Managerial Auditing Journal

Life cycle costing: a review of published case studies

Eric Korpi Timo Ala-Risku
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Eric Korpi Timo Ala-Risku, (2008),"Life cycle costing: a review of published case studies", Managerial
Auditing Journal, Vol. 23 Iss 3 pp. 240 - 261
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MAJ
23,3 Life cycle costing: a review
of published case studies
Eric Korpi and Timo Ala-Risku
240 Department of Industrial Engineering and Management,
Helsinki University of Technology, Finland

Abstract
Purpose – Despite existing life cycle costing (LCC) method descriptions and practicable suggestions
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for conducting LCC analyses, no systematic analyses on actual implementations of LCC methods exist.
This paper aims to review reports on LCC applications to provide an overview of LCC uses and
implementation feasibility.
Design/methodology/approach – A review of LCC cases reported in academic and practitioner
literature. Case reports were compared against one another and against the defining articles in the
field.
Findings – Most of the reported LCC applications were far from ideal. Compared to the methods
suggested in the literature many of the case study applications: covered fewer parts of the whole life
cycle, estimated the costs on a lower level of detail, used cost estimation methods based on expert
opinion rather than statistical methods, and were content with deterministic estimates of life cycle
costs instead of using sensitivity analyses.
Research limitations/implications – This review is limited to reported LCC applications only.
Further research is encouraged in the form of a field-based multiple-case study to reveal
context-specific dimensions of LCC analysis and implementation challenges in more detail.
Practical implications – This review highlights the difficulty of conducting a reliable LCC
analysis, and points out typical problems that should be carefully considered before drawing
conclusions from the LCC analysis.
Originality/value – First systematic analysis of LCC applications that gives directions for further
research on the LCC concept.
Keywords Life cycle costs, Product life cycle, Case studies
Paper type Literature review

Introduction
The life cycle cost of an item is the sum of all funds expended in support of the item from its
conception and fabrication through its operation to the end of its useful life (White and
Ostwald, 1976).
Such life cycle costs of a product can be many times the initial purchase or investment
costs (Woodward, 1997), and according to several sources 70-90 percent of these total
life cycle costs become defined already in the design phase (Bescherer, 2005;
Dowlatshahi, 1992; Lindholm and Suomala, 2005). Yet initial investment costs are most
often used as the primary and sometimes the only criteria in purchase decision
(Lindholm and Suomala, 2004; Woodward, 1997). In spite of the obvious long-term
Managerial Auditing Journal benefits of life cycle costing (LCC), its adoption has been relatively slow (Lindholm and
Vol. 23 No. 3, 2008
pp. 240-261 Suomala, 2004; Woodward, 1997). Possible reasons for the slow adoption include the
q Emerald Group Publishing Limited
0268-6902
lack of standard or formal guidelines and the lack of reliable past data (Ardit and
DOI 10.1108/02686900810857703 Messiha, 1999).
 The amount of cross-case studies in the field of LCC is extremely low and most of Life cycle costing
them either are limited to a single industry (Ardit and Messiha, 1999; Lindholm and
Suomala, 2004; Sterner, 2000) and/or just cover some superficial features of life cycle
cost analysis like the adoption rate (Hyvönen, 2003; Lukka and Granlund, 1996).
The purpose of this study is to explore with a multiple-case analysis based on a
literature review, what are the business contexts where LCC is used and what kinds of
methods are applied to LCC analyses. Although the findings of this review represent 241
only the reported LCC case studies, the results nevertheless indicate:
.
the extent of attention of academics studying LCC; and
.
the variety of LCC applications and resulting complication of LCC methods.
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Based on literature related to LCC methods we formulated a framework for analyzing

published LCC cases. Using several publication databases we identified relevant LCC
case studies for our analysis. The most interesting results of these analyses are
presented in this paper with the following structure. In the next section, we will discuss
the literature of LCC and the dominating methods of doing life cycle cost analysis. The
third section presents the research design used to gather data and analyze the case
studies. The following section will examine the results of our multiple-case analysis.
The fifth section considers the limitations of the study and subsequently the conclusions
of this research are discussed. In the final section, future research suggestions are given.

Literature review
Background
LCC was originally designed for procurement purposes in the US Department of
Defence (White and Ostwald, 1976) and is still used most commonly in the military
sector as well as in the construction industry (Woodward, 1997). The adoption of life
cycle thinking has been very slow in other industries (Lindholm and Suomala, 2004).
Public sector has also been a relevant promoter for life cycle cost calculations
(Woodward, 1997).
There are relatively few articles written about the frequency of LCC use and the
results of these articles are somewhat heterogeneous. In a Finnish study only 5 percent
of large industrial companies had used LCC (Hyvönen, 2003). In a Swedish building
industry study, 66 percent of the companies used LCC to assist on decision making
(Sterner, 2000) and in a US study 40 percent of city administrations used life cycle cost
analysis when assessing their building projects (Ardit and Messiha, 1999).
In addition to LCC there are other traditions taking a wider perspective on product
life cycle. Most notable of these are total cost of ownership (TCO) and life cycle
assessment (LCA):
Total cost of ownership (TCO) is a purchasing tool and philosophy which is aimed at
understanding the true cost of buying a particular good or service from a particular supplier
(Ellram, 1995).
It is often used for two purposes: supplier selection and supplier evaluation (Bhutta and
Huq, 2002). Thus, it focuses mainly on transaction costs and the costs of the
operational phase are not considered (Lindholm and Suomala, 2004). Another tradition
that has a life cycle perspective is LCA, but it concentrates on environmental issues
and is not really concerned with the cost aspect (Emblemsvåg, 2001).
 MAJ From our perspective, LCC is the most relevant cost management method, as TCO
23,3 neglects operations and maintenance (O&M) costs, and LCA promotes environmental
impacts instead of being a costing tool.

LCC purposes
LCC is said to focus primarily on capital or fixed assets (Ellram, 1995). Asiedu and Gu
242 (1998) on the other hand state that LCC can be used for all sorts of products:
The purpose and nature of the analysis however depends on the product.
As discussed above LCC was originally designed for procurement purposes, i.e. to
be used from a point of view of a client. Many of the most prominent LCC methods
(Fabrycky and Blanchard, 1991; Woodward, 1997) are intended to be used to support
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design decision making, but nevertheless from a client’s perspective. From a

manufacturer’s perspective, Dunk (2004) presents motivational factors for using LCC:
manufacturers with a strong customer-focus may recognize LCC as a customer service
leading to competitive advantage. However, the ability of a manufacturer to perform
LCC is affected by the quality of information available.
A useful frame of reference detailing LCC purposes that accounts for both client and
supplier perspectives is presented in (Barringer and Weber, 1996):
.
Affordability studies. Measure the impact of a system or project’s LCC on
long-term budgets and operating results.
.
Source selection studies. Compare estimated LCC among competing systems or
suppliers of goods and services.
.
Design trade-offs. Influence design aspects of plants and equipment that directly
impact LCC.
.
Repair level analysis. Quantify maintenance demands and costs rather than using
rules of thumb such as “maintenance costs ought to be less than _?_ percent of
the capital cost of the equipment.”
.
Warranty and repair costs. Suppliers of goods and services along with end-users
need to understand the cost of early failures in equipment selection and use.
.
Suppliers sales strategies. Can merge specific equipment grades with general
operating experience and end-user failure rates using LCC to sell for best benefits
rather than just selling on the attributes of low, first cost.

Life cycle costing methods

Durairaj et al. (2002) have presented and compared different life cycle cost analysis
methods in their paper. Some of the methods presented in the paper are extremely
narrow by scope and hence are not useful for a general analysis. Out of the eight
methods, three were found to be relevant in describing LCC methods. We used these
three publications (Emblemsvåg, 2001; Fabrycky and Blanchard, 1991; Woodward,
1997) and another defining article in the field of LCC (Asiedu and Gu, 1998) to build the
framework against which we compared the methods used in the case studies.
Life cycle is usually divided from an individual product’s perspective into three or
four steps. Fabrycky and Blanchard (1991) used a four-step division to categorize the
costs of an individual product (Figure 1). Despite this formal categorization, LCC has
been criticized for lack of consideration of design costs (Ellram and Siferd, 1998).
 Life cycle cost analysis is a forecast of the future and thus different cost estimation Life cycle costing
methods must be applied. The use of different cost estimation methods depends on, for
example, availability of data and the phase in which the calculations are done
(Fabrycky and Blanchard, 1991). Fabrycky and Blanchard introduce three different
ways to estimate costs:
(1) estimating by engineering procedures;
(2) estimating by analogy; and
243
(3) parametric estimating methods.

In estimating by engineering procedures, costs are assigned to each element at the

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lowest level of design detail and then combined into a total for the product or system.
The problems with this method are the need of detailed data and hours of effort needed
to perform the calculations. However, estimating by engineering procedures might
result in an accurate estimate if all the needed data is available and the estimator does
not cut any corners.
In estimating by analogy, as its name already states, the cost estimator draws
analogies between different products or their features. Estimating by analogy can be
performed either based on system level or on task level. Arguably, the most significant
problem of estimating by analogy is the high degree of judgment required. This is the
cheapest of these three methods because it does not require much data. However, it could
be the most inaccurate, especially if the analogies are drawn on a system level. The
experience and expertise of the estimator are crucial, if accurate estimates are desired.
This method is suitable for new products when extensive databases are not available.
Parametric estimation utilizes different statistical techniques and seeks the factors
on which the life cycle costs depend. The parametric method requires comprehensive
date. According to Fabrycky and Blanchard (1991) this method should be preferred in
most situations.
Also more advanced methods of cost estimation have been suggested for LCC.
Emblemsvåg (2001) suggests activity-based costing (ABC) to be used in life cycle cost
analysis. However, ABC is not easily adopted in conjunction with unique investments,
because it requires extensive activity-cost databases.
Since, LCC takes into account future costs, the time-value of money needs to be
accounted for in the calculations (Fabrycky and Blanchard, 1991). Therefore, future cash
flows should be discounted to present value especially if the life of the asset is long.
In fact, many LCC methods (Fabrycky and Blanchard, 1991; Woodward, 1997) also take
inflation into account. Nevertheless, choosing the right discount and inflation rate for the
situation might be a challenge, and it may also have a notable effect on the LCC results.
All of the defining articles in the field of LCC (Asiedu and Gu, 1998; Emblemsvåg,
2001; Fabrycky and Blanchard, 1991; Woodward, 1997) acknowledge the stochastic
nature of LCC calculations. These sources suggest sensitivity analyses to be done in

Research and Production and Operation and

Retirement and
Development Construction Maintenance
Disposal Cost
Cost Cost Support Cost
Figure 1.
Life cycle cost categories
Source: Fabrycky and Blanchard (1991)
 MAJ order to cope with the uncertainty. Some of the methods (Emblemsvåg, 2001; Fabrycky
23,3 and Blanchard, 1991) also suggest the use of Monte Carlo simulation to deal with the
uncertainty.
There are at least two commercial standards intended to assist on life cycle cost
analysis. One is intended to be used only in the building industry (ASTM International,
2002) and the other is suitable for more general use (International Electrotechnical
244 Commission, 2004). There are also some military and public sector standards and
handbooks on LCC.

Research design
Our research started by establishing potential categories according to which the case
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studies could be classified. This step was based on an extensive literature review. Some
of the categories were used to classify the operating environment and others the methods
used in the life cycle cost analysis. The next step was to decide how to collect the material
and to actually choose the case studies suitable for the review. Subsequently, the articles
chosen were classified according to the different categories on operating environment
and LCC methods. In this classification phase extensive judgment was required because
many of the issues we investigated were not clearly reported in the case studies and thus
had to be interpreted from the text. In the next phase, interactions between all the
different categories were investigated in order to find out:
.
what kind of characteristics of the operating environment encourage the
adoption of LCC;
.
what are the main purposes for conducting LCC;
.
how do LCC implementations conform with the methods suggested in literature;
and
.
how do the characteristics of the operating environment affect the methods used
in LCC analysis.

The most relevant findings of these analyses are presented in this paper.

Data collection
Based on our review, the literature in the field of LCC was quite fragmented. Therefore,
we decided to use several databases instead of individual journals to identify LCC case
studies. The databases chosen for the review were AIP Scitation American Society of
Civil Engineers, ABI Inform: ProQuest Direct, EBSCOhost-databases, Elsevier:
ScienceDirect, Emerald Library, Google Scholar, IEEE XPLORE, JSTOR, Springer
Verlag: LINK and Wiley Interscience. Accessibility and the contents of these databases
framed our selection. In the review, we sought for articles dated after the defining book
of Fabrycky and Blanchard (1991). The following two search terms were used:
(1) “life cycle cost” AND case; and
(2) “life cycle costing” AND case.

These words were searched from the abstract, title and keywords sections of the
articles during July 2006. We felt that, if life cycle costs and case study were not
mentioned in these sections of the paper then they did not play a significant role in the
paper and should not be included in the review. In Google Scholar it was not possible to
 define article sections to narrow down the search, so we decided to limit the search only Life cycle costing
to article title.
A total of 205 articles were found under these criteria. Some of these articles were
dismissed because of the following reasons:
.
we did not have access to the full text version of the article (18 rejections); and
.
the article did not meet our criteria for suitable case studies: LCC played only a
minor role in the article or there was no case study in the article (132 rejections). 245
Thus, we were left with 55 case studies that were suitable for the review. All the
suitable articles were relatively new: a total of 38 cases were from 2000 onwards. The
included case studies are listed in the Appendix.
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There were only seven journals with more than one suitable case study: Renewable
Energy, Building and Environment, Energy, Structural Safety, Construction
Management and Economics, Energy and Buildings and Applied Energy. Articles
from a total of 43 journals were used in the study.

Case analyses
Nine different features were analyzed from all of the case studies. Four of the features
described operating environment and another four described the methods used in
the analysis. The purpose of LCC analysis in the cases was assessed with a single
category. The different categories and our classification on these features are
presented in Table I. Each of the classifications is described in more detail in the results
section.

Research results
Operating environment
Industry and public sector influence. We used SIC divisions (US Department of Labor,
2006) to classify the industries in which the case studies were done. We made two
minor alterations in the SIC divisions in order to better describe the case studies.
We added energy category into our classification, because a notable part of the cases
were concerned with energy use and/or production. One of the cases did not fit to any
of the existing SIC divisions, thus we denoted it with the research category in Table II.
In addition, the cases were analyzed to identify the possible influence of public
sector, i.e. whether the case analyses were performed for the needs of public or private
sector. This analysis was done as public sector has been stated to be a relevant
promoter for life cycle cost calculations (Woodward, 1997).
Our findings (Table II) in this category support the literature in the field only
partially. Almost two thirds of the articles were from the construction industry; the
construction cases dominated more than one could have expected on the basis of the
literature. On the other hand only one of the cases was from the military sector (in
Table II, it is included in the transportation category). One might have expected more
military cases to be found because of the fundamental role of the US Department of
Defense in the development of LCC. Other industries widely represented in the review
were energy, transportation and manufacturing. Six cases had features of both energy
and construction divisions and therefore these cases are shown in both of these
categories. Research and real estate divisions are discarded in further analysis because
of their low count.
 MAJ
Item Classification Based on
23,3
Operating environment
Industry Construction SIC divisions (US Department of Labor,
Transportation 2006), with two alterations
Manufacturing
246 Energy
Research
Real estate
Public sector Public Woodward (1997)
influence Private
Perspective of the Manufacturer Fabrycky and Blanchard (1991) vs Dunk
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analysis Client (2004)

Other
Nature of the product Continuous production Our own classification, inspired by Asiedu
Recurring investments and Gu (1998)
Unique investments
Purpose of the analysis
Purpose of the Affordability studies Barringer and Weber (1996), with two
analysis Source selection studies – vendor alterations
Source selection studies –
product
Design trade offs – optimization
Design trade offs – comparison
Repair level analysis
Warranty and support costs
Supplier’s sales strategies
LCC methods
Life cycle phases Research & development Fabrycky and Blanchard (1991)
included Production and construction
in the analysis (production)
Operations and maintenance
(O&M)
Retirement and disposal costs
(disposal)
Information sources Public statistics Descriptions in analyzed cases
Internal sources
Other firms
Other articles
Other sources
Information sources not reported
Cost estimation Estimating by engineering Fabrycky and Blanchard (1991)
methods procedures
Estimating by analogy
Table I. Parametric estimating
Dimensions of case Nature of the analysis Stochastic Fabrycky and Blanchard (1991) and
analysis Deterministic Emblemsvåg (2001)

Although there was only one military case, a large portion of the cases (40 percent)
were written to fulfill the needs of the public sector (Table II). One article was written
by a standard committee and it is not included in the public or in the private sector
cases.
 Perspective of the analysis. If the analysis was done from the perspective of the party Life cycle costing
responsible for the costs accumulated during the O&M phase, the case was added to the
“client” category. If the analysis was done by the manufacturer of the product in
question, the case was naturally added to the “manufacturer” category. If neither of these
points applied to the party who did the calculations, the case was added to category
“other.” In almost two thirds of the cases there was a client (owner/user) perspective
(Figure 2). A quarter of the cases had been written from the point of view of the 247
manufacturer. Five cases considered life cycle costs from the point of view of society or
the economy. Three of the cases in this category have been allocated to “client,” one case
to “manufacturer” and one had neither perspective and was included in the category
“other”[1]. The portion of cases reported from manufacturer’s perspective was quite
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large considering the dominant position of client view in the LCC method literature.
The perspective was not clear in all case studies, because most of the cases had been
written by academics with rather unclear contacts to the actual companies. In fact
37 articles had a strong academic focus, which made it somewhat difficult to interpret
the perspective.
The industry had clearly an effect on the perspective used (Figure 2). A manufacturer’s
perspective was more likely to be used in the analysis of the transportation industry than
in other industries. Cases with energy industry focus were done mostly from client
perspective.

Industry In total Public Private

Construction 34 14 19
Energy 10 5 5 Table II.
Transportation 9 3 6 Industry and public
Manufacturing 6 0 6 sector influence of the
Research 1 1 0 analyzed cases (industry
Real estate 1 1 0 non-exclusive)

Perpective by industries
100%
90%
80%
70%
60% manufacturer
50% client
40% other
30%
20%
10%
0%
E

gy

Figure 2.
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tio

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AG

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rta

tu
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Case perspective and

u
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ac
str

po

uf
AV

ns

association with industry

Co

an
a
Tr

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 MAJ When analyzing the private/public sector influence on the perspective of the analysis,
23,3 manufacturer perspective was found to be more common in the cases done for the
needs of the private sector. A total of 71 percent of the manufacturer cases were from
the private sector, whereas almost half (46 percent) of the client cases were done for the
needs of the public sector.
Nature of the product. We grouped the products of the case studies into three
248 categories:
(1) products that are produced continuously;
(2) recurring investments; and
(3) unique investments.
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First we made the classification from both manufacturer and client perspectives and
then we classified the products from the perspective of the party who had done the
calculations (analyzer). We made this classification in two steps for two different
reasons. First of all it was not possible to classify the products universally because the
different parties experienced the products in a different way. For example, a hot water
boiler can be regarded as continuous production from the supplier’s perspective and as
a recurring investment from a client’s point of view. We were also interested to see
what kind of differences there were between the different parties.
Figure 3 shows that manufacturers considered most of the products as recurring
investments or continuous production whereas clients considered the same products as
unique or recurring investments. This difference in the way how the different parties
considered the products is quite natural; manufacturers produce more units of the same
products than what the clients are likely to buy. An interesting observation was that
the analyses of continuous products were almost exclusively done in the transportation
and manufacturing divisions, making the construction and energy cases focus mainly
on investments. However, most of the LCC analyses conducted in the construction
division considered rather some parts of larger projects than entire construction
projects.

How do the different parties see the products?

40

35

30

25 Continuous production
Recurring investments
20
Unique investments
15 Unclear

Figure 3. 10
Product classification in
terms of decision making 5
recurrence from different
perspectives 0
Manufacturer Client Analyzer
 The most typical product was one that manufacturers considered as recurring Life cycle costing
production and the clients as unique investments. About 42 percent of the products had
this combination. Most of the parties that did the calculations thought that the product
was an investment (recurring or unique, 80 percent). Making the calculations in an
investment situation enables taking the special characteristics of the operating
environment into consideration. On the other hand conducting these calculations for
continuous production would enable a wider application of the calculations. The fact 249
that most of the analyses were indeed executed in investment situations suggests that
it is important to take the actual operating environment of the product into account.

Purpose of the analysis

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We used Barringer and Weber’s (1996) list of possible functions for LCC use with small
modifications in order to classify the purposes in which the analyses were made. We
divided two of the categories into two subcategories each. Source selection studies were
divided into vendor and product categories and design trade-offs were divided into
optimization and comparison categories. The first modification into Barringer and
Weber’s model was done in order to illustrate that most of the source selection studies
compared different products or systems with each other, instead of different suppliers.
The reason for the second alteration was to illustrate the existence of two quite
different types of design trade-off calculations. In some of the cases an optimal design
is searched and in the others a few different design options are only compared with
each other. Categories in Table III are not exclusive; one case study can have multiple
purposes.
All of the categories in the Barringer and Weber (1996) model were represented in at
least one case study. Most common uses of LCC were source selection studies for
different products and design trade-offs, both comparison and optimization.
In a few articles also two other notable benefits of LCC analyses were mentioned:
(1) they were able to systematically take into account the cost aspect in design
decision making; and
(2) they were able to find out the factors that had the largest effect on the total life
cycle cost.

Industry seemed to have some effect on the purpose for which LCC analyses were used.
Five of the six affordability studies were done in the construction division and four of
them were done for the needs of public sector. A total of 29 percent of the public sector

Purpose of LCC use Count Percentage

Affordability studies 6 11
Source selection studies – vendor 1 2
Source selection studies – product 20 36
Design trade-offs – optimization 9 16
Design trade-offs – comparison 16 29
Repair level analysis 7 13 Table III.
Warranty and repair costs 3 5 Purpose of LCC in the
Suppliers sales strategies 1 2 case studies
 MAJ construction cases were in fact affordability studies. Energy cases focused on the
23,3 source selection studies for different products. About 80 percent of all energy cases
belonged to this category. Many design trade-offs had been done for the needs of the
private sector (59 percent of the private sector cases). Source selection studies
dominated the public sector cases (50 percent of the public sector cases).
The nature of the product had some surprising effects on the purpose of the LCC
250 study. Two thirds of the affordability studies were done for recurring investments
although one might have expected these studies to be done almost exclusively for
large, unique investments. Another surprising thing was that three quarters of the
source selection studies for different products were done for unique investments and
the rest of the cases for recurring investments. One might have expected that there
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were more recurring and continuous production products in this category. The lack of
continuous production cases among source selection studies might be explained by the
search terms used in case selection; based on our literature review, these sorts of
products might be mostly considered in the TCO literature.

Methods and coverage

Life cycle phases included in the analysis. We investigated which life cycle phases were
included in the case study analyses. The results can be found in Table IV. In one case
study, there was no distinction between life cycle phases. In all the other cases, O&M
support costs were dealt with at least partially. In some of the case studies, for
example, only energy costs were included from the O&M phase. Production and
construction costs were also very commonly included in the case studies. On the other
hand research and development (R&D) costs as well as retirement and disposal costs
were included only in about a quarter of the cases. Our interpretation of the term initial
costs might be a partial reason for the low percentage of the R&D category. If the costs
were not specified in detail, we interpreted that initial costs include only production
and construction costs, not R&D costs. Also in some situations there are not any R&D
costs, for instance if you compare one existing solution with another one. It was
interesting and depressing to note that only three case studies had included costs from
all of the four phases of the life cycle in the analysis. In a few case studies where LCC
was used for comparative purposes the authors had explained the exclusion of some
cost categories by stating that the costs are roughly the same in different alternatives.
There were only minor differences between the industries. Transportation industry
emphasized design costs (44 percent of the transportation cases included design costs) and
de-emphasized retirement and disposal costs (none of the cases included these costs).
The perspective from which the cases had been done had some logical effect on
the life cycle phases covered. Manufacturers focused more on the earlier parts of the life
cycle and the clients on the other hand focused more on later parts of the life cycle
(Table V).

Life cycle phase Use (percent)

Table IV. Research & development 20

Life cycle phases Production and construction 87
included in the case O&M support 98
studies Retirement and disposal 26
 The function of the LCC analysis had some effect on the life cycle phases considered in Life cycle costing
the analysis. Disposal costs were covered in 67 percent of affordability studies in
contrast to 20 percent of the other cases. In repair level analyses other than O&M costs
were not much covered: R&D costs were covered in 14 percent of these cases and
disposal costs were covered in the same fraction of cases. Production costs were also
covered in only 43 percent of the repair level analyses.
Within the above cost categories the division into smaller categories has been very 251
limited in most of the articles. By far the most often recurring subcategory is energy
costs (in 22 cases), which in the cost breakdown structure of Fabrycky and Blanchard
(1991) is included in the O&M costs.
Information sources. In method literature of LCC mainly internal sources of
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information are dealt with Fabrycky and Blanchard (1991) and Woodward (1997).
Unfortunately the internal sources of cost information were not described so deeply in
the case studies. As a matter of fact the use of internal sources of cost information was
reported only in one third of the articles. Based on the descriptions in the case studies,
we decided to use a division of information sources shown in Table VI.
Public statistics was the most common reported source of information, especially in
the energy and construction divisions (Table VI). Internal sources were the second
most common source and it was used extensively in the manufacturing division
(83 percent). In 15 percent of the cases the sources of cost information were not reported
at all. Reporting of information sources was especially inadequate in the transportation
division: In one third of the cases cost information sources were not reported at all and
in all the other cases there was only one reported source of information. Collaboration
and information sharing were quite rare in the case studies. There was reported
information sharing between the different parties in the supply chain in only 12 case
studies. Out of these 12 cases in six cases only purchase price information was shared,
and in only three cases detailed information from, for example, O&M costs was
distributed to the other party.
Manufacturers’ reporting of information sources was deficient. In 36 percent of the
cases done from the point of view of the manufacturer, information sources were not
reported at all. Manufacturers did not receive any cost information from their

Perspective R&D (percent) Production (percent) O&M (percent) Disposal (percent) Table V.
Life cycle phases
Manufacturer 29 93 100 7 associated with case
Client 14 83 97 31 perspective

Public Internal Other Other Other Not

statistics sources firms articles sources reported
Information sources (percent) (percent) (percent) (percent) (percent) (percent)

Construction 50 21 26 24 21 15
Energy 70 10 40 60 20 0
Transportation 33 33 0 0 0 33 Table VI.
Manufacturing 17 83 0 17 0 0 Information sources used
Average 44 33 22 20 15 15 in the case studies
 MAJ customers to support life cycle cost analyses in any of the case studies. There would be
23,3 a clear opportunity to acquire data from the customers and thus be able to estimate the
O&M costs more reliably and accurately.
Cost estimation methods. Deducing the cost estimation method used was difficult
because the authors of these articles did not explain the method that had been used. In
fact a lot of judgment and interpretation was needed. There were two good indicators
252 of the method used. The first indicator was the calculations. In some cases the method
was evident from the numbers and formulae used, and another good indicator was the
source of information and the level of detail of this information. For example, external
information (public statistics or other publications) often had to be adapted to the
purpose by using analogy or expert opinion. In many cases a combination of two or
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three estimation methods had been used.

According to Fabrycky and Blanchard (1991), parametric estimation should be
preferred in most of the situations. From these case studies only less than half used
purely parametric cost estimation methods (Table VII). ABC had been used in only one
analysis.
Industry had a clear effect on the cost estimation method used (Figure 4).
Construction and energy divisions used a lot of analogy with the estimates. In the
construction and energy divisions, data from secondary sources (Table VI) were used
and this increased the need for expert judgment and the proportion of cases applying
analogical methods. Transportation and especially manufacturing divisions used more
parametric cost estimation methods.
The function of the analysis had an exceptionally strong effect on the cost estimation
methods used. Repair level analysis and warranty and support cost estimation cases
were all purely parametric. This implies that these analyses relied more on data. The
optimization cases were also very data intensive. None of the optimization cases were
purely analogical and 67 percent of the cases were either purely parametric or purely
engineering. Source selection studies were on the other hand the least data intensive.
Only a quarter of these cases were done with purely parametric methods compared to
57 percent of the other cases. The proportion of purely analogical cases was instead
really high with the source selection studies: 25 percent of the studies were purely
analogical compared with 6 percent of the other cases.
Cost estimation methods also had an effect on the life cycle phases considered in the
analyses. Especially, R&D and production costs were not taken into account in many
of the parametric cases. R&D costs were covered in 12 percent of the parametric
studies compared to the 27 percent of the other studies. Production costs were

Cost estimation methods Count Percentage

Parametric 25 45
Analogy 7 13
Engineering 2 4
A mix of parametric and analogy 14 25
A mix of parametric and engineering 1 2
Table VII. A mix of analogy and engineering 1 2
Cost estimation methods A combination of all three methods 1 2
used in the case studies Unclear 4 7
 Use of cost estimation methods in different industries Life cycle costing
100%

90%

80%

70% 253
60%
Parametric
50% Analogy
Engineering
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40%

30%

20%

10%
Figure 4.
0%
Construction Energy Transportation Manufacturing Cost estimation methods
used in case studies of
Notes: Full color indicates the amount of cases using only the respective method, different industries
striped color indicates method use mixed with other methods

considered in 76 percent of the parametric studies compared to the 97 percent of the

other studies. This lower percentage of production and construction costs can be at
least partially explained by the purpose of the analysis. All the repair level analyses
and warranty and support cost estimations are parametric and on the other hand these
analyses do not take the production and construction costs into account in many cases.
The differences in R&D costs could not be explained with the purpose of the analysis.
One possible reason for this difference might be lack of suitable data; it is probably
hard to find quantitative data on R&D costs.
Nature of the analysis. Considering the methods suggested in the LCC literature the
amount of deterministic life cycle cost analyses was a surprise. Almost half (49 percent)
of the analyses were deterministic. This means that almost half of the studies ended up
with a single number without taking into account the uncertain nature of the cost
estimations. A few determining factors for this worrying result were also found when
comparing this category with other ones.
The industry seemed to have a strong effect on this issue (Table VIII). Construction
cases were relatively stochastic but transportation and manufacturing cases were
extremely deterministic by nature.

Deterministic (percent) Stochastic (percent) N

Construction 41 59 34 Table VIII.

Energy 50 50 10 The nature of life cycle
Transportation 67 33 9 cost analyses in the case
Manufacturing 83 17 6 studies
 MAJ Information sources used in the analysis also had an effect on the fact, whether the
23,3 analysis was deterministic or stochastic. Most interesting finding of this analysis was
that use of public statistics in the construction industry had a clear effect on this:
47 percent of the cases where public statistics had been used were stochastic, while the
share of stochastic studies was 71 percent for the studies where statistics had not been
used. A possible explanation for this finding is that the public statistics are mostly in a
254 form of single numbers, not distributions, making the statistics appear as universal
truths and hiding the variability of the costs. In fact, sensitivity analyses should be
emphasized more when relying on public statistics because fitting the information
from public statistics into the particular situation always requires expert judgment and
thus induces more uncertainty to the calculations.
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One factor that increases the significance of sensitivity analysis is the discount rate
that needs to be used when addressing future life cycle costs. Choosing the right
discount rate is not easy, because it depends for example on the risk-level of the project,
market situation, credit rating of the company and on many other factors (Brealey and
Myers, 2003). The authors of the case study articles had acknowledged the importance
of discounting; in only one article the future costs had not been discounted at all and
discount rate was also the most common factor for sensitivity analysis.
The number of studies lacking proper sensitivity analysis was disappointing, when
you consider that energy-related costs constituted a large proportion of total life cycle
costs in many case studies and the price of energy has been highly volatile and very
hard to forecast (Huisman and Mahieu, 2001).

Limitations of the study

One limitation of this study is related to terminology used in the research design. We did
not attempt to find out and classify all the case studies about cost management practices
with a life cycle view. Instead we concentrated on what has been reported under the term
of LCC. For example, one of the findings of our study might be explained with our search
term; there was only one source selection study for continuous products among the case
studies. According to our literature review, these types of cases might be covered more in
TCO case studies. Focusing explicitly on life cycle cost cases in this study was, however,
justified, as, by definition, other identified life cycle cost management traditions
excluded some of the life cycle phases we were interested in. There seems nevertheless to
be overlap in the uses of the different costing traditions.
Maybe the most notable limitation of our study is that it is limited only to the reported
case studies and the reported studies do not necessarily represent all the practices used in
the field. In some situations, the deficiencies in reporting might have led to interpretations
underestimating the actual methods. For example, the calculations may have been
reported at a lower level of detail than at which they have actually been performed.
Another reporting related limitation arises from the fact that a notable proportion of the
case studies were written from an academic perspective and this may have had an effect,
for example, on the information sources used and reported. In fact, articles with a strong
academic focus were typically using analogous cost estimation methods as the access to
internal information sources was limited (22 percent of articles with academic focus,
versus 56 percent of others used internal sources of cost information).
A third limitation related to reporting practices is that the aspects we wanted to find out
from the case studies were not always clearly presented. Judgment and interpretation was
 needed in these categories. Especially, problematic was “cost estimation method”- Life cycle costing
category. Other categories where considerable amount of judgment was needed were
“nature of the product” and “perspective of the analysis.”

Conclusions
The purpose of this study was to explore through the analysis of published LCC case
studies: 255
.
what kind of characteristics of the operating environment encourage the
adoption of LCC;
.
what are the main purposes for conducting LCC;
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.
how do LCC implementations conform with the methods suggested in
literature; and
.
how do the characteristics of the operating environment affect the methods used
in LCC analysis.

We address the research questions in the subsequent sections.

As a general observation, LCC case studies do not have a strong tradition in any
scientific journal. Thus, the case studies are unconnected and are not founded on previous
discourse. The focus of the case studies themselves was not in developing LCC further,
but in displaying its use in a specific context and especially in justifying the superiority of
one product/design aspect over another, despite the higher initial cost of the former.
The lack of a general discourse was obvious from some of the case studies. The
shortage of standards and formal procedures was complained in several case studies,
although there are at least two commercial standards (ASTM International, 2002;
International Electrotechnical Commission, 2004). On the basis of our research the
reason for the low-adoption rate of the standards seems to be the strong context-specific
nature of LCC methods. The methods used depend strongly at least from the purpose of
the analysis and the availability of information. Thus, while agreeing with the statement
that the slow adoption rate of LCC results from lack of standard or formal guidelines
and the lack of reliable past data (Ardit and Messiha, 1999), we amend it by noting that
the variety and context-specific nature of LCC methods makes the establishment and
application of formal guidelines fairly complicated.

Characteristics of operating environment

The statements of Woodward (1997) that the main LCC users come from construction
and military, as well as public sector having a notable role in encouraging the use of
LCC received partial support. The proportion of case studies done for the needs of
public sector was indeed notable (40 percent of cases). Construction division dominated
the reported cases very strongly (62 percent), but military cases were almost absent.
However, this is likely to be due to the reporting bias discussed above.
The majority of the analyses were done from the client perspective, but the share of
cases reported from manufacturer’s perspective was in fact quite large (25 percent)
considering the dominant position of client view in the LCC method literature.
This is surprising also in the light that the manufacturers were not reported to receive
any information from their products’ users regarding the O&M and disposal phase
costs, although all of the manufacturer cases were reported to include the O&M costs.
 MAJ Most of the analyses were done to support investment decisions rather than
23,3 continuous procurement or production decisions. This indicates that LCC is mostly
performed in situations where the specific end use of the product needs to be taken into
account.

Purposes for LCC analyses

256 LCC had been used for wide range of different purposes. All of the six categories in the
classification by Barringer and Weber (1996) were represented in at least one case study.
In general, most common uses of LCC were source selection studies for different products
and design trade-offs, both comparison and optimization. There were some differences in
the LCC purposes by industry: construction industry is the main user of affordability
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studies, and cases from energy division focused mostly on the source selection studies for
different products. Quite understandably, the public sector uses LCC mostly in sourcing
decisions, while the private sector uses LCC as a design support tool.

Life cycle costing methods

The reported LCC methods were overall fairly unsatisfactory, in terms of all of the
analyzed aspects of the cases (life cycle phases considered, information sources used,
cost estimation methods used, and the deterministic nature of analyses).
All the life cycle phases (Fabrycky and Blanchard, 1991) were taken into account in
only three case studies. Additionally the level of detail of the calculations was very low.
Only a few articles had presented the costs at a similar, high level of detail, what the LCC
method publications suggest (Fabrycky and Blanchard, 1991; Woodward, 1997). The
design phase was neglected in the LCC analyses (presented only in 20 percent of cases),
which is much in line with remarks from Ellram and Siferd (1998). It must, however, be
noted that this negligence is not as such a feature of LCC methods (Fabrycky and
Blanchard, 1991), but rather a feature of the reported LCC implementations.
According to Fabrycky and Blanchard (1991) parametric estimation should
be preferred in most of the situations. From these case studies only less than half used
purely parametric cost estimation methods. Construction and energy divisions
performed especially poor in this category mainly because these industries did not
report having internal cost databases and therefore had to rely heavily on external
sources of data (public statistics and other articles). As a whole, the reporting of the use
of internal sources of information has been quite rare. It is, however, possible that this
is partially due to shortcomings of the reporting or the academic nature of the cases.
The purpose of the analysis had an extremely strong effect on the cost estimation
methods used. Repair level analyses and warranty and support cost estimations were
all purely parametric. Design optimizations were also very data intensive. On the other
hand source selection studies involved lots of expert judgment and analogy. While the
strong relationship between purpose and method selection is not surprising, it
indicates a need for further development of context-specific LCC methods or standards.
The deterministic calculation methods of almost half of the case studies were quite
alarming. These analyses did not pay any attention to the fact that future costs are
always uncertain. In cases where uncertainty was addressed, the most common factor
for sensitivity analyses was discount rate. Considering the fundamental role of highly
volatile energy costs in many analyses, including the deterministic ones, the need for a
sensitivity analysis is ever greater.
 Further research Life cycle costing
As the reviewed case studies focused heavily on the characteristics of products or
designs, there seems to be room for case studies focusing on the implementations of
different LCC applications. The current case studies are by no means encouraging for
readers looking for insights on how to conduct LCC in practice.
To address the limitations in this study, we suggest two lines of further research:
(1) a similar literature-based multiple case analysis for other cost management 257
terms with a life cycle focus to generate an overview of LCC traditions; and
(2) a multiple case study of actual applications of LCC methods used in the
industry.
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The framework we have developed for this review could serve as a good starting point
for both of these analyses, especially for the study of actual applications of LCC
methods in the industry.
With a multiple case study of actual applications in the industry, one could
circumvent the inherent limitations of our research design, namely the bias caused by
reporting and the extent to which judgment is needed in interpreting the reporting.
Such a field study of actual LCC methods could reveal context-specific dimensions of
LCC analysis and enable the development of a more detailed formal guideline for
performing LCC analyses. Field studies are fairly resource intensive, and to minimize
the costs of recording an individual case, a tested framework of analysis is very
valuable. We hope the framework we have used here in analyzing reported cases can
serve also with field studies of LCC applications.

Note
1. From the category “other” two cases were done from a perspective of a party that purchases
a component, but installs it as a part of a system produced for an external client and thus is
not responsible for the costs incurred in the O&M phase. One case was from a point of view
of a LCC software provider, another from a point of view of a standard committee and the
last case in that category was an academic article with neither a client nor a manufacturer
perspective.

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