Life-cycle costing

At the end of the day, the most important analytical technique to get a project off the ground is likely to be the economic analysis. Can the system pay for itself? Can it be profitable? Once you’ve established the feasibility of the other aspects of your design, now turn your mind to making the financial case for it!

Life-cycle costing can be applied to any project. Australian Standard AS/NZS 4536:1999 defines life-cycle cost as the sum of acquisition cost and ownership cost of an asset over its life cycle from design stage, manufacturing, usage, maintenance and disposal.

Advice on the project life-cycle

It is important to consider the entire life-cycle of the project - from project conception, build, use and finally decommission - in the life-cycle cost analysis. When projects span a long period of time, it is useful to factor in adjustments in costs. For example, the running cost of electricity will likely change over a period of time.

Steps

Key costs to consider in Life-Cycle Costing are (from Blanchard & Fabrycky, p583):

• Acquisition - research, design, construction
• Operations - personnel, facilities, utilities
• Software - operation and maintenance cost
• Product distribution - transport, traffic, handling
• Maintenance - customer service, factory cost
• Test and support equipment cost
• Training - operator and maintenance cost
• Technical data cost
• Refinement and disposal cost
• Supply support cost - spares, inventory, support

For the purpose of your analysis, if you’re not including all these factors, it’s worthwhile establishing which of these costs lie within and outside of the boundaries of your analysis.

Key concepts

• an explanation of what considerations are included in life-cycle costing
• an example that calculates the life-cycle costing of a project
• advice to the student engineer on how to interpret a life-cycle costing

Core resources

The NSW Government has prepared a management standard (clearly written for bureaucrats, be selective in your reading) for life-cycle costing.

It includes the principles and a worked example.

• Transport for NSW, Life-Cycle Costing Management Standard (PDF, 18 pages)

Similar tools…

When it comes to accounting for your project, consider alternative costing mechanisms, such as:

• Cash flow concepts, see: Watts, J.M., and Chapman, R.E., Engineering Economics

• The Triple-Bottom Line is an accounting framework with many critics, but aims to balance out the requirements of people, profit and planet.