Total Cost of Ownership Simplified

by | Nov 8, 2018 | Administration, Operations & Maintenance | 0 comments

In any business environment, the term “Total Cost of Ownership” is generally defined as all direct and indirect costs associated with an asset over its entire life cycle – first cost plus the costs of operation. First cost is ALWAYS less than the costs of operation, and it can range from 1-33% of the total life cycle costs. For HVAC systems, this first cost range tends to be more narrow and closer to 15-20%, which leaves 80-85% in operating costs.

Given this relationship between first cost and operating costs, when purchasing an asset, owners should not just consider an item’s purchase price (short-term cost), but they should also consider its long-term price, which is its total cost of ownership.

Most operating budgets include line items for day-to-day costs of running the business such as utilities, labor for maintenance and repairs, and materials. In facilities management, the total cost of operation for heating and cooling systems is often defined as the sum of 5 variables: energy (utility costs), maintenance, equipment capital (renewal), the cost of failure, and repair costs. With this definition, it would stand to reason that reducing a part would yield a reduced sum. Not necessarily.

The diagram below represents the total cost of operation as defined by the sum of its 5 main parts. Energy represents 30-50% of the whole with regular maintenance and the cost of failure following it. Cost of failure includes the cost of any rental equipment while repairs are taking place but also includes any revenue impacts to the overall business. Repairs and capital (first cost) are typically the lowest contributors, collectively making up less than 20% of the whole.

Let’s say a facility manager is directed to reduce operating costs and chooses to make staffing cuts to support this directive. Less salary and burden mean less costs overall, right?

Maybe, but probably not.

Less full-time employees will likely mean less time allotted to regular maintenance tasks like cleaning coils, changing filters, and greasing bearings. And yes, all of these tasks can be rolled into a service contract. No argument there. However, it would be extremely difficult to outsource these tasks for less cost than it would be to retain those same employees. Beyond the cost, a service contract has a definitive scope of work. Maintenance staff, however, realize a moving target when it comes to scope of work; their daily activities vary by the immediate needs of the team and building they support.

So, for the sake of argument and this hypothetical scenario, let’s assume that less maintenance staff translates into less time for regular maintenance activities.

Less time spent performing maintenance tasks means less of these tasks will be completed, which will yield less efficient operation. Equipment will only perform at its best if properly maintained.

Less efficient operation will result in higher energy costs

Not only will energy costs likely increase as equipment efficiency decreases, but repairs costs will also likely rise.

Every once in a while, I’ll see a quote pop up in my LinkedIn feed, “Warning: If you don’t schedule time for maintenance, your equipment will schedule it for you.” So true.

Maintenance that schedules itself is corrective maintenance, a repair. Even if regular maintenance costs decrease, it’s to be expected that repair costs will increase.

The Total Cost of Ownership of any asset or building comes down to balance. Each time a variable is adjusted, it has an impact on the others in the equation. This response isn’t necessarily good or bad, but it’s something to be aware of when making long-term decisions that impact your operating budget.

 

About me: My career has offered me a whirlwind of opportunity in the engineering and construction industry, but my passion is rooted in developing and implementing training programs for facilities management teams. Every facility manager I have ever had the privilege of meeting simply wants to do good work, and my mission in life is to empower them to do more of it.

I have been responsible for the development and management of over $370 million in specialized energy solutions and infrastructure projects. Since starting my career in healthcare engineering consulting, I have provided healthcare facility managers with the tools and resources they need to make data-driven, well-informed decisions that improve their energy efficiency, building performance, and facility operations. The most recent of these solutions is a healthcare facilities operation and maintenance training program, the first of its kind in the industry. 

Let’s connect: If you have a success story in facilities management, I’d love to hear about it and learn how you made it happen. 

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