Contract Hire: Analysis of Operational Lease for Fleet Management

This report delves into the concept of contract hire, which is essentially an operational lease enabling businesses to utilize company vehicles through fixed monthly payments. It examines the expected shifts in fleet control, including internal administration, security, and the influence of government regulations. The report further explores how contract hire can adapt to sudden demand changes, offering flexibility in market conditions, staffing requirements, and corporate social responsibility guidelines. By comparing contract hire to traditional car ownership, the analysis highlights the financial and operational advantages, such as cost savings and the ability to comply with CSR guidelines. The report concludes by providing insights into the benefits of operational leases for fleet management, including the ability to adapt to changing regulations and market demands.

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Table of Contents
Introduction.................................................................................................................... 3
Expected Changes in control of the fleet.....................................................................3
Internal administration...............................................................................................3
Less control in ensuring the security of the fleet....................................................3
Changes in government regulations.........................................................................3
How the model might meet sudden demand changes...............................................4
Flexibility to changes in market conditions.............................................................4
Response to changes in staffing requirements.......................................................4
Response to changes in corporate social responsibility guidelines.....................4
References......................................................................................................................5

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Introduction
A contract hire is typically an operational lease that allows an enterprise to use a
company vehicle by simply making some fixed monthly payments for a specified period
which is usually between two and four years, (Cosci et al., 2015, p. 337). When the
lease agreement expires, the lessee returns the car to the owner.
Expected Changes in control of the fleet
Internal administration.
When a company owns a fleet of cars, then the management may be forced to spend a
lot of time and resources in determining a funding arrangement. Financing the servicing,
inspection, insurance, and maintenance of the cars will be the responsibility of the
management. However, in-car hire agreements, the lessor may be responsible for many
activities such as car maintenance, installation of security equipment such as GPS
navigation gadgets, child safety seats, and fire extinguishers, (Morais, 2013, p. 433.
Less control in ensuring the security of the fleet.
In car ownership, it is the responsibility of the firm to ensure that security equipment’s
such as alarms, fire extinguishers, first aid kits and GPS navigation instruments are
installed, (Contract Hire and Leasing, 2017). However, in operating leases, the lessor
may be responsible for installing all the required security and safety equipment in the
car. Therefore, the work of the management will only be to inspect the equipment and
report to the lessor on their working conditions.
Changes in government regulations.
When an enterprise owns vehicles, its control and operational techniques may be
affected by changes in regulations relating to emissions, taxes, wear and tear
deductions and ownership. However, in an operational lease, the renting company has
no claim for tax deductions, (Altamuro et al., 2014, p. 553). Also, it has no title of
ownership of the car hence it will not be affected by ownership regulations such as
revaluation of vehicles. Contract hire can even cover maintenance of cars, insurance,
and replacement of old and damaged cars which may be considered unworthy by the
government.

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How the model might meet sudden demand changes
Flexibility to changes in market conditions
Companies may acquire vehicles on loans making them liable to loan and interest
payments, (Morais, 2013, p. 440). However, in a contract hire the firm only makes
monthly rental payments. This makes the business more flexible in responding to
changing market conditions. The company may also save more money for other
activities as it may benefit from VAT exceptions especially if the car is used solely for
business purposes.
Response to changes in staffing requirements.
Operational leases may last for a period of 12 to 48 months, which enables the firm to
respond to changes in staffing requirements more efficiently than through other funding
techniques, (Morais, 2013, p. 440). When renewing a lease agreement, a company
may employ new drivers who are more qualified than the previous ones.
Response to changes in corporate social responsibility guidelines.
When a company operates a car hire agreement, then it may be able to comply with
CSR guidelines such as switching to more fuel efficient car models and models that
make less CO2 emissions easily. This can be necessitated by renewing lease
agreements with owners of cars with detailed features, (Contract Hire and Leasing,
2017).

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References.
Altamuro, J., Johnston, R., Pandit, S.S. & Zhang, H.H., 2014. Operating Leases and
Credit Assessments. Contemporary Accounting Research, 31(2), Pp.551-580.
Contract Hire and Leasing, 2017. The UK's No.1 Leasing Website. [Online]
Available at: https://www.contracthireandleasing.com/guides/buy-versus-lease-the-
benefits-of-car-leasing/
[Accessed 30 October 2017].
Cosci, S., Guida, R. & Meliciani, V., 2015. Leasing Decisions and Credit Constraints:
Empirical Analysis on a Sample of Italian Firms. European Financial
Management, 21(2), Pp.377-398.
Morais, A.I., 2013. Why do Companies choose to Lease Instead of Buy? Insights from
Academic Literature. Academia Revista Latinoamericana De Administración, 26(3),
Pp.432-446.