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2A(4.3) TCO Analysis
Strategic Sourcing Framework

Description
Total Cost of Ownership (TCO) analysis is done as part of evaluating and developing the sourcing approach.  
The objective of TCO analysis is to determine the direct and indirect costs of a product or service over its full life cycle 
(from procuring, installing, deploying, operating, upgrading, maintaining and disposal).
Objective:
  • To determine the direct and indirect costs of a product or service over it’s full life cycle 
  • (from procuring, installing, deploying, operating, upgrading, maintaining and disposal)
Output:
  • Estimated total cost of ownership calculation

WHAT IS TOTAL COST OF OWNERSHIP?
Total Cost of Ownership (TCO) is an estimate of the total costs of goods, services or construction works over the whole of their life.  
It’s the combination of the purchase price plus all other costs you will incur, less any income you receive.  
For example: the initial purchase price plus installation costs, operating costs and ongoing maintenance less the residual value on disposal.
Why is TCO important?
The procurement principles encourage us to make balanced procurement decisions. This includes getting the best value for money. 
It means accounting for all costs and benefits over the lifetime of the goods or services.  
Part of good procurement is achieving the right price. Best value for money is the lowest whole-of-life cost. 
This involves identifying the initial purchase price and estimating all future costs and returns.
A procurement decision based on the initial purchase price only rather than the total costs over the whole-of-life, 
could fail to recognise the real costs to your department.

See related topics and documents
  
  
2A(4.3)SPF GPG - TCO Analysis.docx