How to Calculate TCO for Automation Systems: Custom vs. Off-the-Shelf

Total Cost of Ownership (TCO) is the sum of all expenses associated with a system throughout its entire lifecycle—from initial deployment to decommissioning.

The price of a license or development represents only the upfront costs. They capture the moment of purchase but fail to reflect what happens next. Once the system goes live, operational expenses kick in: support, updates, administration, and staff training when the team changes. As the business grows, scaling costs come into play—such as new licenses, integrations, and feature expansions. This is why TCO is calculated over a period of at least three years; this timeframe provides a truly representative picture of the solution's actual cost.

TCO structure: 5 layers of costs

To ensure a comprehensive TCO calculation, expenses must be properly structured. Below are the five layers that cover the entire lifecycle of an automation system.

⚪️ Layer 1. Acquisition

This includes licensing or development costs, implementation, data migration, and team training. For off-the-shelf solutions, this layer also covers integration with existing infrastructure—which is rarely included in the base price. While building from scratch offers maximum flexibility, it comes with the highest upfront costs. Custom development based on an existing platform serves as a middle ground: it provides a faster launch and lower initial costs thanks to ready-made modules, while still allowing for project-specific feature development.

⚪️ Layer 2. Operational costs

This covers maintenance, updates, hosting, and SLA (Service Level Agreement) contracts. With traditional custom development, you also need to factor in maintaining your own codebase, which includes bug fixes and ensuring compatibility with external services. In a low-code approach, a portion of these costs is covered centrally—core updates and base module maintenance do not require dedicated resources from the client.

⚪️ Layer 3. Human resources

This includes the time internal specialists spend on system administration, user support, and vendor coordination. With custom development, a portion of the tech team is constantly tied up with maintaining the codebase rather than driving feature development. Another factor is the cost of knowledge transfer during team transitions. Low-code solutions lower this dependency, as a standardized architecture makes it much easier to hand over the system between specialists.

⚪️ Layer 4. Scaling

As a business grows, off-the-shelf solutions require new licenses or upgrading to a more expensive pricing plan. Traditional custom development, on the other hand, demands architecture refactoring and rework. Low-code solutions scale without these additional overheads, as the system cost does not depend on the number of users.

⚪️ Layer 5. Risks

Off-the-shelf solutions create vendor lock-in: changes in pricing policy or the discontinuation of support directly impact the total cost of ownership. Traditional custom development accumulates technical debt, which over time drives up the cost of making any changes. Then there are migration costs—transferring data and processes to another platform is expensive regardless of the solution type.

The TCO calculation formula

The basic TCO calculation model is as follows:

TCO = Initial Costs + (Operating Expenses × years) + Scaling Costs + Risk-related Expenses

Hidden costs coefficient

Due to unaccounted internal team hours, unplanned reworks, or delays, actual expenses can often exceed budget projections. Therefore, it is standard practice to build in a 20–40% buffer on top of the calculated total. A 20% buffer is typically sufficient for initial costs, while operational and risk-related expenses usually require 30–40%.

Discounting future expenses

When comparing options over a three-to-five-year period, it is essential to apply Net Present Value (NPV). This metric accounts for the time value of money—acknowledging that the same amount spent in year one carries a different financial weight than in year three. This is especially critical when comparing a scenario with high upfront costs against one with distributed operational expenses. NPV ensures an accurate, apples-to-apples comparison of these different financial models.

Custom TCO vs. off-the-shelf solutions

⚫️ Time-to-market
An off-the-shelf solution launches much faster—a typical implementation takes weeks rather than months. Custom development requires more upfront time, but it doesn't create any bottlenecks for future growth.

⚫️ Alignment with business processes
An off-the-shelf solution comes with its own built-in logic. A company must either adapt to it or spend resources on custom configurations and workarounds—extra expenses that are rarely accounted for in the initial budget. Custom development is built entirely around your existing processes, eliminating the need for compromises.

⚫️ Cost of changing requirements
In an off-the-shelf solution, changes depend entirely on the vendor. With custom development, the company sets its own priorities, though every single modification requires resources. A low-code approach reduces the cost of updates thanks to its modular architecture, as adding new features does not require significant infrastructure changes.

⚫️ Vendor lock-in
A vendor can change licensing terms, hike up pricing plans, or discontinue product development—leaving the company with a tough choice: either accept the new conditions or migrate. Custom development eliminates this dependency entirely.

⚫️ Security and compliance
Off-the-shelf solutions come with built-in security mechanisms and receive regular updates. This is a major advantage for companies that lack in-house security expertise. On the other hand, custom development provides full control over data architecture and hosting—which is critical for highly regulated industries such as finance, healthcare, and the public sector.

TCO is a tool that allows you to evaluate options based on their actual total cost throughout the entire system lifecycle, rather than just the price of a license or upfront development costs.

An off-the-shelf solution is the right fit if your processes are standard and a fast time-to-market is your priority. Custom development is more effective when your processes are unique, the system needs to evolve alongside the business, and full control over data and architecture is paramount.

If you are looking for a system tailored to your specific business needs that will scale alongside your growth, fill out the contact form below. Our manager will get in touch with you to propose the optimal solution for your business.