FEATURE
TOTAL COST OF OWNERSHIP: A BEGINNER’S GUIDE
Visibility of an asset’s lifecycle, from purchase to projecting future running costs, allows FMs to make data-driven judgments on maintaining or replacing them. Here, Daniel Golub, Asset Division VP at iOFFICE + SpaceIQ, explains how FMs can calculate the total cost of ownership (TCO).
If you’ve ever owned a car, you’ll know that the total cost comprises more than just the sale price. Once it’s out of the dealership forecourt, there’s tax, insurance, and running costs such as petrol and maintenance to consider. Ignore these factors and a car that you set your heart on can turn into a money pit.
It helps to think about building assets in similar terms. Whether it’s an essential piece of machinery in an industrial production site or a new air- filtration unit in an office, an asset’s purchase price and installation cost are just the beginning.
By understanding the total cost of ownership (TCO), facilities managers can make more informed purchasing decisions, save money in the long run, and collect the data to develop a more accurate strategy for areas such as capital renewal programmes and deferred maintenance.
What is TCO? TCO isn’t as scary as it sounds. It’s simply a method to help you determine which assets are most cost-effective for your business and which are costing you more to maintain than they should. In basic terms, every pound you spend to buy, install, operate and maintain an asset makes up its TCO. While all assets differ, there are numerous factors for facilities managers to consider, including:
utilities or fuel, the labour associated with training technicians, supplier costs if specialists subcontract the work, and the calculated impact on business operations should the failure of an asset lead to downtime.
Maintenance costs Assets demand both reactive and planned preventative maintenance (PPM). As such, facilities managers must factor in the cost of repairs or replacements, statutory works and safety testing, the price of parts and materials, and the hourly rate for technicians to perform these tasks.
“Across an extensive and mixed
portfolio, the same type of asset will
face more or less demand depending on the
Purchasing price When you buy an asset, you need to consider the sale price, installation cost, and any potential interest on the purchase.
Operational costs Once the asset is up and running, there’s insurance,
26 | TOMORROW’S FM location.”
Current value If you can sell the asset later, it’s worth understanding its resale value as this can depreciate over time.
How do I use TCO to my
advantage? Utilisation – No two assets are used the same way. Some operate more frequently than others. Across an extensive and mixed portfolio, the same type of asset will face more or less demand depending on the location. An air-conditioning system or lighting controls in a city centre building with high occupancy would deteriorate quicker than if the same system were in a quieter suburban office, leading to a more intense PPM programme and higher TCO for the former. That said, an asset with a higher TCO could have greater intrinsic value to your business, especially if it’s fundamental to operational runtime.
To make a fair comparison, facilities managers need to create and calculate an asset utilisation equation. You can do this by tracking an asset’s runtime per hour. Firstly, you need to identify
the purchase date and the date the equipment went live. Sometimes it takes a few days to bring an asset online.
Once you’ve determined the TCO for each asset, you can divide the number by the total runtime. If a machine has a TCO equalling £100,000 and you’ve used it for 2,000 hours
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