What is the Total Cost of Ownership (TCO)?

What is the total cost of ownership?

The total cost of ownership (TCO) is a financial estimate, including a broad range of inputs intended to help buyers and owners determine their fleet's direct and indirect costs. A TCO includes the cost of owning a commercial vehicle or piece of equipment from the time of purchase through the asset’s sale or retirement. In conducting a TCO analysis, owners and fleet managers can figure out a more accurate return on investment.

How is the total cost of ownership calculated?

When working on TCO calculations, owners need to figure out all the elements associated with the ownership lifecycle—not just the initial cost. Think about all the long-term costs associated with acquisition, operations, and resources before making purchasing decisions.

Acquisition costs

These are the costs of the vehicle or equipment. It’s the initial purchase price, acquisition or import costs, financing, licensing and permits, and more. The acquisition also includes fleet management systems, telematics devices or other tracking devices, installation costs, and employee training in the fleet business.

Operating costs

Operating costs are the recurring costs throughout the lifespan of the vehicle or equipment. This includes maintenance costs and repairs, fuel, insurance, taxes, fines, labor,  training, support services, and other ongoing procurement. But that’s not all; there are often hidden costs in operations that aren’t immediately apparent. For example, downtime costs if there are breakdowns or opportunity costs to take on a lucrative job. Fleet owners will also have to factor in depreciation as every asset will lose value over time.

Resource costs

Unless you’re an owner-operator on your own, most fleet managers will need help. They’ll need to hire knowledgeable drivers, dispatchers, maintenance technicians, warehouse staff and more to run their business for optimal results. Hiring these resources translates into additional costs.

Why is TCO important in fleet management?

The total cost of ownership calculation is a vital decision-making tool that helps improve fleet performance and an organization’s bottom line. Here are a few ways TCO can help with fleet management.

• Budgeting and planning: Keeping costs in check is a big part of managing a fleet. Knowing the true TCO helps managers look for ways to reduce the TCO. They can understand where their fixed and indirect costs are and take action to lower them.

• Fleet productivity: TCO helps managers know if they’re getting the full return on their investments or if an asset is leaving money on the table. 

Fleet selection: When decision-makers know the general TCO for their fleet, it can help them decide on future fleet purchases. For example, they can determine if a new car will deliver a return on their investment or if they should search elsewhere.