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Do You Know Your TCO: Total Cost of Ownership?

Monday, January 27, 2020

We all know the secret to success in construction is to constantly aim for increased margins and lower risk – not always easy in a volatile and risky field!  When working with owners from a Risk Management perspective I review their tools and equipment portfolio to ensure we have all the documentation for their insurance, but I also hone in on their TCO or Total Cost of Ownership.

From an equipment profit and loss perspective, firms that track their TCO will have far better insight into the real dollars spent on their fleet allowing them to make better decisions on when to repair and/or replace aging equipment. 

Breaking down TCO

The Total Cost of Ownership is broken down into 7 basic subgroups:

  • Loan/Lease Payments – or initial cash investment
  • Maintenance
  • Fuel
  • Parts
  • Depreciation
  • Insurance/Registration
  • Employee Training

Factoring in ALL of the above is critical if you want to know the true ROI (Return on Investment) of the equipment.  Here are some things that often slip by an owner’s radar when it comes to their fleet:

  • When to buy new or used – factoring in the initial drive off the lot depreciation of the piece is important when buying a customized new fleet item. 
  • Maintenance schedule – will this have to be outsourced or can you handle it in house – buying an older piece of equipment may require more than buying new. 
  • Fuel – for many this is the largest expense.  An excavator can use up to 6-12 gallons per day on site.  Do you have solid tracking systems in place?
  • Employee training – this is a given for any piece of equipment, especially safety training.  But moving from a low tech to a higher tech version will require training – are you considering that time (and money)?

Tapping into Technology to track your TCO

The use of technology including telematics, AI, and a myriad of project software is not new to the construction industry – but many owners fail to use it to monitor their TCO.  What you use of course depends on the size of your firm and your budget – but even the minimum is far better than relying on the human factor and paper trails.

We mentioned fuel cost above as being one of the biggest expenses, yet most firms don’t have a detailed inventory of usage.  Many firms know how much diesel they buy in a month, but they aren’t tracking where that diesel is going. Consider using a fleet management tool that will calculate not only miles per gallon per asset but will also calculate the cost per usage per hour – a number that will give you a true TCO.  Not only will this real time number give you an accurate job site cost, it will also allow you to see trends and a spike in fuel usage could be a red flag for a maintenance issue.

Managing maintenance schedules using technology and adopting a proactive versus reactive mentality will help you get a clearer picture of your TCO.  The secret is to try and automate as many processes as possible using things such as telematics – allowing a direct connection between equipment and cloud-based software.  Data collected not only will alert foreman and owners of possible issues in real-time, but the analysis of current and legacy data and predictive modeling gives construction firm owners a big leg up not only on TCO but on future actions and planning.  Tight budget?  There is a myriad of software programs available that integrate with a mobile application and require manual data input.  Not as efficient as telematics but still far better than pen and paper.  The trick is building this into your employee processes and have ongoing training.

Lastly, I want to touch on the insurance aspect.  Keeping your risk manager up to date on recent leases and purchases, as well as employee staffing changes and safety training, and early claims reporting will help manage the insurance cost part of your TCO. 

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.