6-3.3 TCO Formula

The TCO formula, laid out in USPS Supplying Practices Process Step 1: Identify Needs, still applies:

TCO = P + Present Value of (O + T + M + W + E – S)


P = Purchase costs

O = Operating costs

T = Training costs

M = Maintenance costs

W = Warehousing and distribution costs

E = Environmental costs

S = Salvage value

A financial review, conducted at contract closeout, determines whether all invoices are paid and whether the actual expenditures matched the planned budget. The review will provide actual cost figures to the cost items that make up the actual TCO value. Invoices and payment are explained, in detail, in Sections 5-11, Invoices and Other Billing Information, and 5-12, Make Payment.

The pricing analyst uses the actual TCO in conjunction with the estimate to track the cost trends over time. How much the actual data differ from the estimate can suggest important areas that can improve future performance (e.g., additional project metrics, cost reduction levers, cost avoidance opportunities). The following should be considered when analyzing the actual TCO:

Another advantage for calculating the actual TCO is that it allows for comparison among alternative projects. For instance, the pricing analyst can compare the actual cost of making an item in-house versus buying it, or sole sourcing versus multiple sourcing, in terms of their impact on overall project cost. The result can be used as support for future make versus buy and sourcing decisions.

The information derived from calculating and analyzing the actual TCO at the end of a project’s life can be used to fine-tune future project estimates on similar projects. It adds to the repository of project metrics, cost elements, and cost data, which will add to project flexibility and help save time and money on future endeavors.