An effective TCO strategy looks beyond an asset’s initial purchase price and considers every facet of its life cycle.
By Regina Ludes
Capital planning is one of many decisions facilities managers must make on any given day. Without a solid understanding of total cost of ownership (TCO), however, those decisions can be rushed and result in purchasing equipment that is either too costly or doesn’t operate as well as expected.
TCO is about more than the purchase price. It’s about looking at all potential costs throughout the asset’s life cycle, including maintenance, repairs, lost business due to extended downtimes, energy consumption and waste. Understanding how these factors figure into the total cost of ownership can help managers develop a common-sense strategy to get the most out of their existing equipment while planning for replacement long before it’s needed.
“Considering the total life cycle of an asset and having a TCO mindset allows you to get in front of the problem before it gets out of hand,” said Allen Randolph, Senior VP of Customer Solutions with Kaivac, a cleaning provider. “The last thing you want is to replace a capital asset you didn’t see coming.”
A Multi-phased Approach
Randolph’s multi-phased approach to TCO analysis looks at an asset’s entire life cycle. During the first phase, when the initial investment is made, there’s usually a business reason for purchasing a new asset, such as HVAC units to keep employees and customers cool and comfortable during warmer months. Phase 2 focuses on owning and maintaining equipment for its expected life, which could be anywhere from five to 30 years, depending on the asset. By keeping to a regular preventive care program and handling minor repairs as they arise, facilities managers can keep equipment operating for most of that expected life. Some managers, however, tend to do minimal work to accomplish that, which is when they run into repair issues, Randolph explained. During Phase 3, as the equipment nears the end of its expected life, repairs and expenses may occur more frequently. Managers must weigh the cost of keeping it running versus replacing it.
Many facilities managers operate in the “run to fail” mode until an asset is no longer effective, said Randolph. However, that approach can mean rushing to replace that asset without taking time to research viable product alternatives. “Under duress, you might buy the same asset as before, even if it wasn’t the best investment,” said Randolph.
Consider Key Factors
At TravelCenters of America, which manages truck stops throughout the country, Krista Elwell, Facilities Director, said their focus is on maintaining equipment for as long as possible before replacing it.
“We consider the lifetime of equipment, then put in a preventive maintenance plan to keep it running. As long as an asset can be fixed, we’ll fix it,” Elwell said.
Age and condition of equipment are the most important factors she looks at when determining total cost of ownership. The company’s service providers are required to keep a checklist for each piece of equipment, including its repair history and performance over time. Those checklists are reviewed every quarter during regularly scheduled preventive maintenance sessions to make sure the equipment is in good working condition.
Other considerations are energy consumption, especially if there’s a sustainability plan in place, and compliance with federal regulations, such as updated refrigerant policy requirements. “The laws are always changing, which can dictate what materials and filters you can use,” Elwell said.
Ask the Right Questions
There are four basic questions that facilities managers should ask themselves when considering any capital improvement, Randolph said. Those questions and the overall evaluation process are the same, no matter what asset is being reviewed, whether it’s a roof, lighting or HVAC system.
Why are we investing in this asset? The answer is usually tied to some business objective. For example, replacing refrigerant in a cooler will keep product properly chilled for customers and prevent waste.
When and where should we invest in this asset? This question enables managers to examine all their locations to prioritize equipment replacement needs.
Is the asset costing us more to maintain than to replace it? If the repair costs are too high, it’s time to consider replacement.
How much should we invest, and what can we afford? If financial resources are limited, managers may choose to keep repairing. However, Randolph said the longer this decision is delayed, the more costly it might be to replace.
Resources for Facilities Managers
Formulating TCO strategies is a complex process. To assist members, ConnexFM’s Thought Leadership Committee is building a database of asset types and capital investments frequently used by facilities as well as life expectancy and replacement costs. This resource will allow members to compare the data with other similar equipment. Facilities managers will be able to plug in their own asset data, which can be as detailed as they want. “It will create a roadmap for future capital needs with relative accuracy,” Randolph explained.
Subject matter experts will be involved with the project, and the data will be peer reviewed for accuracy, Randolph said. The first draft will be available in 2025. Several white papers about TCO are also available, covering different maintenance areas, such as HVAC, roofing, lighting and flooring.
With the right tools and data, facilities managers can determine an asset’s total cost of ownership and make well-informed capital planning decisions for their organizations.
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