Pricing a Fleet Service Contract From the Fixed-Cost Line Upwards
You run a two-ramp workshop in Siliguri with one helper. Your fixed monthly costs are: rent ₹18,000; electricity ₹4,000; helper's wages ₹12,000; equipment loan EMI ₹6,000; insurance and sundries ₹2,000, a total of ₹42,000. Your normal charge is ₹450 per hour of labour, and you mark up parts by 25 per cent. A fleet owner offers a quarterly contract: six diesel taxis, one service each per quarter, at a flat ₹2,800 per vehicle, payable 45 days after the invoice. Each service needs 4 litres of engine oil at a cost of ₹380 per litre, one oil filter at ₹250, two hours of labour, and an air filter (cost ₹300) on about half the vehicles, which he says he will pay for separately only if it is actually replaced. Your ramps currently run at about 60 per cent of available hours. You are GST-registered and must charge 18 per cent on services.
1. Work out the parts cost and your normal price for one of these services, then say whether ₹2,800 is below cost, below normal price, or both. Show the figures.
Read the worked answer
Cost build-up for one vehicle (without air filter):
- Engine oil: 4 x ₹380 = ₹1,520
- Oil filter: ₹250
- Parts cost: ₹1,770
- Parts at 25 per cent markup: 1,770 x 1.25 = ₹2,212.50
- Labour: 2 h x ₹450 = ₹900
- Normal price: ₹3,112.50 + 18 per cent GST
Air filter if replaced: cost ₹300, charged at ₹375 including markup.
Where ₹2,800 sits: it is below the normal price by ₹312.50, so it gives away the full labour margin and a slice of the parts margin. It is not below cost: the incremental (out-of-pocket) parts cost is ₹1,770, so each service still contributes 2,800 - 1,770 = ₹1,030 towards fixed costs and profit.
The GST trap matters more than the headline: if the fleet owner means ₹2,800 inclusive of GST, the net revenue is 2,800 / 1.18 = ₹2,372.88, and contribution falls to 2,372.88 - 1,770 = ₹602.88 per vehicle. That single clarification is worth more than an hour of haggling. Get it in writing before signing anything.
2. Compute the contribution from the contract and the number of such jobs needed per month just to cover fixed costs. What does this tell you about how hard you should bargain?
Read the worked answer
Contract contribution (GST exclusive):
- Per vehicle: ₹1,030
- Per quarter: 6 x ₹1,030 = ₹6,180
- Per month equivalent: ₹6,180 / 3 = ₹2,060
Fixed-cost coverage: fixed costs are ₹42,000 per month. 42,000 / 1,030 = 40.8, so you need about 41 jobs of this type per month just to break even on fixed costs - roughly 10 per week, far more than the two per month this contract brings.
If ₹2,800 is GST inclusive: contribution per vehicle is ₹602.88, so 42,000 / 602.88 = about 70 jobs per month to break even. The same contract then covers barely 3 per cent of fixed costs.
What this means for bargaining: the contract is worth about 5 per cent of your fixed-cost requirement, so it is not the contract that keeps the workshop open - the retail work is. That gives you two useful conclusions. First, you can afford to lose it, so do not accept bad terms just to win it. Second, because the ramps are only 60 per cent utilised, the 12 labour hours per quarter are genuinely spare capacity, which is exactly why any price above ₹1,770 is worth having. Bargain on terms and price, but walk away only if it is both GST-inclusive and below the parts cost plus a token margin.
3. Draft the commercial terms you would negotiate before signing, with reasons for each.
Read the worked answer
Terms to put on paper:
- Price: ₹3,100 per vehicle plus GST at 18 per cent, or hold ₹2,800 plus GST with a written note that prices are reviewed quarterly if oil cost moves more than 5 per cent. Reason: at ₹2,800 exclusive you still make ₹1,030 contribution on idle capacity, but you must be protected against lubricant price rises over a quarter.
- GST clause: state clearly that all prices are exclusive of GST. Reason: at inclusive pricing the contribution nearly halves, and a fleet owner will read the number whichever way suits him.
- Credit: 30 days, or 45 days with a 2 per cent credit charge. Reason: ₹16,800 per quarter is not large in absolute terms, but a 45-day precedent spreads to other fleet customers and the working capital cost is real for a two-ramp shop.
- Air filters and extras: billed at cost plus 25 per cent, only when replaced, with the old part shown to the driver or retained. Reason: prevents disputes and protects margin on items you cannot predict.
- Scope in writing: define exactly what a 'service' includes - oil and filter, fluid top-ups, brake and tyre inspection, a signed checklist - and what is chargeable extra. Reason: undefined scope is where small contracts become loss-making.
- Volume floor and scheduling: the rate applies to a minimum of six vehicles per quarter, booked in slots you nominate. Reason: the price is justified only by the volume and by fitting it into quiet hours.
- Payment method and warranty: NEFT to the workshop account; parts warranty per supplier; no liability for pre-existing faults recorded at intake. Reason: avoids the arguments that cost a small workshop more than the job is worth.