Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and

indirect costs Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Like direct costs, indirect costs may be either fixed or variable. Indirect costs include administration, p ...

of a product or service. It is a

management accounting In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions. Definition One simple definition of management accounting is th ...

concept that can be used in

full cost accounting Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or a ...

or even ecological economics where it includes

social cost Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...

s. For manufacturing, as TCO is typically compared with doing business overseas, it goes beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits.

Use of concept

TCO, when incorporated in any financial benefit analysis, provides a cost basis for determining the total economic value of an investment. Examples include:

return on investment Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...

internal rate of return Internal rate of return (IRR) is a method of calculating an investment’s rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or ...

, economic value added, return on information technology, and rapid economic justification. A TCO analysis includes

total cost of acquisition Total cost of acquisition (TCA) is a managerial accounting concept that includes all the costs associated with buying goods, services, or assets. Generally, it is the net price plus other costs needed to purchase the item and get it to the point of ...

and

operating cost Operating costs or operational costs, are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to main ...

s, as well as costs related to replacement or upgrades at the end of the life cycle. A TCO analysis is used to gauge the viability of any

capital investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

. An enterprise may use it as a product/process comparison tool. It is also used by

credit market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, ...

s and

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

agencies. TCO directly relates to an enterprise's asset and/or related systems total costs across all projects and processes, thus giving a picture of the profitability over time.

Computer and software industries

TCO analysis was popularized by the Gartner Group in 1987. The roots of this concept date at least back to the first quarter of the twentieth century. Many different methodologies and software tools have been developed to analyze TCO in various operational contexts. TCO is applied to the analysis of information technology products, seeking to quantify the financial impact of deploying a product over its life cycle. These technologies include

software Software is a set of computer programs and associated documentation and data. This is in contrast to hardware, from which the system is built and which actually performs the work. At the lowest programming level, executable code consist ...

and hardware, and training. Technology deployment can include the following as part of TCO: * Computer hardware and programs ** Network hardware and software ** Server hardware and software ** Workstation hardware and software ** Installation and integration of hardware and software ** Purchasing research ** Warranties and licenses ** License tracking/compliance **

Migration Migration, migratory, or migrate may refer to: Human migration * Human migration, physical movement by humans from one region to another ** International migration, when peoples cross state boundaries and stay in the host state for some minimum le ...

expenses ** Risks: susceptibility to vulnerabilities, availability of upgrades, patches and future licensing policies, etc. * Operation expenses ** Infrastructure (floor space) ** Electricity (for related equipment, cooling, backup power) ** Testing costs ** Downtime, outage and failure expenses ** Diminished performance (i.e. users having to wait, diminished money-making ability) ** Security (including breaches, loss of reputation, recovery and prevention) ** Backup and recovery process ** Technology/user training ** Audit (internal and external) ** Insurance ** Information technology personnel **

Corporate management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activities ...

time *Long term expenses ** Replacement ** Future upgrade or scalability expenses ** Decommissioning In the case of comparing TCO of existing versus proposed solutions, consideration should be put toward costs required to maintain the existing solution that may not necessarily be required for a proposed solution. Examples include cost of manual processing that are only required to support lack of existing automation, and extended support personnel.

Facilities and built environment

Total cost of ownership can be applied to the structure and systems of a single building or a campus of buildings. Pioneered by Doug Christensen and the facilities department at

Brigham Young University Brigham Young University (BYU, sometimes referred to colloquially as The Y) is a private research university in Provo, Utah. It was founded in 1875 by religious leader Brigham Young and is sponsored by the Church of Jesus Christ of Latter-d ...

starting in the 1980s, the concept gained more traction in educational facilities in the early 21st century. The application of TCO in facilities goes beyond the predictive cost analysis for a new building’s “first cost” (planning, construction and commissioning), to factor in a variety of critical requirements and costs over the life of the building: * replacement of energy, utility, and safety systems; * continual maintenance of the building exterior and interior and replacement of materials; * updates to design and functionality; * and recapitalization costs. A key objective of planning, constructing, operating, and managing buildings via TCO principals is for building owners and facility professionals to predict needs and deliver data-driven results. TCO can be applied any time during the life of a facility asset to manage cost inputs for the life of the structure or system into the future.

Developing standards for TCO in facilities

APPA, an

ANSI The American National Standards Institute (ANSI ) is a private non-profit organization that oversees the development of voluntary consensus standards for products, services, processes, systems, and personnel in the United States. The organi ...

Accredited Standards Developer, published ''APPA 1000-1 – Total Cost of Ownership for Facilities Asset Management (TCO) – Part 1: Key Principles'' as an American National Standard in December 2017. APPA 1000-1 provides financial officers, facility professionals, architects, planners, construction workforce, and operations and maintenance (O&M) personnel the foundation of a standardized and holistic approach to implementing TCO key principles. Implementation of TCO key principles can improve decision making, maximizing financial strategies over the life of an asset, starting at the planning and design stage and extends to the end of the asset's life. APPA 1000-2, slated for publication in 2019, will focus on implementation and application of key TCO principals in facility management.

Transportation

The TCO concept is easily applicable to the

transportation Transport (in British English), or transportation (in American English), is the intentional movement of humans, animals, and goods from one location to another. Modes of transport include air, land ( rail and road), water, cable, pipelin ...

industry and to motor vehicle ownership, for example, the TCO defines the cost of owning an

automobile A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, seat one to eight people, have four wheels, and mainly transport people instead of goods. The year 1886 is regarded ...

from the time of purchase by the owner, through its operation and maintenance to the time it leaves the possession of the owner. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget. Some of the key elements incorporated in the cost of ownership for a vehicle include:Bartlett, J.
The Cost of Car Ownership Over Time
updated 1 April 2020, accessed 28 January 2021 * Depreciation costs *

Fuel A fuel is any material that can be made to react with other substances so that it releases energy as thermal energy or to be used for work. The concept was originally applied solely to those materials capable of releasing chemical energy b ...

costs *

Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

Financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

* Repairs * Fees and taxes *

Maintenance Maintenance may refer to: Biological science * Maintenance of an organism * Maintenance respiration Non-technical maintenance * Alimony, also called ''maintenance'' in British English * Champerty and maintenance, two related legal doct ...

costs * Opportunity costs *

Downtime The term downtime is used to refer to periods when a system is unavailable. The unavailability is the proportion of a time-span that a system is unavailable or offline. This is usually a result of the system failing to function because of an un ...

costs.

References