total cost of ownership

Understanding True Cost of Ownership

What does TCO involve?

Total Cost of Ownership (TCO) involves all related costs across the asset’s entire life cycle to provide a more accurate basis for determining the value (cost vs. ROI) of the overall investment than the purchase price alone. The overall TCO includes direct and indirect expenses which also include intangible or ‘softer’ costs that may be assigned a monetary value. For example, an asset’s TCO might include the initial purchase price, a good deal on ongoing support, maintenance, and low system management time because of its user-friendly control systems and interfaces.

What factors influence TCO?

For a typical built asset, the TCO would need to factor in costs accumulated from purchase to decommissioning. For example, this means initial acquisition price (design / build install), commissioning, repairs, maintenance, upgrades, service or support contracts, integration, security, software licenses, user training, upgrades, decommissioning and disposal. It can even include the credit terms on which the company purchased the asset. Through analysis, the purchasing manager might assign a monetary value to intangible costs, such as systems management time, electricity used, downtime, insurance and other overhead. The total cost of ownership must be compared to the total benefits of ownership (TBO) to determine the viability of a purchase.

There are several methodologies to calculate total cost of ownership, but the process is not perfect. It can be difficult to define a singular methodology for basing purchasing decisions on uniform information. There are also unforeseeable costs that can distort the model such as a vendor refusing to continue to provide availability of spares. Unpredictable costs can also include sudden rises in price in spares and consumables or rises in raw material commodities.

Another problem is that it is difficult to determine the scope of operating costs for any piece of equipment; some cost factors are easily overlooked or inaccurately compared from one piece of equipment to another. For example, do support costs include the cost of spare parts? This might make support cost more than it does on an equivalent piece of equipment, but eliminates an additional cost factor of parts acquisition.

Owner / Operators and purchasing decision makers complete total cost of ownership analysis for multiple options, to then compare TCOs to determine the best long-term investment.

Definitions:

First Cost (FC)

The summation of individual cost elements, using established methods, to estimate the future initial costs of a program, based on what is known today.

Life Cycle Costing (LCC)

An important economic analysis used in the selection of alternatives that impact both pending and future costs. It compares initial investment options and identifies the least cost alternatives for a twenty year period.

Total Cost of Ownership (TCO)

A financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.

TCO related cost models

Once the TCO for the desired option is ascertained, the values can be used in various metrics / cost models to assist the owner in the decision making process on cost vs. ROI.

Facility Condition Index (FCI) is comparative benchmark to indicate the relative condition of an asset, a part of an asset or an entire portfolio of assets. The FCI provides a corresponding rule of thumb for the annual reinvestment rate (funding percentage) to prevent further accumulation of deferred maintenance deficiencies. The FCI value is a snapshot in time, calculated on an annual basis that is represented on a scale of 0.0 – 1.0 or 0% – 100% with the higher the value the poorer the asset’s condition. A fair to good value is generally regarded as 10-15%. The owner may set the point that would trigger the decision to replace the asset.

 

FCI (Facility Condition Index) = DM (Deferred Maintenance) + CR (Capital Renewal)

CRV (Current Replacement Value)

Error budgets

The set points of FCI values can be further enhanced with the use of Error Budgets. Error Budgets are used to define the effective availability performance of assets in terms of a percentage up time. Error Budgets are measured as an average over a fixed number of FCI snapshot periods and allow the limits of the FCI set points to be exceeded providing that the value over time averages out within the level of acceptance. For example, if the error budget for the FCI was set at 10-15%, a one month period could be allowed to temporary rise to 18% providing that the average over a 12 month period remained no higher than 15%.

Similarly Error Budgets can be used independently to determine asset operational uptime efficiencies. For example, an Error Budget of 97% operational uptime would require the asset to be operational for at least 97% of the time over a fixed 12 month period.

Adaptive / Adequacy Index (AI) or Programmatic Index (PI) is a benchmark expressed as a value from 0.0 to 1.0 to indicate the assets suitability to perform a programme / mission based role. AI is calculated by dividing the deferred programme / adaptive requirements (PR) by the current replacement value (CRV).

 

AI (Adaptation Index) or PI (Programmatic Index) = PR (Program Requirements)

CRV (Current Replacement Value)

 

For both of the above models, the Current Replacement Value (CRV) must take into account all the costs required to reinstate the replacement for the current asset to the point where the new asset is functioning as required to perform as required by the programme. Such costs include but are not limited to: initial acquisition price (design / build install), integration, testing, security, software licenses and user training up to active commissioning.

REBIM collects events as Issues, Tasks and post which are all logged against tagged equipment. Using the powerful REBIM API to access the equipment events provides valuable business intelligence needed to support the Total Cost of Ownership process. To find out more, visit our user documentation for creating Issues and Tasks.

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