Understanding how to calculate the total cost of ownership (TCO) for a machine can help you manage your budget and maximize profits. A piece of equipment’s sticker price is only part of the overall cost. Focusing on additional expenses, such as maintenance, insurance and fuel consumption, is important for reducing overhead. With an accurate TCO, your team can make informed investment and operational decisions to boost efficiency and lower costs.
How to Calculate the Total Cost of Ownership for Your Heavy Equipment
To calculate the total cost of ownership, you can add your equipment’s initial purchase price, predicted operating costs and estimated maintenance costs together. Once you have that value, you can subtract the estimated resale value from it. Use the following formula to calculate a machine’s TCO:
- Initial purchase price + operating costs + maintenance costs – resale value = TCO
Initial Purchase Price
The initial purchase price is the equipment’s ticket price plus fees and taxes. This is the total price you pay for the equipment when you purchase it from a dealer. If you finance equipment, you should also add the total interest you will pay over the span of your loan to your total purchase price.
Operating Costs
Add the following costs together to determine your equipment’s total operating costs over its lifespan:
- Fuel consumption: Multiply your equipment’s average annual operating hours by its fuel consumption in gallons per hour. You can then multiply the result by the current price of fuel per gallon to get an estimated annual fuel cost. Next, multiply the estimated annual fuel cost by your equipment’s predicted lifespan in years. Consider inflation and potential fuel price fluctuations because these can increase your TCO in the future.
- Transportation: Add your equipment transportation costs to your TCO. If you can’t drive your equipment on the road, you may need to purchase a hauling vehicle or hire a company to haul the equipment for you.
- Storage: Equipment storage is another important consideration. Include this cost in your TCO if you need to pay a monthly fee for storage or construct a storage area for your equipment.
- Electricity: If you purchase an electric or hybrid piece of equipment, factor battery charging power consumption into your TCO. Divide the battery’s kilowatt-hours or amp-hours by its charging efficiency, and multiply this by the estimated number of charges per day. Multiply the daily charges by your estimated number of operating days in a year, and multiply this result by your equipment’s estimated lifespan in years.
- Operator wages: Multiply a worker’s hourly wage by your equipment’s annual operating hours, and then multiply this number by your equipment’s lifespan.
Maintenance Costs
Maintenance costs can vary by machine and by how well your team takes care of it. Look at your existing equipment’s maintenance costs to estimate values for your new equipment. You should factor in details such as:
- Lubricants such as oil and grease
- Routine, preventive maintenance services
- Significant repairs or component replacements such as axles, tires, tracks and ground-engaging tools
- Minor component replacements such as gaskets, filters and belts
Add the annual maintenance costs of a few machines together to determine the average cost. You can then multiply the average by your new equipment’s projected usable years for an accurate estimate.
Resale Value
Your machine’s estimated resale price is the value you will subtract from your ownership expenses for the TCO. The resale value is the amount you can make if you decide to sell your machine in the future. This value can vary based on when you plan to sell the equipment.
For example, you may decide to sell it while it’s still in good working condition and increase your return on investment (ROI). If you wait until the equipment is no longer operational, buyers may purchase it for parts or refurbishment.
To estimate resale value, look at comparable used equipment prices. Keep in mind that numbers may increase with inflation depending on when you plan to sell your equipment.
What Factors Affect Heavy Equipment Lifetime Costs?
The following factors can impact heavy equipment lifetime costs:
- Preventive maintenance frequency
- Equipment operation frequency and duration
- Operator experience in safe equipment operation
- The number of years you plan to use the equipment before selling
How to Reduce Total Equipment Cost for Maximized Profits
The following tips can help you reduce TCO, extend equipment life and maximize your company’s profits:
- Invest in high-quality, fuel-efficient equipment: The equipment you invest in significantly impacts TCO. Opt for long-lasting brands that can deliver a high ROI. It’s also important to look for fuel-efficient models because this can reduce operating costs.
- Schedule regular preventive maintenance: Preventive maintenance helps you catch potential repair needs before they intensify. Addressing minor complications early can help you avoid significant repairs and save money.
- Train operators: Train each operator how to use equipment safely and efficiently. They should understand how to care for the equipment and prevent damage with habits such as proper warmup, cool-down and storage procedures. They should also lubricate equipment regularly and recognize signs of repair needs.
- Streamline operations: Assign the ideal equipment to each task or project, and implement efficient techniques. For example, you can use 2D or 3D machine control systems to complete perfect grades on the first pass and reduce rework.
- Monitor equipment usage: Use telematics technology to monitor equipment usage and make informed decisions. Telematics data can help you reduce idle time, track maintenance needs and adjust project schedules for greater efficiency.
- Practice efficient battery charging and usage: Using and charging equipment batteries efficiently can help you reduce power consumption and energy costs. This can also help batteries last longer, resulting in fewer replacements.
Maximizing ROI and Profits
After calculating a machine’s TCO, you can determine the TCO for your entire fleet and compare it to your expected revenue. Investing in new equipment is an excellent option for high-value tasks or ongoing project needs. You can also rent equipment or purchase used machine models for less frequent tasks or temporary needs.
Boost Profits With Cat® Equipment You Can Depend on
Whether you calculate a skid steer, bulldozer or excavator’s total cost of ownership, understanding a piece of equipment’s TCO can help you maximize profits. Once you understand the total cost of owning and maintaining equipment, you can identify cost-saving opportunities.
Carolina Cat® offers a wide selection of quality equipment, helping you build a long-lasting fleet and lower your TCO. We also offer expert maintenance and reliable replacement parts to help you prolong equipment lifespans and reduce repair costs. Contact Carolina Cat to learn how our equipment and services can boost your profits.