The total cost of ownership

Features - Course Management

By tracking changes to the total cost of ownership of all golf course equipment and assets, golf course superintendents can make better decisions concerning new purchases, maintenance, energy/fuel management and overall better course conditions.

May 16, 2011
Michael Vogt CGCS, CGIA

A physical asset is a resource your club owns or controls to generate cash flow to continue to operate your club and renew your worn or used-up assets. Assets include inventory, land, tennis courts, swimming pools, clubhouse, maintenance equipment fleet and other vehicles, and all the systems and equipment in them. In short, assets include all the tangible elements that enable you to conduct your business.

Some of the following ideas will require a fundamental rethinking of the way you do things. It may not be easy for you to implement them without making several changes to your current systems.

Total Cost of Ownership for Procurement, Maintenance and Energy Management.

Are you tracking the total cost of ownership (TCO) for your key assets? If not, you can achieve significant cost reductions by starting to do so.

Without such information your club will be inclined to focus on improving the short-term performance of their golf course department. They will tend to do so even at the expense of decreasing the performance of another department and reducing company cash flow, the lifeblood of any golf business.

Why are superintendents tempted to focus on reducing acquisition costs or first costs, without considering operating costs throughout the life of the asset? Similarly, golf course superintendents may be tempted to focus on reducing short-term labor and acquisition costs without paying much attention to the effects of maintenance practices, energy consumption and most importantly: total member/player satisfaction.

Lacking TCO information, many superintendents have a hard time knowing when to replace a large asset such as a $40,000 fairway mower. They say they typically wait for a unit to wear out or to be on the brink of failure before they replace it.

If the TCO is calculated at the appropriate level of detail and shared with other management, the information can guide informed decisions in procurement, maintenance, labor savings and energy management. When all management use the same cost data, they can cooperate in making better decisions that improve company performance.

Although different businesses may disagree on an exact definition of TCO, all business functions within the same company should certainly agree on one.

The TCO of any physical asset should reflect, at minimum, these three costs:

• Acquisition cost;
• Depreciation;
• Operating cost.

TCO may also include opportunity cost. The following sections consider each in detail.

Acquisition Cost. The acquisition cost includes the first cost or purchase price of an asset. It may also include freight or transportation cost, import duties and tariffs; fees paid to agents, the cost of installing or implementing the asset, initial training, and so on.

An example: An irrigation system pump station will have purchase cost, freight costs, installation costs, training costs, perhaps building cost, maintenance costs and utility cost. In some cases, components of the first cost may be depreciate over time.

Operating Cost.
The operating cost includes two elements:

•    Cost of utilities includes the cost of electricity, natural gas, water, gasoline, diesel fuel, or other resources consumed through the operation the machine or component.
•    Cost of maintenance includes the cost of routine maintenance, planned preventive maintenance, emergency maintenance, and fees for service plans or extended-warranty coverage.

Of course, all energy use affects the carbon footprint of your business as well. Your carbon footprint carries a real cost, too. But the cost may not appear on your company’s profit-and-loss statement.

Opportunity Cost.
When you make an asset investment decision, you usually choose one investment over an alternative that you might have chosen instead. Opportunity cost is the difference between the value of the choice you made and the value of the alternative.

For example: a tractor-drawn rough mower or a dedicated rough mower. The tractor-drawn unit may be less expensive based on the fact you may already have the tractor in inventory to power the cutting unit.

While some clubs do not consider opportunity cost as part of the TCO, it is a real cost that should influence investment, purchasing and asset procurement decisions.

Disposal Cost.
The disposal cost includes the labor cost of removal plus the cost of recycling or salvage – including landfill, hauling, or destruction. Many times the asset will still have value, unlike a building, sand bunker or green that bears a disposal cost at the end of its useful life.

Why You Need Detailed TCO Data.

Your club general manager, controller or finance committee typically tracks some of the foregoing costs in an asset-management system. They may do so only for major assets.

Superintendents and property managers working on purchasing, maintenance, and energy management often need data that better meets their needs for operational decision making.

For this reason I recommend the following practices:

• Track actual rather than theoretical TCO;
• Track TCO for individual assets rather than for asset categories (similar to a fleet of golf cars);
• Track TCO for the same asset in each of its different locations;
• Track TCO as it changes over time; and
• Make sure you always have access to the data being tracked.

The following sections elaborate on each recommendation.

Track Actual TCO.
It is relatively easy for superintendents and property managers to estimate the theoretical TCO of an asset. You can do so by reading the manufacturer’s performance specifications, estimating utility and fuel usage and utility and fuel prices, factoring in preventive maintenance costs and projecting operating costs.

Understanding the total cost of ownership of a piece of equipment helps superintendents make smarter, leaner purchasing decisions.But a manufacturer’s performance specifications may bear only a vague resemblance to the actual operating characteristics of its equipment in the field. Estimates lack the detail and accuracy you need to make better day-to-day unique to your facility operating decisions.

When it is time to consider replacing an asset, you want to do so because its actual TCO – not its theoretical or estimated TCO – exceeds its replacement cost.

Track TCO for Individual Assets Rather Than Groups or Categories of Assets.
To simplify operations and data management, many clubs track assets only at the category level. Asset categories may be fairly high-level (equipment expenses, tee cost of maintenance, water feature maintenance) or more specific (fairway mower No. 3, tee No. 8 and maintenance building). Higher-level asset categories are less useful for tracking TCO. This is because TCO is likely to vary greatly for individual assets within a category.

Track TCO for Each Important Asset at Every Use and Location.
Consider two identical triplex greens mowers purchased and put into service at the same time. One operates 6 hours a day and mows 12 greens on the hilly side of the course over rough terrain. The other operates for 4 hours a day on the flat links side of the course with concrete wall to wall cart paths. Each asset will age differently from the other, and one will require more adjustments, parts and routine maintenance.

Equipment operating under diverse conditions will surely age at different rates. Each motor will have different maintenance needs. Each may consume a different amount of fuel per hour of operation. Collectively, these factors will contribute to a significantly different TCO for each asset.

How about golf greens? No. 12 is a par 3, located in the thick woods with restricted air flow and poor morning sun light. Three fans run throughout the summer. Careful hand watering and frequent venting is required to keep this green healthy as well as constant ballmark repair, while No. 17 is out in the open and a long par 4. I would estimate No. 12 will have a higher cost of TCO than No. 17.

Would it take too much effort for you to track all assets differently? If so, you do not have to collect detailed operating data for all assets in all locations. Just do it for your most expensive and mission-critical assets.

Track TCO as It Changes over Time.
TCO varies over the life of an asset. Actual TCO for an asset may change during five years. During the first year of ownership most of the TCO typically consists of acquisition cost. In subsequent years, the book value of capital equipment depreciates according to schedule (in Figure 1, five years, declining balance). Even non-profit clubs should account for asset depreciation, to fund reserves to replace assets. Also, be aware that replacement cost of the asset may also change as new, more expensive technology becomes available.

Gather Granular, Current Data.
Golf course equipment constantly drifts – or even jumps – out of peak performance. Parts wear out. User behavior, the biggest single factor in energy efficiency and equipment maintenance, tends to become more careless with time (the machine with the dull paint, increased hours and a ripped seat). Downtime or out of service time needs to reconciled as a cost in lost production.

Your club and you, as golf course superintendent, may expect maintenance technicians to extend the life of an expensive asset for as long as possible. To do so may preserve cash flow, but it may not make good financial sense.

If you know the total cost of ownership for an asset, you need not make judgment calls about when to replace it. Your detailed cost data will tell you.

Resist the Urge to Focus Solely on Short-Term Performance Metrics.
Members, owners and general managers expect money to go further now than ever before, and superintendents feel intense pressure to serve short-term financial goals. But asset-replacement practices have a disproportionate effect on the long-term financial performance. Procurement decisions affect not only the first cost of an asset, but also TCO over the asset’s lifetime.

Maintenance of course assets and equipment management is a crucial function for golf course superintendents. TCO is a metric that’s useful to all golf maintenance operations, big and small.

By tracking changes to the total cost of ownership of all golf course equipment and assets, golf course superintendents can expect to make better decisions concerning new purchases, maintenance, energy/fuel management and overall better course conditions. These better decisions, in turn, can reduce maintenance costs, reduce needed labor to perform specific functions, increase membership/player satisfaction, boost rounds played and in turn generate additional revenue.

For these reasons, it makes sense for superintendents to enhance their capabilities to track TCO at the appropriate level of detail. GCI

Michael D. Vogt, CGCS, CGIA, is a consultant with the McMahon Group and a frequent contributor to GCI.


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