Understanding Total Cost of Ownership

The Total Cost of Ownership (TCO) of your business's vehicle fleet is a major expense. By minimising the TCO, you can maximise profits in the long term. TCO is the combined cost of everything involved in running your fleet rather than just the initial purchase price.

All of the following adds up to your business's TCO.


1. Residual Value

Residual value is the amount you can sell your fleet vehicles for when you no longer need them. The difference between this amount and the initial purchase price makes the largest contribution to TCO. Some vehicles have a higher residual value than others as they are generally more desirable to own. Manufacturer reputation, quality, reliability and other facts such as the remaining warranty period all affect residual value and can mean a buyer pays more.


2. Tyres and smooth driving

The next biggest contributor is the cost of replacement tyres. The amount differs depending on the type of tyres needed, so consider all models in the fleet when calculating this figure. Tyre wear is influenced by how cars are driven, so it may be worthwhile to think about driver training to maximise the lifetime of your fleet's tyres. Smooth driving not only minimises tyre wear but improves fuel economy and puts less strain on brakes. Evidence suggests that driver training can pay for itself by reducing TCO and the number of accidents that occur.

3.  Fuel consumption

The less fuel that a vehicle consumes, the lower its TCO contribution will be, and small changes make a big difference. A vehicle that covers 35,000 kilometres a year at 10l/100 kilometres will consume 3,500 litres of fuel and one that consumes only 9l/100 kilometres will use 3,150 litres. With today's higher cost of fuel this means a difference of AED 600 annually. For a fleet of 100 cars used over three years, this adds up to a saving of over AED 180,000. Fuel is the fourth highest TCO calculation.​​

4. Funding cost

Depreciation may be more relevant than your fleet's capital cost but it is still important to think about the initial price paid. This is because it determines the funding cost or the opportunity cost of not having capital for other business activities. A lower priced car will therefore mean a lower funding cost and this is the fifth largest TCO calculation.

5.  Insurance

Insurance costs are affected by more than the provider you choose. Consider the expense for repairs including parts and labour. For labour costs, think about the hours needed for repairs including the availability of parts and bodyshop lead times.


6.  Management cost

The final figure and one of the most difficult to calculate is management cost. You should ask yourself whether the fleet supplier is professional and easy to do business with. Do the vehicles they supply help your business to run smoothly? Are you frequently solving issues with the supplier? The time you spend managing your fleet is always a cost to your business.

7. Service, maintenance and repair (SMR) costs

The next major cost is servicing. This includes any fixed and hourly costs to service your vehicles, plus the price for replacement parts and the hours or days your cars are off the road. They combine for the total servicing costs. You then need to add the cost for any unscheduled maintenance, which could involve replacing bulbs, brake pads or windscreen wipers.

The reliability of your fleet influences repair costs greatly, as a model that does not break down often costs less to your business. This includes the labour and parts costs, as well as the inconvenience to your workforce. Even when repair costs are covered by a warranty, the vehicle is not earning money for your business. As a result, the most reliable cars are the most cost effective as the TCO is lower even before you consider the cost of inconvenience.

For cars that do need repair work, those with a longer and more comprehensive warranty lower the TCO further. The combined total of scheduled servicing, unexpected maintenance and repairs for the period of ownership give you the second largest component of TCO.


​​

Add up all of the above and you can see your fleet TCO clearly. It is worthwhile to compare the TCO of different vehicles to help find models that make financial sense for your firm. You may also find that the cheapest to buy may not have the lowest TCO.