How to Use Total Cost of Ownership to Make Data-Driven Equipment Decisions

Acquiring the skid steers, excavators and attachments to dig earth, move materials and more — plus keeping them operational — can be costly. And typically, the largest capital expense for a project is equipment. Fleet managers are tasked steadying equipment costs and generating a return on investment — neither of which are easy tasks.

Understanding the total cost of ownership (TCO) for each piece of equipment or asset class is essential to making sound, data-driven fleet decisions that positively impact your bottom line. Those decisions include what brand to purchase, whether to purchase new or used, when to dispose of an asset for maximum ROI and when to rent instead of own.

Some companies may assume that owning makes more business sense than renting, but in many cases, those assumptions could be mistaken. Visibility into TCO can pay off by enabling you to see, quantitatively, when renting is the right decision. TCO can show how much money can be saved by avoiding the capital expenditure of an equipment purchase as well as the costs of ongoing maintenance, transportation and storage. And keep in mind, money subtracted from the capex budget can be invested elsewhere in the business.

Comprehending TCO is the first step in reducing it. But TCO isn’t always an easy number to calculate, in large part because it includes maintenance and operation costs. Since those costs vary with use and operating environment, they are different for each company.  Determining the real costs for a company requires historical data — usually at least six to nine months. Without that information, you are doing guesswork rather than math.

Cloud-based fleet management software, used together with equipment telematics, is essential to having the right data to crunch. Most modern fleet management solutions allow a company to view costs associated with owning, operating and maintaining a specific asset.

To calculate TCO, begin by adding up:

• The purchase price, including taxes
• The cost of insurance and extended warranties
• The cost of transporting the equipment from jobsite to jobsite
• Maintenance and repair costs, including parts, supplies and labor
• Fuel and oil costs
• Storage costs
• Interest on financing
• Depreciation

For continuing expenses such as insurance, maintenance and fuel, you need to estimate how many years your company plans to own the asset, then multiply the projected annual costs by that number.

Subtract any revenue expected from the sale of the unit at the end of its planned lifecycle to arrive at the TCO. To annualize the TCO, you need to divide the TCO amount by the number of years your company plans to own the equipment.

Of course, annual TCO is not constant. The expense of depreciation slows over time, while maintenance and repair costs change with usage hours and operating conditions and increase as a machine ages. For determining maintenance costs, a preventive maintenance plan, administered through fleet management software, is critical. You can use fleet management software to generate regular reports that reveal the cost curve for owning and operating the equipment to help pinpoint the best time to dispose of it.

Understanding whether a piece of equipment is profitable requires a second input, beyond TCO, and that is utilization. Fleet management software can provide visibility into utilization of each asset or asset type. Higher utilization means a lower cost per hour of use. The more a machine is used, the more profit it’s generating. On the flip side, underutilized assets may be good candidates for rental. While there are no hard and fast rules, it may be smart to assess units with a utilization of less than 50 percent as rental candidates. That’s because this equipment spends much of the time idle, all the while depreciating in value.

To make a buy vs. rent comparison, look at the annualized TCO compared to the cost of renting the same unit for the number of days or weeks per year the equipment is used. Don’t look only at hours of usage per year. Even if your company uses an asset for a small number of hours per year, if the equipment is used almost daily, it’s essential and should probably be owned.

Total cost of ownership isn’t just a number, it’s an important piece of data that can help you find more value. Taken together, TCO and utilization are essential to developing an impactful fleet strategy. Taking these steps can help your company achieve annual budget goals and lower fleet costs by making smarter decisions around what equipment to buy, when to sell assets and when to rent instead of own.

Bret Kasubke is the director of customer equipment solutions at United Rentals