Total Cost of Ownership (TCO) & Life Cycle Costing (LCC)
Sources: Documentation from State of Massachusetts Procurement Information Center (PIC), City of Fort Lauderdale, Laramie County School District and Cobb County among others.
Definitions
Total Cost of Ownership (TCO) refers to the sum of all costs incurred throughout the lifetime of owning or using an asset; they typically go beyond the original purchase price. TCO enables decision makers to look at asset procurement in a more strategic way (beyond the lowest bidder) and to level the playing field when choosing among competitive bids where the lowest priced bid may or may not be the least costly asset to procure.
Life Cycle Costing (LCC) is a technique to establish the total cost of ownership. It is a structured approach that can assist management in the selection process. It can take into account any costs that the selection team feels are appropriate. Maintenance, asset disposal, training, cost of upgrades, energy consumption, resources used in manufacture and cost of duplicate service during installation are all examples of costs that could be included in an LCC analysis.
Guidelines
The Program must include in the solicitation (Bid or RFP) relevant information about the product to be procured so that data supplied by bidders can be compared in an apples-to-apples manner. This type of information might include:
Particular application for which the product is intended.
Projected number of years of product use. (The solicitation may just state an operating time period.)
Operating environment (temperature, light, capability of product users).
The solicitation must describe how Life Cycle Cost will be applied in the award process. Factors not described in the solicitation may not be used in the evaluation. The solicitation must describe all relevant costs, along with appropriate supporting information, the bidder must provide.
Typical elements used in Life Cycle Costing awards may include:
Average unit price including, if applicable, recurring and nonrecurring charges.
Delivery, shipping and transportation costs.
Switching costs prepared by the Program that include a reasonable estimate of what it will cost to switch from a current product or brand to another.
Support costs (e.g., manpower, energy, parts requirements, scheduled maintenance, and training).
Disposal costs.
Unit salvage or residual value.
Any other relevant information.
Language
Example #1: If so specified in the ITB, the County may elect to evaluate equipment using Lifecycle Cost (LCC) analysis to arrive at a total cost of ownership (TCO). In using LCC analysis, the County assumes the analysis period will be ___ years. Factors such as the following may be considered: maintenance costs, cost of supplies, labor intensity, energy usage, environmental impact, and residual value. The County reserves the right to use those or other applicable criteria which, in its sole opinion, will most accurately estimate total cost of use and ownership of the product(s) identified in this procurement. Bidders are asked to provide the following estimates:
1. _________
2. _________
3. _________
Etc. _________
Example #2
Bidders are asked to itemize all costs and to provide specific hardware requirements. Costs should include, but not be limited to, the following:
Basic cost of system
Add on costs
Implementation costs
Training costs
Original license fees and annual licensing fees
Annual maintenance and technical support costs
Hardware costs if provided by your firm
Any other options that may be recommended or not listed herein