By Matt Rossiter and Dillion Blake
Moving to a flexible, tax-free reimbursement program can help oil and gas companies manage a mobile workforce and save money during both economic booms and busts
Oil and gas companies know all too well the belt-tightening that comes with an economic downturn. Oil prices have been low for years now, showing companies how critical it is to ensure methods of maintaining profitability during all pricing circumstances.
Sometimes these ways take surprising forms, like shifting away from the traditional fleet toward a new type of vehicle program.
The Challenges of Having a Fleet
Oil and gas companies employ a massive mobile workforce for field activities, including maintenance and diagnostics on wellheads and drills, or production data acquisition. Companies often provide a fleet of private-passenger trucks for these field employees to use when driving to a site.
But maintaining a fleet in this industry is incredibly expensive. Wellheads and drilling operations are usually located in remote, uninhabited areas. Companies need rugged trucks with 4×4 suspension for off-roading. These fleet vehicles are not only costlier to purchase than, say, providing a fleet of sedans for sales people, but they are also more expensive over the life of the vehicle.
Vehicles going off-road take quite a beating due to the rugged terrain. This means an oil and gas company is making repairs to its fleet much more frequently than a company of sales people driving sedans around town.
Additionally, it’s difficult to flip these vehicles for anything close to book value. Once it’s time to trade them in for something newer, they’re generally the opposite of gently used. This means whether the company owns or leases, it will take a loss when trading in or selling its fleet vehicles.
These costs add up. The oil and gas industry is one of the most changeable in the world, and companies need to stay one step ahead by taking advantage of opportunities to save on the sunny days to prepare for the rainy ones.
Instead of spending thousands each year for hundreds of company vehicles – including storage, repairs and fuel – organizations should instead consider a flexible reimbursement program, which a company can run lean or fat, depending on the economic circumstances. Either way, it remains fair and accurate.
The Benefits of FAVR
Oil and gas companies can reduce expenses with a fixed and variable rate reimbursement (FAVR) for employees’ personal vehicles.
FAVR vehicle programs offer some of the fairest, most accurate and defensible vehicle payments. FAVR is widely considered a “best-of-breed” program that blends the fixed costs of owning a vehicle with geographically specific variable expenses (such as fuel) to produce highly accurate reimbursements.
FAVR programs are the fairest, most targeted option for organizations, especially for oil and gas companies with employees dispersed across different regions driving 5,000 or more miles per year. A FAVR program can be implemented in any company, regardless of size, and they can be custom-built to suit an individual company. Companies start by choosing a standard base vehicle model(s) and setting insurance requirements that fit their organization’s objectives.
Mobile workers receive a monthly fixed reimbursement based on the ownership costs associated with the base vehicle specific to where they live. However, the mobile worker has the flexibility to drive any truck they’d like within the program parameters. Fixed rates are calculated to cover insurance, taxes, depreciation and registration. The variable reimbursement each month is based on the price of gas where they live and accounts for the changing costs of fuel, maintenance and tires.
Employees Like FAVR, Too
FAVR has a number of benefits that will appeal to employees, including to prospective employees, as part of a recruitment strategy – a plus in the oil and gas industry, where turnover can be high.
Receiving a fixed sum designed to cover insurance, taxes, depreciation and registration, an employee earns more net dollars than a company with a fleet program. This also reduces the employees’ tax burden. In contrast to flat allowances, FAVR is a tax-advantaged program, making it especially attractive. Employees are granted a tax-free, variable cents-per-mile reimbursement scaled to the price of gas locally, which accounts for the cost of fuel, maintenance, oil, tires and other incidental expenses.
Employees also can drive their preferred vehicle – as opposed to a dented three-year-old truck, as is the case with many oil and gas fleets – and get paid to do it. They also can buy a new vehicle and get it free, or for much less money than a standard car payment plus insurance (depending how much a company chooses to reimburse and what kind of car the employee chooses).
Combining FAVR and Fuel Cards
Companies don’t need to give up fuel cards just because they move away from a fleet, and can still issue their employees a preloaded fuel card each month. Employees get their fixed payments covering ownership of the vehicle in a paycheck, and a variable reimbursement loaded to a card that covers fuel – a fair and realistic amount based on the cost of gasoline in each month.
In this program, companies can have both flexible reimbursement programs and fuel cards, but with protection around the fuel card amount. Companies only reimburse employees for a specified amount of gasoline based on an estimation of the business miles they will drive, as opposed to paying for all personal use with a fuel card.
A Boon for O&G Companies
FAVR avoids the capital drain associated with fleet programs, freeing organizations from buying and maintaining company vehicles, and mitigating the risk of over- or under-reimbursing an employee for fuel. A FAVR program generally costs a business about 14 to 26 percent less than a fleet program, which often adds up to hundreds of thousands of dollars. Companies benefit from a lower tax burden because of the tax-free reimbursement, giving them the opportunity to do more with less – an especially helpful option during an economic downturn.
Additionally, this flexible program can react to the economic environment, running leaner in downturns (for example, by reimbursing less for gas because prices are lower) and preventing other expense cutting. The main distinction is that a company does not own the asset, so in a down economy, the company is not on the hook for storage and maintenance costs for an entire fleet of vehicles – some of which may not even be in use when times are tough and head count is down.
Good Times, Bad Times
In an industry that’s always bracing for the next downturn, it’s important to know there are options out there for vehicle programs and reimbursements, giving companies some choice in how they manage a mobile workforce. A FAVR reimbursement can go up and down, but the amount reimbursed will remain fair, defensible and in compliance with the IRS – which is helpful during economic booms and busts.
Not being bound to a fleet also creates flexibility. Instead of relying on depreciating assets that need to be stored, maintained and fueled up, companies can issue tax-free payments to employees – payments that can change with the economy. This flexibility may prevent some hard choices between downsizing a vehicle fleet or downsizing the workforce.
Companies considering FAVR should consult a business vehicle solution provider to develop a program that meets their requirements and strategic objectives. Business vehicle partners can provide the best local, industry and market data to help set the most effective fixed and variable rates for an organization. Given the constantly changing nature of regional costs, a dedicated partner can help keep variable rates accurate from month to month.
Because FAVR is an IRS-approved program and not a new idea, there are technology solutions available that navigate the ins and outs of FAVR compliance and reimbursement – alleviating administrative headaches and allowing oil and gas companies to focus more on productivity and safety in the field.