Understanding Contract Maintenance Part I

Aug. 3, 2015
In simple terms contract maintenance is a maintenance agreement between a fleet and a service provider that is governed by a contract.

In simple terms contract maintenance is a maintenance agreement between a fleet and a service provider that is governed by a contract, according to Joe Gallick, vice president of sales for NationaLease.  It defines how the parties will interact and also defines all the maintenance events that are covered including scheduled preventive maintenance and unplanned maintenance.

Lance Bertram, senior vice president of sales, marketing and distribution for Idealease, says breakdowns that are the result of driver negligence or accident damage typically are excluded from contract maintenance agreements. “If I can predict it, it’s in my cost structure,” Bertram says. “But if I can’t predict it, it would be unfair to hold me responsible for it because I never built it into my cost structure.”

About eight to 10% of fleets choose to go the contract maintenance route, Bertram says and they do so “because they have one goal and that is to better service their own customers” and they believe contract maintenance allows them to do just that.

Gallick believes customers opt for contract maintenance when they determine that maintaining their own fleet is not one of their core competencies. Given the sophistication of today’s vehicles, the cost of diagnostic tools and equipment and the shortage of qualified technicians, some fleets are deciding that outsourcing their maintenance makes sense. Outsourcing maintenance on a contract basis has some advantages over just letting a service provider handle your maintenance on an as needed basis. “Contract maintenance gives the fleet the benefits of being able to budget maintenance costs on a predictable basis over a long period of time,” Gallick says.

Typical maintenance contracts last from three to seven years. However, Bertram says unlike full-service leasing which often has a penalty for ending the lease early, most contract maintenance agreements include a provision that allows the agreement to be terminated each year on the anniversary date with appropriate notice. “I always say that a full service lease might be for six years but [contract] maintenance is really six one year agreements back to back to back to back.” He believes that gives customers flexibility and also holds service providers to a higher standard because they get evaluated each year.

Most contract maintenance agreements feature two cost components: a fixed cost and a mileage charge. “We call it fixed and variable pricing,” Gallick says, “because it might not be a cost per mile. It could be a cost per hour if it is a refrigerated unit for example.”

Bertram says it costs fleets between 10 cents and 25 cents a mile to maintain a truck and for most providers of contract maintenance when the fixed and variable costs are put together the costs remains 10 cents to 25 cents per mile. In some instances Idealease and other providers of contract maintenance will charge a flat rate “if it makes the customer feel better,” he says. The primary reason that is not done regularly is that the service provider has both direct and indirect costs. Direct costs for contract maintenance include things like cost of tires, labor, brakes, etc. “It is all the things I need to collect on if the truck moves,” Bertram explains. The other side is the fixed or indirect costs which cover things like water, electricity, rent — all the expenses the service provider incurs to keep his business operational.

Is contract maintenance right for your fleet? In Part 2 of this article we will look at further at the benefits of contract maintenance as well as providing tips on what to look for in a contract maintenance provider.

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