Contract hire

Contract hire is a monthly contract for renting a vehicle or a plant, which covers everything but insurance, fuel and operator.

This kind of contracts are provided by contract hire companies specialised in renting who agree to rent a vehicle or a plant for period that is not necessarily the life of the vehicle or plant.

Contract hire agreements are much simpler than contracts at a fixed price, because the commitment and responsibility of the supplier is smaller. Cases such as late payment, acceptance tests and many others simply do not appear. However, account should be taken of the intellectual property rights arising from the work.

Diferrence between contract of hire and sales of goods

Contract of hire is fairly well easy to distinguish from the sales of goods:

• Because the parties never predict that ownership will be transferred from the owner to the hirer.
• A contract of hire is an agreement whereby one person gives the right to possess without ownership of the goods to another person in return for payment.
• Payment can be periodic as in the case when the owner of the house hires the TV or can be one-time, as in many cases car rental.

"Hire contracts may be called rental agreements, leasing agreements, contract hire, etc. but legally they are all the same".

Contract hire of vehicles

Contract hire of vehicles has become a very attractive option. It may differ from the delivery of the vehicle itself, through maintenance, drivers, insurance, etc. to the condition of the complete distribution conflicts. Therefore, there has been a rapid development of external distribution companies offering a variety of services. The financial benefits of contract hire include the release of capital and the easier and more predictable costs of operations.

Contract hire commonly used in the supply of car fleets company. The lessor bears some responsibility for the management and maintenance of the assets at an agreed level. However, fleet management goes beyond normal contract hire and includes constituents such as accident management so that altogether related to the vehicle is outsourced to the hirer.

Body shopping

Contract hire is sometimes dismissively referred to as "body shopping ". Independent contracts are closely linked, whereby individuals sell their own services to customers on a similar basis to a contract hire.

Examples of Contract hire

• Long term car rental: Long term car rental is a service in which a customer can rent a vehicle for a period of time, usually several months to years, to fulfil their personal or business needs. The customer pays a fixed amount each month and the rental company provides regular maintenance and servicing for the vehicle. The rental company also handles any repairs or replacements.
• Plant hire: Plant hire is a service in which a company rents out a variety of large machinery such as diggers, excavators, bulldozers, forklifts and cranes to other businesses or individuals for a pre-determined period of time. The hirer is responsible for providing fuel, insurance and any operator needed to operate the machinery. The hirer also pays a fixed fee per month for the duration of the contract.
• Aircraft leasing: Aircraft leasing is a common form of contract hire in which an airline leases an aircraft from a lessor for a pre-determined period of time. The lessee, or the airline, pays a fixed fee each month and the lessor is responsible for providing regular maintenance and servicing as well as any repairs or replacements. The lessee is also responsible for providing fuel, insurance and any pilots or crew needed to operate the aircraft.

Advantages of Contract hire

Contract hire is a long-term rental agreement that is perfect for businesses that require a fleet of vehicles or plant. Below are some of the advantages of contract hire:

• Cost-effective: Contract hire is a cost-effective option for businesses as it eliminates the need to purchase the asset outright, and instead allows the business to spread the cost over a fixed period of time. This is ideal for businesses that have a limited budget and need access to vehicles or plant without the added financial burden of ownership.
• Focused on usage: Contract hire allows businesses to focus on utilising the asset for its intended purpose, rather than worrying about the costs of ownership. This allows businesses to make better use of the asset, as well as having the flexibility to upgrade or change the asset when needed.
• No depreciation: As you do not own the asset, you do not need to worry about depreciation. This is great for businesses that require an asset for a short period of time, as there is no need to worry about the asset losing its value over time.
• Flexibility: Contract hire allows businesses to have access to the asset for a set period of time, without the commitment of ownership. This provides businesses with the flexibility to upgrade or change the asset when needed, without having to worry about selling the asset.
• Cost savings: Contract hire can also provide savings on running costs, as the asset is maintained by the company leasing the asset. This means that businesses do not need to worry about the additional costs of maintenance and repair.

Limitations of Contract hire

Contract hire has some limitations which should be taken into consideration before signing a contract. These include:

• Excess Mileage Charges - Contract hire agreements often come with a specific mileage limit and if the user exceeds this limit, they will be liable to pay an excess mileage charge.
• Early Termination Fees - If the contract hire agreement is terminated early, there may be early termination fees that the user may have to pay.
• Maintenance Costs - The user is usually responsible for the cost of regular maintenance and servicing of the vehicle or plant.
• Insurance - The user will need to arrange their own insurance cover for the duration of the contract.
• Residual Value - The user will be liable to pay the difference between the agreed residual value of the vehicle or plant at the end of the contract, and the actual value.

Other approaches related to Contract hire

Contract hire is a monthly contract for renting a vehicle or plant, which covers everything but insurance, fuel and operator. Other approaches related to contract hire are:

• Leasing - this involves signing a contract that allows you to use a vehicle or a plant for a predetermined period of time, usually two to five years. The lessor is the owner of the equipment and the lessee is the user who pays a fixed amount of money for the usage of the equipment.
• Rental - this type of agreement involves renting a vehicle or a plant for a short duration, usually a few days or weeks. The rental agreement includes the specific terms and conditions regarding the use, maintenance and insurance coverage of the vehicle or plant.
• Hire purchase - this is an agreement where the hirer pays a deposit and makes regular payments to the owner of the vehicle or plant. After all the payments have been made, the hirer has the right to become the owner of the vehicle or plant.

In summary, Contract hire is a monthly contract for renting a vehicle or a plant, which covers everything but insurance, fuel and operator. However, there are other approaches related to contract hire, such as leasing, rental and hire purchase, which involve various levels of ownership and commitment.

Contract hire — recommended articles

Full service leasing — Service lease — Conditional sale agreement — Novated lease — Ijarah — True lease — Residual payment — Long term lease — Staged payments

References

• Agrawal V., Ferguson M., Toktay L, Thomas V. (2011), Is leasing greener than selling?, Management Science manuscript MS-09-00479.R2
• Bott F., Coleman A., Eaton J, Rowland D. (2000), Professional Issues in Software Engineering, CRC Press, p.113
• Buchan R., Felming E., G. Fiona (2012), Estimating for Builders and Surveyors, Routledge, p.45
• Owens (2001), Law for Non-Law Students , Cavendish Publishing, p.347
• Rouse C. (2002), Bankers' Lending Techniques, Global Professionals, p.285
• Rushton A., Oxley J., Croucher P. (2000), The Handbook of Logistics and Distribution, Institute of Logistics and Transport, Kogan Page Publishers, p.383

Footnotes

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Author: Maciej Michałek