How to Calculate TCO in Fleet Management

Calculating the total cost of ownership (TCO) involves comparing the overall cost of a vehicle or fleet, like maintenance, against the remaining positive value of the vehicle or fleet in question. As part of this calculation, it’s essential to factor in fleet management costs, as they can significantly impact the overall TCO.

Understanding the value and cost of assets owned by your business is a decidedly important aspect of any successful enterprise. Because this sort of information is pretty invaluable to most businesses, a lot of top fleet management providers now come with tools to help owner-operators track and calculate operating costs, schedule in maintenance, and comply with local laws.

In this guide, you’ll learn how to calculate TCO and why it’s important for your business, so you can stay up to date on the value of your fleet.

In this guide:

• What Is Total Cost of Ownership (TCO)?
• What You Need to Calculate TCO
• How to Calculate TCO in Fleet Management
• Why Is Calculating TCO Important?

What Is Total Cost of Ownership (TCO)?

The total cost of ownership (TCO) is the overall value of a particular vehicle or fleet of vehicles.

The term is used to describe the calculation you do to determine that value, which includes a wide array of factors that are either a cost (negative value) or an asset (positive value).

What You Need to Calculate TCO

There are a lot of factors that go into calculating TCO, and forgetting any single one of them could dramatically impact the perceived value of the vehicle or fleet. Here are the factors you need to consider when calculating TCO.

• Initial cost
• Maintenance over time
• Fleet operating costs
• Current resale value
• Production value lost

Initial cost

One of the major factors to consider when calculating TCO is the initial cost of the vehicle or vehicles in your fleet. How much you spent when you acquired the vehicle will be one of the largest overall costs and will be a big indicator of whether your vehicle or fleet is valuable.

There are some factors that will impact this in ways you might not realize, too. It’s important to take into account whether you leased the vehicles or bought them outright, and factoring in inflation doesn’t hurt either. Additionally, converting your fleet to electric vehicles (EVs) will incur upfront costs, but could be massively cost-saving in the long run.

Maintenance over time

Another big and important cost, particularly over a long period of time, is the maintenance of your vehicles during their lifespan. This can range from simple paint jobs to full-on engine repairs, and all of them factor into the overall cost of the maintenance over time.

There are plenty of maintenance costs that may need to be factored into TCO, including car washes, oil changes, tire rotations, transmission fluid replacements, brake inspections, and any other important maintenance to keep your vehicles in tip-top shape.

Fleet operating costs

Operating a fleet is obviously quite expensive, and it is part of the equation when it comes to understanding TCO. Some examples of fleet operating costs include fuel, taxes, licensing, and other administrative work associated with managing an entire fleet.

Another operating cost to consider is fleet management software. Depending on your provider, you’ll likely have a monthly fee associated with running your business, but the improved efficiency will likely make up for it in the long run.

Current resale value

While all the factors listed above are costs, the current resale price is actually an asset that contributes positively to the value of the vehicle or fleet. Whatever you would receive by selling the vehicle on the open market is typically subtracted from the TCO overall calculation.

Production value lost

For fleet management, the value of your vehicles isn’t just in the resell price, but also in how much money to vehicle could produce if it were in your rotation. Selling it, maintaining it, or taking it out of your fleet for any reason will cause you to lose production value from it, so you’ll need to consider this cost when calculating TCO.

How to Calculate TCO in Fleet Management

Once you’ve collected all the factors that are required for calculating TCO, including the costs and assets associated with your fleet, you can get started with actually getting the number you need.

The basic equation for calculating TCO is to add up all the costs and then subtract the remaining value of the vehicle or fleet. Then you divide that number by the total mileage or engine hours over the lifespan of the vehicle. Here is what that simple equation to calculate TCO in fleet management would look like for the factors above:

(Initial cost + Maintenance over time + Fleet operating costs + Production value lost – Current resale value)/Total mileage = Total cost of ownership (TCO)

You need to remember that different fleets may have different factors that are important to them, and there is no one-size-fits-all calculation across the fleet management industry.

Why Is Calculating TCO Important?

All this talk about TCO and we haven’t even talked about why this kind of information is valuable for fleet managers in the first place. Here are some of the reasons that calculating TCO is important for your business to be successful in the long run.

• Accurate reporting – Having in-depth TCO data available allows you to provide valuable insights on maintenance, compliance, buying, and selling decisions for your business over time.
• More affordable maintenance – Accurate data about the value and maintenance costs of your vehicle can allow you to be preventative rather than corrective when it comes to fixing problems, which is decidedly more affordable.
• Better compliance – Many federal regulations require accurate reporting to assess and audit fleet management businesses, which is why having information like TCO and other data can go a long way in speeding up the process.
• Lower costs – Tracking costs is the first step in addressing your overspending areas, which in turn allows you to lower costs across your fleet management business.

If you want to not only track TCO data for your fleet but also manage the operations more comprehensively, you can learn more about fleet management systems and how they work in our dedicated guide.

How to reduce fleet management costs

Calculating TCO isn’t the only way to help your fleet management business reduce costs. In fact, there are a few strategies you can employ that will help keep your business in the black, no matter what kind of economic downturn is in progress.

• Reduce idle time – By encouraging drivers to avoid idle time, you’ll be able to save on fuel costs for your team in the long run.
• Optimize routes – Shorter routes means less fuel usage, so you’ll be able to save time and money for your drivers and your clients.
• Schedule preventative maintenance – Fixing a problem is a lot more expensive than preventing it, so schedule maintenance before it’s too late.

All of this can be achieved with fleet management software, allowing you to streamline operations for your business and make life easier for your drivers.