WHAT IS TOTAL COST OF OWNERSHIP (TCO)?
Total Cost of Ownership (TCO) is a strategic asset maintenance practice that considers the holistic costs of designing, building, operating, maintaining, and renewing physical assets. A TCO model helps facility managers and owners make informed, predictive, and defensible building life cycle investment decisions based on multiple types of integrated datasets. Understanding the TCO model doesn’t have to be as complex as it seems.
HOW DOES TCO HELP MY ORGANIZATION?
A TCO model can be used to help various stakeholders understand all costs associated with the life cycle of a physical asset. You may ask what costs are included; those are:
- Initial costs of design and construction
- Operations and maintenance expenditures
- Deferred maintenance backlogs
- Utilities, energy, and carbon emissions
- Systems renewal and programmatic improvements
- Decommissioning, repurposing, and divesting
These costs can be divided into two groups: one-time costs and recurring costs. Initial design, construction, and “end-of-use” activities (such as decommissioning, repurposing, and divestment) can be understood as one-time costs. Recurring costs happen over the life cycle of each individual asset and include operations, maintenance, deferred maintenance, utilities, energy, and renewals/improvements.
DOES TCO IMPROVE CAPITAL PLANNING?
A TCO model delivers objective and informed decision-making capability and can answer several questions, including:
- Where should investments be prioritized?
- Why should an asset receive investment?
- How much investment should be made in each asset?
- What are the consequences of asset investments across the total portfolio?
With a well-built TCO model, organizations can build long-range, viable, and flexible capital strategies. At Facility Optimization Solutions LLC (aka FOS), we are assisting many of our clients in development of TCO models, toolsets, or components that are scaled to their organizational needs and resources. We believe that a TCO model is not a one-size-fits-all solution. Each should be tailored to reflect the specific challenges and stewardship goals of the individual client.
A TCO solution should be a foundational roadmap for studies and data collection, used to facilitate development over time. As an example, one of FOS’s long-term municipal clients used a multi-phased approach to facilities master planning. The municipality combined that with an existing in-house dataset to develop a solid TCO foundation. Phase one included a facility condition assessment (FCA), phase two was a space utilization and workplace strategies study, and phase three was a long-term facility master plan. Additional existing in-house datasets, such as energy and utility studies along with operational costs, were included to complete the spectrum of costs. Facing a set of challenges that many facility managers are familiar with, the municipality’s facilities were not well integrated into long-term plans. Additionally, maintenance and renewal projects were competing against other budget items, and they faced interdepartmental competition for funding. By partnering with FOS, they hoped to answer:
- How to prioritize deferred maintenance and capital renewal investments
- How to efficiently utilize their space
- How to create actionable and realistic projects based on physical and operational needs
- How to maintain objective communication between municipality leadership and stakeholders
FOS recommended a targeted investment approach to achieve a strategic level of improvement across the portfolio. The deliverables helped create a database of assets and investment needs, as well as a tool to prioritize limited resources and depoliticize decision making responsibly and transparently. Results from the master plan recommended discontinuing investment from their civic center building to reinvest needed capital into the deferred maintenance, renewal, and programmatic needs elsewhere. Data-driven decisions provided key stakeholders the necessary justification to support a robust reinvestment program that’s currently underway. The results of the phased study also secured funding for flex space to facilitate renovations and new emergency response facilities.
THE FOUNDATIONS OF TCO
Building a TCO model is no small task. The first step is creating an inventory of assets and assessing their condition – after all, we cannot improve what we cannot measure. This is done by performing an FCA to understand current-state deferred maintenance and capital renewal liabilities, creating a current replacement value (CRV) for all assets and inventorying assets at the building level. The FCA builds the base asset inventory, recurring maintenance need, and recurring renewal need. The FCA also serves the purpose of focusing on phases of utilization, utilities/energy analysis, and maintenance/operational costs on the highest value/potential assets.
A TCO model may be built in parts or phases, but the order of operations is critical. The more cost components, or information sources, included in the TCO model, the better the decision-making abilities will be. When starting with a blank slate, we recommend understanding the current state of conditions through an FCA before building other layers. You may be asking – when building a TCO model, where do we put the information? A centralized database should be maintained to store and interrelate information. TCO models are dynamic, so using a tool that allows users to continually update information is key. The database should allow integration to automate delivery of information from other sources, and interrelated information may be analyzed, visualized, and reported to support decision making. TCO model platforms can be made in Excel, custom Access/SQL databases, or custom web-based platforms. Each of these has specific advantages and disadvantages that should be considered at the start of your TCO journey.
THE RESULTS OF TCO
The level of complexity for a TCO model should match each organization’s unique needs, staffing levels, or ability to engage consultants to build and maintain the datasets. The key to keeping data current is to collect and manage only what is necessary to make decisions. Ultimately, you should have a continually updated model of your physical portfolio’s total cost of ownership to inform decision making and demonstrate the effects of investment on one asset as well as on your entire portfolio. The goal of TCO is to guide confident, results-focused facility improvement through live data.