Replacing Smarter in a High-Cost Environment
Inflation, aging assets and unpredictable acquisition costs are forcing municipalities to rethink how they plan fleet replacements.
For municipal fleet managers, replacing vehicles has always required a balancing act between capital budgets, operational needs and the cost of keeping aging assets on the road. Inflation has made that balancing act considerably more difficult.
Vehicle acquisition costs remain well above pre-pandemic levels, while labour, parts and maintenance expenses have also increased. At the same time, many municipalities are still dealing with replacement backlogs created when vehicle availability became constrained during the pandemic.
The result is a difficult question: When capital is tight, which vehicles should be replaced now, which can safely remain in service, and how can a municipality avoid creating a larger financial problem several years down the road?
Increasingly, the answer lies in moving beyond annual replacement decisions and developing a disciplined, multi-year strategy based on lifecycle costs, operational risk and reliable fleet data.
“Inflation has led municipalities to prioritize replacements based not just on age and mileage but also on safety, service criticality, maintenance exposure, and downtime,” says Ian O'Dowd, Senior Strategic Client Advisor at Element. “Many are phasing replacements over multiple budget cycles and planning earlier because vehicle and upfit lead times remain variable.”
Although the sharp increases in vehicle pricing seen during the pandemic have moderated, the impact continues to be felt in municipal capital plans.
Ashley Hyland and Graham Peart, Strategic Account Managers at Holman, see municipalities responding by extending their planning horizons. “Inflation and other economic headwinds have fundamentally changed how municipalities budget for and acquire fleet assets,” Hyland says. “Over the last several years, municipalities have been challenged to navigate rising vehicle acquisition costs driven by higher OEM pricing, supply chain disruptions, rising labour costs, and increased component pricing.”
Many fleet operators are now paying significantly more for the same vehicle than they did pre-pandemic while also facing longer lead times and greater uncertainty around delivery schedules.
As a result, municipalities are increasingly looking beyond the next budget year.
“Several of our customers are now evaluating replacement requirements several years in advance, allowing them to forecast future capital requirements, mitigate potential budget spikes, and better manage the impact of rising acquisition costs,” Peart says. “A longer planning horizon also helps municipalities avoid large replacement peaks where too many vehicles are set to be replaced at the same time.”
“Inflation and other economic headwinds have fundamentally changed how municipalities budget for and acquire fleet assets.”
- Ashley Hyland, Strategic Account Managers, Holman
Extending replacement cycles
When acquisition costs rise, extending the life of an existing vehicle can appear to be the obvious way to reduce capital spending. But that calculation becomes more complicated when the full cost of keeping an aging asset in service is considered.
“Yes,” O'Dowd says when asked whether inflation has changed the economics of repairing versus replacing vehicles. “Higher vehicle prices can make repairing vehicles and deferring replacements look attractive, but parts, labour, and downtime costs have also increased.”
The right decision should be based on total lifecycle cost, including expected repair costs, lost productivity, downtime, safety, resale value, and replacement lead time, he adds. “For many vehicles, the operational cost of failure outweighs the apparent savings from extending a given vehicle's service life.”
That is particularly important for municipalities, where the consequences of a vehicle failure can extend beyond repair costs. A breakdown involving a snowplow, emergency response vehicle, utility truck or other critical asset can disrupt public services and force departments to find alternatives with short notice.
Peart similarly caution against viewing replacement decisions primarily through the lens of purchase price. “While acquisition costs have increased, so too have maintenance and repair expenses due to higher labour rates, technician shortages, parts inflation, and ongoing supply chain pressures,” he says. “In fact, many fleets are likely to see their rising maintenance costs outpace overall inflation.”
Holman's Vehicle Economic Service Life analysis is designed to help fleets look beyond traditional replacement triggers. “Our proprietary Vehicle Economic Service Life (VESL) analysis shows that delaying replacement cycles too long leads to a significant increase in maintenance spending, as well as reduced productivity, increased downtime, and less predictable operating budgets,” Hyland explains.
This model helps Holman’s customers shift away from age/mileage-based replacement decisions by evaluating additional data points.
Extending lifecycles
O'Dowd stresses that fleet managers need to be selective when weighing the pros and cons of extending lifecycles of aging vehicles. “Selective extension is often the more economical and operationally sound approach: retaining lower-risk assets where condition and utilization support it while continuing to replace operationally critical vehicles according to policy,” he explains.
This distinction is important. Extending the service life of a lightly-used, well-maintained asset may make financial and operational sense. Applying the same policy to a heavily-used vehicle that is essential to service delivery could create significant maintenance and downtime risks.
Peart identifies several factors that are making this decision more difficult, including capital constraints: “Municipal fleet operators are competing for limited capital funding while simultaneously managing aging assets and evolving operational requirements.”
He also points to inflation. “Fleet budgets that were established several years ago often no longer align with current acquisition costs,” he says. “Municipal fleet operators often find themselves hampered by multi-year budget plans that are difficult, if not impossible, to adjust.”
Even though supply conditions aren’t as bad as they were a few years ago, uncertainty remains a key consideration. “Although lead times continue to improve, municipalities still need to account for potential delays in vehicle production, upfitting, and delivery,” Hyland adds.
The accumulated effect of these pressures is visible in a number of today’s public-sector fleets. “Many organizations extended vehicle lifecycles during the pandemic due to limited vehicle availability and are now navigating aging fleets and replacement backlogs,” Hyland says.
The challenge now, is to prevent decisions made during the pandemic and subsequent supply chain disruptions from becoming permanent policy. “Specific to replacement cycles, many municipalities opted to extend lifecycles during the past five years, mainly out of necessity rather than strategy,” Peart says. “Today, many municipal fleet operators are shifting back to more disciplined lifecycle management.”
Building a rolling replacement plan
A long-term fleet strategy needs to be more than a list of vehicles scheduled for replacement. It should be a rolling plan that can adapt as vehicle costs, utilization patterns, lead times and operational priorities change.
“A successful strategy is a rolling, funded plan that combines age, mileage, maintenance history, downtime, utilization, service criticality, and anticipated replacement cost,” O'Dowd says.
He recommends municipalities maintain, a 5- to 10-year capital outlook, a more defined three-year funding plan, and a detailed annual ordering plan. “The plan should be refreshed regularly as pricing, lead times, and specifications change,” O'Dowd adds.
Hyland and Peart say that a successful strategy must be:
1. Sufficient – Replacing enough vehicles annually to prevent fleet aging and replacement backlogs.
2. Consistent – Avoiding large fluctuations in yearly replacement volume and capital spending.
3. Correctly Allocated – Prioritizing replacements based on economic need, utilization, maintenance trends, and operational risk rather than simply age/mileage.
The goal is a balanced fleet, rather than a cycle of widespread deferrals, followed by a sudden demand for large amounts of capital. “Successful municipal fleets maintain a balanced age distribution across their assets, creating predictable capital requirements, stable maintenance spending, reduced downtime, and improved operational performance,” Hyland says.
For planning purposes, Holman recommends municipalities look:
- - 3 Years Ahead – Detail Capital Budgeting
- - 5 Years Ahead – Replacement Forecasts
- - 7-10 Years Ahead – Strategic Lifecycle Planning
“Today, many of our municipal customers are leveraging this long-term replacement planning to provide finance and operations with a more accurate view of fleet demand and future capital requirements,” Peart says.
Predicting future costs
One of the biggest challenges with a multi-year replacement strategy is that future acquisition costs cannot be known with certainty. This makes regular forecasting and scenario planning increasingly important.
“Element helps clients build and regularly refresh multi-year replacement plans using fleet data, comparable benchmarks, current pricing, lifecycle costs, lead times, and scenario forecasting,” O'Dowd says.
AI-supported analytics, he adds, can help identify emerging cost and risk patterns across large datasets, “while coordination across the client, Element, OEM, and upfit network provides the context needed to translate those insights into practical decisions.”
Together, these capabilities provide earlier visibility into pricing, order timing and specification alternatives, helping clients identify and prioritize high-cost, high-risk vehicles before they place further pressure on the budget, O'Dowd explains.
At Holman, Hyland and Peart advocate moving away from a replacement plan built around a single forecast of future costs.
“The key to managing vehicle cost uncertainty is moving beyond annual budgeting and adopting a long-term, data-driven fleet replacement strategy,” they say. “Rather than treating replacement planning as a year-to-year exercise, organizations should develop a dynamic multi-year roadmap that can be regularly updated as market conditions evolve.”
Their approach considers “fleet inventory, vehicle utilization, maintenance performance, replacement cycles, acquisition costs, and anticipated growth.”
This methodology provides a comprehensive view of future fleet needs and potential capital expenditures. And because future pricing remains uncertain, flexibility needs to be built into the process.
“Since vehicle pricing is influenced by a variety of factors – inflation, supply chain disruptions, regulatory changes, market demand, etc. – we do not rely on a single cost assumption years into the future,” Hyland says. “Instead, we model a range of potential stakeholders, allowing our customers and their stakeholders to understand how different market conditions could impact future budgeting.”
A strategy for the long term
For municipalities under immediate budget pressure, deferring vehicle replacements can provide short-term relief. However, both O'Dowd and the Holman team emphasize that short-term savings should not come at the expense of a sustainable replacement strategy.
“Our advice is to build a sustainable fleet plan and lean on trusted partners to determine when market conditions justify an adjustment,” O'Dowd says. “Regular reviews of fleet data, AI-supported insights, lifecycle costs, and operational needs help ensure decisions are driven by long-term strategy rather than short-term budget pressure.”
Deferring replacement may postpone immediate spend, he argues, but it can also increase maintenance, downtime, and long-term operating costs.
Holman offers similar advice: “The best advice I can offer fleet operators is to focus on building a flexible, multi-year replacement strategy that is reviewed and updated regularly,” Peart says. “Organizations that plan proactively are better positioned to manage cost volatility, optimize lifecycles, and avoid the operational and financial risk associated with deferred replacement decisions.”
