Chapter 03ProcurementArticle 3.1
Total Cost of Ownership
The cheapest quotation is not always the lowest-cost decision over the full lifecycle.
- ProblemThe lowest price is read as the lowest cost.
- SignalsAcquisition, installation, maintenance, downtime, support, end of life.
- DecisionWhich compliant offer creates less lifecycle cost and risk.
- ControlOnly elements with real evidence are compared.
01Business problem
Two technically acceptable offers arrive. One is cheaper. In many evaluations that settles it.
But the purchase price is only the first cost the plant pays. A cheaper item that fails sooner, needs a different spare range, arrives later or cannot be supported in five years can cost far more than the difference in price. Those costs land in other budgets, usually maintenance and operations, which is why they are easy to miss at the moment of purchase.
02Core concept
Total cost of ownership (TCO) is the acquisition cost plus the main costs created by owning, operating, supporting and finally disposing of an item.
Typical elements, where they apply:
- purchase price;
- logistics: freight, duties, handling;
- installation and commissioning;
- maintenance: planned work and consumables;
- downtime exposure: the consequence of failures and of waiting for parts;
- spares and support: spare range, technical support, availability over time;
- energy or operating consumption, where relevant;
- end of life: removal, disposal, replacement.
Not every element applies to every material. A gasket does not need a lifecycle model. A pump, a valve package or a critical rotating spare often does.
03Decision rule
Use TCO where lifecycle differences between offers are material and the evidence to compare them exists. Where they are not, or where the figures would be guesswork, say so and decide on compliance and price.
TCO informs the technical recommendation. The commercial evaluation and the award remain with procurement.
04Signals and inputs
- Price
- Unit price and commercial terms.
- Delivery
- Lead time and its reliability.
- Reliability evidence
- Failure history, references, test data.
- Maintenance requirement
- Intervals, consumables and repair effort.
- Spares and support
- Whether parts and service will remain available.
- Compatibility
- Fit with installed equipment and existing spares.
05Model
- 01AcquisitionPrice, freight, duties, handling.
- 02InstallationModification, commissioning, interface work.
- 03OperationEnergy and consumables, where relevant.
- 04MaintenancePlanned work, failure rate, repair effort.
- 05SupportSpare range, service availability, lifecycle support.
- 06End of lifeRemoval, disposal, replacement.
The sign is approximately equal on purpose. A TCO comparison is an estimate built from the elements that genuinely differ between the offers. Elements that are the same for both can be left out. Elements that cannot be estimated with any confidence should be named as uncertain rather than given a precise number.
06Worked example
Illustrative example
Option A against Option B
Two technically compliant offers for a pump, compared over five years. All figures are illustrative, in thousands of a neutral currency unit.
| Element | Option A | Option B |
|---|---|---|
| Purchase | 40 | 52 |
| Logistics and installation | 6 | 6 |
| Planned maintenance, 5 years | 15 | 10 |
| Seal kits and spares, 5 years | 12 | 6 |
| Downtime exposure, 5 years | 20 | 8 |
| Total, 5 years | 93 | 82 |
Option A is cheaper to buy and more expensive to own, mainly because of shorter seal life and a separate spare range. The comparison is only as good as its evidence. Without the downtime line the totals are 73 against 74: the offers are effectively level, and the case for B rests on whether its longer seal life can be evidenced. If it cannot, the honest conclusion is that TCO does not separate the offers.
07Professional judgement
TCO should inform a decision, not decorate it.
A lifecycle comparison is persuasive because it produces a single number. That is also its risk. If failure rates, downtime costs or support assumptions are guessed, the number carries a precision the evidence does not have.
The professional work is choosing which elements genuinely differ, using real evidence for them, and stating clearly what was assumed. Technical compliance and lifecycle consequence belong in the same conversation. The commercial decision does not move to the materials side because of it.
08Failure modes
Price treated as total cost
The plant pays the difference later in maintenance and downtime.
ControlCompare the lifecycle elements that genuinely differ.
False precision
A guessed downtime cost decides the comparison.
ControlMark uncertain elements instead of inventing values.
TCO used for every purchase
Effort is spent where lifecycle differences are trivial.
ControlApply TCO where lifecycle cost is material.
Spare range ignored
A new model needs a new, parallel stock of spares.
ControlInclude spares and compatibility with the installed base.
Technical and commercial roles blurred
Materials input is presented as an award decision.
ControlKeep TCO as input to the recommendation; the award stays with procurement.
09Field note
10Practical checklist
- Offers are technically compliant before cost is compared.
- Lifecycle elements that genuinely differ are identified.
- Each element rests on evidence or is marked as an assumption.
- Compatibility with installed equipment and spares is checked.
- The time horizon of the comparison is stated.
- TCO is presented as input to the recommendation, not as the award.
11Connected intelligence
Experience
See this principle in practice
- Technical Evaluation GovernanceFramework developed
- Procurement, Expediting and Agreement SupportOperational experience
12Evidence and basis
Option A and Option B are neutral and the figures are invented for the example; no real supplier, tender or saving is shown. Basis: technical evaluation and procurement support in the CV roles. Commercial evaluation and award are procurement responsibilities.
Sources & References
- ISO 15663:2021 Petroleum, petrochemical and natural gas industries: Life cycle costingInternational Organization for Standardization (ISO) · Official Standard · 2021
Life cycle costing as a method is described in the standard listed. The example and the guidance on when to use TCO are the author's professional view.
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