FACULTY OF ENGINEERING & BUILT ENVIRONMENT
DEPARTMENT OF CONSTRUCTION MANAGEMENT & QUANTITY
SURVEYING
CONSTRUCTION ECONOMICS
LIFE CYCLE COSTING
INTRODUCTION
Life-cycle costing (LCC) is ‘‘a general method of economic evaluation which takes into
account all relevant costs of a building design, systems, components, material, practice or
project over a given period of time, and adjusting for differences in the timing of those
costs.’’ Life-cycle costing models can be used to track the costs of development, design,
manufacturing, operations, maintenance, and disposal of a system or a project over its useful
life. Life cycle costing is a mathematical method used to form or support a decision and is
usually employed when deliberating on a selection of options. It is an auditable financial
ranking system for mutually exclusive alternatives which can be used to promote the
desirable and eliminate the undesirable in a financial environment.
LCC is a decision making tool, a management tool, and a maintenance guide.
It is a decision making tool in the sense that it can be used to select among alternative
projects, designs, or building components.
It is a management tool in the sense that it can be used to estimate the costs that will
incur during a building’s life.
It is a maintenance guide in the sense that it can be used to forecast the maintenance
and operating tasks that will incur at each year of a building’s life.
Definition of Life Cycle Costing
“The present value of the total cost of that asset over its operating life, including Capital,
Occupation costs, Operating costs and Cost or benefit of the eventual disposal of the asset at
the end of its life”
Essentially, it means the total cost that the project will impose throughout its whole life. All
future cost are reduced to present value by the use of discounting techniques, and therefore,
the economic worth of a project can be assessed.
OBJECTIVES OF LCC
The decisions made at design stage will impact on the performance (maintenance cost) in the
later stage (e.g. air cooled chiller is cheaper for building but expensive to maintain and higher
energy cost).
LCC helps to evaluate decisions at design stage, by looking at its economic implications.
The specific objectives of LCC includes:
1. Evaluate the investment options and opportunities effectively.
2. Evaluate the project in term of total (life cycle cost), instead of total initial cost.
3. Ensure effective management of asset over its whole life.
LCC APPLICATIONS
Applying LCC to decision making process:
1. As an evaluation technique to choose between options (buildings, components,
materials, finishes etc).
2. As a basis for predicting future running costs.
3. As a management tool to ensure facility is being used effectively and value for money
is being maximized.
4. As a basis for budgeting for future expenditure.
5. As a means for considering total cost rather than just capital cost (to guide project
decision).
LCC ADVANTAGES AND DISADVANTAGES
Over the years, various advantages and disadvantages of life cycle costing have been
identified by various professionals.
The advantages include that it
1. is useful to reduce the total cost.
2. is useful to control programs.
3. is useful in comparing the cost of competing projects.
4. is useful tool for making decisions associated with equipment replacement, planning,
and budgeting.
5. Is an excellent tool for making a selection among the competing
contractors/manufacturers.
Disadvantages of life cycle costing include that it
1. is time consuming;
2. is costly;
3. has doubtful data accuracy; and
4. is a trying task when attempting to obtain data for analysis.
LCC IS A TOTAL COST APPROACH
Life Cycle Costing ensures optimisation of cost reduction and is widely adopted by long term
investors.
The costs to be considered for Life Cycle Costing should be all cost expenditure throughout
the life of a project, these include:
1. Capital Costs – Include land, building, professional fees, furniture and equipment.
2. Financing Costs – Consider flexible funds in terms of amounts and sources, effect of
alternative funding source, tax implications.
3. Operating Costs – Estimate of rent, rates, levies, energy costs, building related
staffing cost.
4. Annual and Intermittent Maintenance Costs – Yearly or intermittent estimate can be
done once details of building design is done. Can be done in association with
equipment manufacturers.
5. Replacement and Alteration Costs – Estimate is derives from normal quantity
surveying techniques.
6. Occupancy Costs – Cost of performing the function (which the asset / building is for).
May change throughout the life of the asset Cost that are not directly related to the
building.
7. Residual Values and Disposal Costs – The resale value of the building, asset or land,
and cost of disposing the building, plants or other assets after the expiry of their
lifecycle. May have major impact on the life cycle costing calculations. May need to
estimate some of these costs, and all assumptions made must be clearly stated.
LCC IMPLEMENTATION
Seven Steps approach to Life Cycle Costing Implementation
Step 1 – Establish the Objectives
Most important step is to define what the project intend to achieve (its objective)
Can be any objective, range from material selection, commission of new system etc
Objective must be clear, unambiguous and unbiased
Should not make prior judgment within the objective
Step 2 – Choose a Method
Next is to determine the range of feasible alternatives to achieve the objective
All realistic alternative should be considered to assist decision making
Step 3 – Formulate Assumptions
LCC deals with future costs and expenditure, hence there is uncertainty
Assumptions will have to be made to proceed with the analysis
Hence all assumptions made must be clearly and explicitly stated.
Estimate should not be used, if factual data is available. Always use factual data
Assumption maybe, consideration for price escalation in labour / energy / material
costs
Step 4 – Identify the Costs and the Life Cycle
Within every alternative, the life cycle of the project, individual component etc must
be considered
All costs must be considered for every stage throughout the entire project period
This is not easy to achieve, and may need many assumptions.
Step 5 – Compare Costs and Rank the Alternatives
Various techniques are available to rank the alternative Such as;
Net Present Value
Internal Rate of Return
Step 6 – Sensitive Analysis
After ascertaining the most suitable Alternative via Step 5, test the sensitivity of the
analysis to certain dominant cost factors and assumptions
This will provide a clearer picture to the decision maker
Step 7 – Investigate Capital Cost Constraints
The initial costs of all alternatives should be aggregated to ensure they do not exceed
the total funding available
If exceed, then certain trade off should be explored so that the lowest life cycle cost is
achieved within the funding limits set
CONCLUSION
LCC helps management to understand the cost consequences of developing and making a
product and to identify areas in which cost reduction efforts are likely to be most effective.
LCC provides a long-term picture of product profitability, feedback on the effectiveness of
initial planning and cost data to clarify the economic impact of alternatives like design. It also
considered a way to enhance the control of manufacturing costs.
