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What is Life Cycle Costing?

date added: 17.12.2010

What is life cycle costing? Basically, LCC is an economic assessment of an item, area, system, or facility that considers all the significant costs of ownership over its economic life, expressed in terms of equivalent dollars. LCC is a technique that satisfies the requirements of owners for adequate analyses of total costs.

A key element in LCC is an economic assessment using equivalent dollars. For example, assume one person has $1,000 on hand, another has $1,000 promised 10 years from now, and a third is collecting $100 a month for 10 months. Each has assets of $1,000. However, are the assets equivalent in terms of today’s purchasing power? The answer is not simple because the assets are spread across different points in time. To determine whose assets are worth more, a baseline time reference must first be established. All monies are then brought back to the baseline, using proper economic procedures to develop equivalent costs. Design professionals normally choose between competing design alternatives. So, for design professionals, life cycle costing is an economic assessment of design alternatives, considering all the significant costs of ownership over an economic life expressed in equivalent dollars. LCC may also be used to assess the consequences of decisions already made, as well as to estimate the annual operation and maintenance (O&M) costs for budgeting purposes.

For designers to perform a life cycle cost analysis, the owner must provide them with information regarding such things as the facility’s economic life, the anticipated return on investment, and financing costs, as well as nonmonetary requirements.

From owner to owner, this information will vary greatly. As an example, assume an owner is planning to build a speculative apartment house. The federal government has set up an investment tax credit for this type of facility. However, it requires retention of property by the owner for a minimum of ten years. The owner, in hiring a consultant to perform LCC, would set a ten-year economic life, and would also state the minimum acceptable rate of return for the project to be economically attractive.

Suppose, on the other hand, the owner is a telephone company that will own and operate the facility from 40–100 years. In this case, the owner would require a permanent type of construction, normally with a 40-year economic life. These examples represent the extremes, but they illustrate that the economic information for LCC will vary from one owner to the next.

Source: www.reedconstructiondata.com

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