Total cost of ownership (TCO) measures the real cost of a vehicle, including all associated costs like acquisition and maintenance. An accurate TCO calculation can help your company determine when to replace fleet vehicles, service them or consider transitioning to leased vehicles. It’s important to measure TCO accurately because a misleading calculation can provide false forecasting into the cost of your assets and lead to damaging financial decisions.
How to Calculate TCO
Ernst & Young (E&Y) conducted a study on TCO in 2012 and determined the major cost categories for this measurement, which included:
- Cost of capital
- Asset depreciation
- Vehicle administration
*In this study the TCO is measured in cost per mile*
Cost of Capital
Capital costs is the most overlooked metric, particularly for small- to medium-sized businesses who purchase assets using cash. When businesses acquire assets without needing financing, it is often assumed this does not need to be included in the TCO calculation. But, it in fact does need to in included, businesses must account for this opportunity loss of money.
The E&Y study found that economies of scale influence total cost of ownership. The greater the fleet size, the lower the TCO per unit. The reason this is true is because larger fleets tend to have greater negotiating power with dealerships and suppliers.
The cost to maintain a vehicle increases over its lifetime. E&Y found maintenance costs to increase exponentially as assets age. With the greatest increases happening in the first and seventh year of the asset life. Repair costs average $14.80 per vehicle when in service one year and increase to $68.62 per vehicle after being in service for over three years. Many fleets may choose to sell a vehicle after its seventh year of service while it still maintains some of its value.
Another big factor when is comes to maintenance costs is the quality of the work. Utilizing a maintenance team that has a good reputation and puts in the time and effort into your vehicle, will reduce costs as well.
The value of your assets decrease over time as it undergoes greater wear and tear. Companies often calculate depreciation under the assumption it will be valued $0 at the end of its predicted useful lifecycle. However, assets can be valued at 20 percent of its purchase price after five to six years of useful life and 10 percent of its purchase price after ten years.
What this means is many assets still have value even after 10 years. So don't assume that because one of you assets is old and beat up it is worthless.
Licensing and Vehicle Administration
Be sure to incorporate your licensing and vehicle administration costs in your TCO calculation. These costs may vary from one fleet to another. Carefully consider all associated costs in your calculation to arrive at the most precise answer.
Utilizing Fleet Maintenance Software
If you have FMS (fleet management software) it makes calculating these numbers much easier. It gives you all the data sets you need in order to calculate all the topics discussed above. Using FMS saves you time, money and give you the most accurate calculations.
If you don't have FMS you will have to invest more time into finding the numbers you need to calculate your TCO. A good idea once you calculate you TCO is to compare it to a similar company. It helps you benchmark where you are at expense wise, and it helps you to see if you are spending too much in certain areas.
With that being said you don't want to use another companies numbers that is similar to yours to calculate your own TCO. This can have negative repercussions because it can give you an unrealistic data that isn't specific to your company. This could lead to you making financial decisions that are bad for your business.