vehicles and participate in the service programs, under the contract, the lessee may wish to maintain the flexibility to move to another vendor or sign more than one agreement and split the business between suppliers.

However, there can be advantages to adding some level of commitment to the contract in return for more favorable rates and terms. The result is a firm, multi-year contract, with the lessee/fleet committing to a designated number of orders and some level of exclusivity for the lessor, in return for more favorable terms, all to be “managed” by a service level agreement (SLA). The SLA outlines specific performance and service levels upon which the supplier is judged, and when effective, it ensures the success of the relationship.

Two Options Available to Transfer Leased Vehicles
Remember, the standard master lease agreement sets forth only the terms and conditions of a transaction if a vehicle is leased thereunder. A contract amendment that covers a guarantee or commitment of order volume or vehicles to be leased over some period of time can be used to negotiate favorable lease terms. Here are some ways this commitment can take shape:

Both methods of vehicle lease conversion have advantages and disadvantages.

Sale/Leaseback. A sale/leaseback can be an enormous transaction, requiring a great deal of financial modeling and paperwork. In addition, the full cooperation of the current supplier is needed. A lessor who is losing the business most likely finds little incentive to dedicate the time and effort required to make the process go smoothly.

Sales tax can be another issue in converting lease vehicles. The lessor is actually purchasing the vehicles, and most states require sales tax collection when a vehicle is sold. This tax can add thousands of dollars to the cost of the transaction. Sales taxes can either be paid up-front, or in some cases, capitalized into the lease.

Another issue that can complicate a sale/leaseback is the sale price. The vehicles being sold are processed under the terms of an existing contract that, if an open-end TRAC lease, requires vehicles be sold at fair market value (FMV), assuming the lessee books the leases as operating leases. Vehicles kept in service to the point where the unamortized book value is lower than the FMV must be sold at FMV.

In this situation, the existing lessor applies these proceeds against the net book value and credit the lessee the difference. At the same time, the new lessor would capitalize the vehicle under the new agreement at an amount greater than they were previously, and so on — essentially, a very complex and detailed transaction. The benefits negotiated would have to be substantial to make it worthwhile.

Attrition. Replacing vehicles as they come up for normal replacement is the most common way the transition is made. It is very simple: the replacement is ordered from the new supplier, and the existing vehicle is turned into and sold by the current supplier under the normal terms of the contract. This is the most orderly method of transitioning from one lessor to another.

Once the method is agreed upon, the lessee can then offer to commit to a number of orders in each year of a multi-year agreement in return for more favorable lease terms — lower interest costs, smaller administrative fee, lower capitalization schedule, etc.

To illustrate, using the example of a lessee with a fleet of 1,000 vehicles: under a standard agreement, the lessee is not required to lease anything under a contract. If the lessee commits to all its normal model-year orders (roughly a third), or some number therein, and agrees to make the new supplier the exclusive lessor, the lessee would no doubt receive better lease rates in return.

Converting Maintenance & Accident Management Programs
As with the lease, vehicles can be entered into the new contract for maintenance and/or accident management programs in two ways.

The difficulties in the latter scenario are far less daunting than when a sale/leaseback is used to bring the entire fleet under the new contract. The lessee must provide a full inventory listing, with vehicle numbers, locations, and driver names, to the new supplier. Driver packs are then produced and disseminated with instructions on how the program works. Most maintenance management programs are similar in their basic structure:

Accident management is an even simpler process, in that far fewer transactions occur than under the maintenance management program. The key is driver training. Drivers must also be directed on how to use the materials and who to call for assistance. Internally, the fleet department must be familiar with the new supplier’s online system, how to track costs, produce reports, notify drivers when maintenance is overdue, etc.

Rather than move the entire fleet into the lease, fleets more commonly move all vehicles to these programs.

Agreeing to move all vehicles into the new programs, and again, assuring some exclusivity for the new vendor in a multi-year agreement gives the fleet leverage to negotiate reduced fees and more favorable terms. (Keep in mind that if the entire fleet is under the maintenance and accident management programs, it is very likely, though not mandatory, that vehicles will eventually be leased under the contract as well.)

Review Fleet Administrative Programs for Leverage
A contract can cover any number of other administrative services, such as:

These services can be reviewed individually to determine if they can provide leverage in negotiating a multi-year master agreement.

Registration Renewal
Not a good candidate for negotiating purposes. Vehicles are usually registered to the lessor/owner, and the renewal paperwork is sent to the lessor/owner or to the driver. The fees for such programs are generally nominal, so there isn’t a great deal to negotiate anyway. Best to simply leave registration renewal with the lessor that owns the vehicle.

“Fleet Desk”
For what is usually a per-vehicle, per-month fee, the lessor dedicates a toll-free number, answered in the lessee’s name, where all questions about policy, procedure, and other issues are handled, including new-vehicle ordering and employee sales of vehicles coming out of service.

The nature of this program also does not lend itself well to negotiating power in a multi-year agreement. It can be very confusing for a driver if his or her vehicle is leased through one company and serviced by another, based upon decisions regarding the lease and the maintenance and accident programs.

Procedures and paperwork can also be different depending upon which lessor owns the vehicle. In addition, the new supplier, if the entire fleet is brought under its program, must be given the policies, paper flow, and other information of its competitor, who might not be anxious to provide it.

It is best to keep fleet desk contacts with the existing lessor, and change only as vehicles are replaced.

Parking Ticket Payment
A relatively minor program, with nominal fees and not a particularly effective negotiating tool. In addition, if parking tickets aren’t paid, dunning notices are sent to the registered owner. Placing the entire fleet in the program can simply create a “middle man.”

Safety Training
Because safety programs are driver rather than vehicle-specific, they are very much in the mix for negotiating a multi-year fleet agreement. It does not matter at all whose car a driver is operating; drivers can undergo safety training and testing, and have their MVR reports reviewed by anyone providing the service. Fees for such programs can run the gamut from per vehicle, per month to flat or transaction fees. However fees are charged, they are definitely fodder for negotiation.

Fleet Fuel Card Program
Without question, one of the most important fleet programs available, particularly with $80/barrel oil and fuel prices that have reached and exceeded $3/gallon. A driver can easily be given a fuel card from one vendor to fuel a vehicle leased and/or serviced by another. Fuel card fees can be as high as $2 per vehicle, per month. With enough annual volume, some level of rebate can also be negotiated.

Best Agreements Foster Fleet-Supplier Partnerships
While simply using volume leverage to negotiate favorable terms under a multi-year agreement may seem enticing, any relationship between supplier and customer is most effective when the parties treat each other as equals and develop a true partnership.

Fleets often like to “play” one supplier against another. While this strategy can be effective in negotiating fees and pricing, it does not foster a healthy business relationship. The fleet and its supplier are most effective when they work together to maximize the programs, learn each other’s business, and develop the kind of one-on-one relationship that works best.

What better way to build such a relationship than by entering into a multiyear agreement? Rather than seeming “comfortable” that it won’t lose the business, the lessor will work hard to live up to expectations. At this point, the service level agreement becomes important. By establishing metrics and targets the lessor must meet or exceed and receiving a multi-year commitment from the lessee, the relationship is cemented and both parties benefit. Some areas that can be benchmarked in an SLA include:

Keep in mind that not only must such benchmarks be clearly defined, but some regular method of tracking, review, and follow-up should be outlined. In a multiyear agreement that promotes an effective partnership, reviewing these metrics isn’t an adversarial process.

A multi-year fleet agreement can be a very effective tool in the fleet manager’s arsenal. If used correctly and entered into with positive intentions, it can make the job much easier and provide fleets substantial cost savings, both hard and soft.