Life Cycle Costing -

An introduction

Paul Wyton
November 2008
Life Cycle Management

A life cycle is made up of all the activities that go into making,

selling, using, transporting and disposing of a product or service -
from initial design, right through the supply chain.

Source:
http://www.epa.vic.gov.au/Lifecycle/whatis.asp
Life Cycle Management

Life Cycle Management (LCM) has been developed as a business approach

for managing the total life cycle of products and services. By learning how to
more effectively manage this cycle, a company or organisation can uncover
a wealth of business, environmental and social value - and make the choice
to engage in more sustainable activities and production patterns.
To be a success, Life Cycle Management should not be deployed only as a
specific methodology, technique or "add on"
It is a systematic approach, mindset and culture that is embraced
throughout the business, where decisions are made that effect both the
input and outputs of your product or service life cycle - from corporate
strategy development, product design, production, purchasing and
procurement, marketing, human resources and more.
What is life cycle costing?

Instrumental to Life Cycle Management is Life Cycle Costing (LCC)

Also known as Whole Life Costing (WLC)

The life cost of an item is the sum of all funds expended in support
of the item from its conception and fabrication through it operation to
the end of its useful life
(White and Ostwald 1976 in Korpi and Ala- Risku 2008)

Introduced within the US Dept. of Defence in 1976 for procurement

processes
Though Williams argues that Stone introduced a pre-curser of cost
in use to the UK construction industry in the 1960's.
What is life cycle costing?

"... a technique which enables comparative cost assessments to be

made over a specified period of time, taking into account all relevant
economic factors both in terms of initial capital costs and future
operational costs" (BS 15686-1, 2000; p.28)
Often driven by Public sector and seen within primarily the
construction sector (Woodward 1997)
Sometimes confused with total cost of ownership (TCO) which is
used for supplier identification and focuses on transaction costs
(Lindholm and Suomala 2004)

or Life Cycle Assessment (LCA) concentrating on environmental

issues
(Emblemsvag 2001)
Purpose

Affordability studies
Source selection
Design trade offs
Repair level analysis
Warranty and repair costs
Suppliers sales strategies
(Barringer and Weber 1996)

Cash flow
Format of LCC
Nature

Is a forecast of the future

Is seen as stochastic (Korpi and Ala-Risku 2008)
Utilises data sourced in a number of ways (Fabrycky and Blanchard
1991)
Estimating by engineering procedures
Estimating by analogy
Parametric estimating
Parametric methods are regarded as the most effective though most
case studies demonstrate an element of mixed method approach
combining parametric and analogy
Should accommodate the time value of money (e.g. discounted cash
flows)
Nature

Data is hard to find

Time consuming therefore costly
Is future based best guessing
Requires input from a greater number of sources within and outside
the organisation
Is often deterministic failing to accommodate sensitivity analysis
is affected by optimism bias
Rationale

Detachment between ownership and operation/use

Fragmentation of elements of delivery
Conflicting objectives
Rewards
Training / Education
95% of LCCs are determined during procurement

All can lead to inappropriate decisions in terms of the whole life of a

product or service
Sustainability
 200
200

180

160

140

120

100

80

60

40

20
1 5
0
Design and construction Maintenance and operation Business operations

Process

Figure 1: Comparison of relative cost over the life of an office building

(from Evans et al., 1998; p.5)
Figure 2: Timing of procurement decisions and impact on life cycle costs
(Kirk and Dell'Isola, 1995; p.11)
Egan

Not specifically around LCC but :

integrate the process and the team around the product: the most
successful enterprises do not fragment their operations - they work back
from the customer's needs and focus on the product and the value it
delivers to the customer. The process and the production team are then
integrated to deliver value to the customer efficiently and eliminate waste in
all its forms.

The Task Force has looked for this concept in construction and sees the
industry typically dealing with the project process as a series of sequential
and largely separate operations undertaken by individual designers,
constructors and suppliers who have no stake in the long term success of
the product and no commitment to it. Changing this culture is fundamental
to increasing efficiency and quality in construction.
Rethinking Construction 1998
Egan

Design for Construction in Use

in our experience too much time and effort is spent in construction on site,
trying to make designs work in practice. The Task Force believes that this is
indicative of a fundamental malaise in the industry - the separation of design
from the rest of the project process. Too many buildings perform poorly in
terms of flexibility of use, operating and maintenance costs and
sustainability
the experience of completed projects must be fed into the next one.
designers should work in close collaboration with the other participants in the project
process.
design needs to encompass whole life costs,
clients too must accept their responsibilities for effective design.
Value for Money (VFM)

Drawing on PFI and other similar procurement models (Swaffield

and McDonald 2007)
VFM Defined
Optimum combination of whole life cost and quality (fit for purpose)
(Procurement Policy unit 1998)

Ensuring VFM throughout the duration of the PFI process is

fundamental to the profitability (success) of the project -
From a contractors perspective and a clients perspective
LCC as a process is a means to effective management
LCC must be managed as effectively for the significant financial risk to
the PFI consortium

Makes absolute sense but..
Makes absolute sense but

Swaffield and McDonald found

QS's within PFI's often do not consider LCC's instead focus on lowest
capital cost, this could occur
during exceptionally busy times;
when working with extremely stringent financial budgets for construction costs;
when under pressure from managers to make a procurement decision quickly;
as a result of employing inexperienced or temporary QS staff;
with advanced technical systems where the maintenance requirements and associated costs are not
well
on products/elements with a relatively low capital cost that are not considered worthy of a detailed
LCC analysis;
where there is a lack of detailed information about the various options, due to poor links with the
supply chain, lack of information from trade contractors about actual costs in use or past performance
of their products, lack of availability of the people who had prepared the original estimates, and/or
failure to fully understand the needs of the client.
Further reading

Bernard Williams Associates (1996) Facilities Economics, Building Economics Bureau

Ltd.
Evans, R., Haryott, R., Haste, N. and Jones, A. (1998) The long term costs of owning and
using buildings, Royal Academy of Engineers, London
Kirk, S.J. and Dell'Isola (1995) Life cycle costing for design professionals, 2nd Edition,
McGraw Hill, London
Korpi, E. and Ala-Risku, T. (2008) Life cycle costing: a review of published case studies,
Managerial Auditing Journal 23 (3) pp 240- 261.
OGC (2007) Whole-life costing and cost management, Office of Government Commerce
Moussatche, H. and Languell, J. (2001) Flooring materials life-cycle costing for
educational facilities, Facilities, 19(10), p.333-343.
Swaffield, L.M. and McDonald A.M. (2007) The contractors use of life cycle costing on
PFI projects, Engineering, Construction and Architectural Management, 15 (2) pp
132-148