Whole Life Cost

Whole Life Costs Guide

If you own a business then purchasing vehicles is not just about getting a good deal now: it’s about making a long term investment. That’s why it’s vital to look beyond the price tag alone and also consider the vehicle’s whole life costs: i.e. the total cost of owning and running that vehicle.

Why are whole life costs so important?

Let’s imagine you are considering two cars that both fit into the same segment and offer similar features. If car A costs £10,000 and car B costs £9,000 then car B would seem like an obvious choice on the surface.

However, while car B may seem like a bargain because it costs £1,000 less, if car A actually costs £3,000 less to run over a certain period after taking into account servicing, fuel, depreciation and other costs, then in reality it will be the more cost effective choice for your business.

What is included in whole life costs?

There are a number of factors that must be taken into account when trying to establish whole life costs for fleets, including:

- Depreciation: How quickly will the car’s value depreciate? This is generally considered the largest aspect of the whole life costs equation with research from CarCost suggesting it can account for around 45 per cent of the total cost.

Depreciation is a calculation of the difference between how much the car would cost to buy (its retail price) and the price it would get at the time of disposal (its residual value). Information used to determine a residual value includes: information about the vehicle manufacturer; historical data on residual values for that model; and auction prices. The likes of Glass’s Guide and CAP Motor Research’s Black Book will provide details on residual value forecasts: but remember that these are just guides and cannot produce exact figures because ultimately the residual value will be determined by how much a used car buyer is willing to pay for the vehicle at the time it is disposed.

- Fleet disposal: With depreciation being the largest factor affecting the whole life costs of cars used by companies, then fleet disposal must also be taken into account as there are so many ways to de-fleet vehicles and this will determine how much money you get for the car you no longer want. For example, you could sell at auction, part exchange, sell to staff, sell to traders or rely on competitive tender: all of which will produce varying results in terms of how much money you get for the stock you wish to dispose of.

- Retail price: Obviously a vital factor in determining whole life costs is how much the car will cost to buy originally. If it is vastly more expensive than another vehicle and depreciates at the same rate then it will be easy to determine that its whole life costs will be prohibitive.

- Servicing and maintenance costs: How much will it cost to maintain the upkeep of a vehicle? If your fleet of cars is taken out on a leasing basis then this should be more straightforward to determine as most leasing companies include servicing and general maintenance for free.

- Running costs: There are a host of running costs that should also be taken into account, such as the cost of insuring a vehicle and its fuel expenditure.

- Company costs: For company car owners there may be additional whole life costs that need to be factored into the equation including: rental costs; National Insurance costs, writing down allowances, and non-recoverable VAT.

But don’t whole life costs fluctuate?

Whole life costs can be seen as an effective way of controlling fleet costs as you are taking all factors into account. They help you understand the true cost of operating a vehicle.

However, bear in mind that whole life costs for cars can vary – and there are a number of additional factors that could influence your long-term expenditure, such as if an accident occurs.

So how do you calculate whole life costs?

There are a number of whole life cost calculators available online. These will ask you to provide details of the vehicle you are interested in – including the model and body style; and also a projected contract period: for example, one year and 20,000 miles; four years and 80,000 miles, etc.

Ensure that any whole life cost calculator you use is completely independent and takes into account reliable industry data. Also bear in mind that whole life costs can vary widely and so this data should only be used as a guide.