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Total Cost of Ownership (or TCO) is the collection of all expenses that go into operating a fleet asset. An accurate TCO calculation for each of your fleet assets can help you project budgeting needs and determine the best time to replace vehicles in your fleet. It's important to measure TCO carefully because a misleading calculation can provide false insight into the cost of your assets and lead to damaging financial decisions.
Ernst & Young (E&Y) conducted an in-depth study on TCO and determined the major cost categories for this measurement include cost of capital, maintenance, asset depreciation, licensing and vehicle administration. In the study, E&Y chose to measure TCO in cost per mile (CPM).
To calculate TCO, you need to add all of the costs associated with the operation of your vehicle. The formula to calculate TCO is:
Capital costs are the most overlooked cost metric, particularly for small- to medium-sized businesses who purchase assets using cash. When businesses acquire assets without needing financing, it is often assumed this does not need to be included in the TCO calculation. But, contrary to that belief, businesses must account for this opportunity loss of money, in other words, the loss of a potential greater return had the money been used differently.
The E&Y study found that economies of scale influence total cost of ownership. The greater the fleet size, the lower the TCO per unit (if measuring by cost per mile). A couple reasons this is true is because larger fleets tend to have greater negotiating power with dealerships and realize more maintenance efficiencies.
The cost to maintain a vehicle or asset increases over its lifetime. In fact, E&Y found maintenance costs to increase exponentially as assets age, with the greatest increases happening in the first and seventh year of the asset. According to a study by Automotive Fleet, repair costs average $14.80 per vehicle when in service one year and increase to $68.62 per vehicle after being in service for over three years.
As fuel is the largest budget item for many fleets, tracking fuel costs and consumption is essential to getting an accurate picture of your TCO. Each of your assets requires some form of fuel to operate, and the costs can vary wildly depending on the vehicle type, fueling location, and of course the fluctuating fuel economy.
The value of your asset decreases over time as it undergoes greater wear and tear. Companies often calculate depreciation under the assumption it will be valued $0 at the end of its predicted useful life. Typically, however, assets can be valued at 20 percent of its purchase price after five to six years of useful life and 10 percent of its purchase price after ten years.
| Cost Categories | Class 8 tractors ($/mi) | Class 6 & 7 trucks ($/mi) | Reefer trailers ($/mi) | Dry van trailers ($/mi) |
|---|---|---|---|---|
| Financing | 17.0 | 28.5 | 9.1 | 8.5 |
| Maintenance | 16.2 | 15.5 | 6.2 | 10.0 |
| Administration | 3.0 | 2.9 | 0.6 | 1.6 |
| Licensing | 2.0 | 2.7 | N/A | N/A |
| Total costs | 38.2 | 49.7 | 15.9 | 20.0 |
Calculating the cost per vehicle provides fleet managers with insights that can be used to streamline operations and make informed budgeting decisions. By evaluating the Total Cost of Ownership (TCO) for each asset, you gain a clear understanding of the financial impact of every vehicle in your fleet.
While it's tempting to calculate your TCO using another fleet's metrics, the result can be misleading. One fleet may vary from another in terms of economy of scale, number of assets, quality of maintenance, asset use and more, which can affect TCO calculations.
While it's important to use your own numbers when calculating TCO, it is a good practice to compare your TCO to a similar fleet's TCO. This can give you a solid idea into how your fleet is performing and whether you are keeping up with your peers.
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