Life Cycle Cost Analysis: Definition, Process & Calculation
With most things, there is a life cycle associated. We know about the biological life cycle, but did you know that businesses have a life cycle as well? One of the ways that we can assess this life cycle financially is the Life Cycle Cost Analysis. Learn more about it here!
Here’s What We’ll Cover:
What Is Life Cycle Cost Analysis?
In business, Life Cycle Cost Analysis (LCCA) is a method of determining the cost of something for its entire life. This can refer to the ownership of a facility, or to the life of a specific project. This economic evaluation method considers all possible costs associated with the subject. This can include any of the following:
Initial costs can relate to a number of different costs. For a company, it may refer to an initial investment cost. In relation to a building or a structure, it may include the construction cost. Initial costs can also be called capital investment costs.
Service costs refer to any service that a subject may require. For a building, this may be related to a repair cost. If the subject isn’t under permanent ownership, these costs only last throughout the defined service period.
Preventative Maintenance Cost
This type of cost is almost always in reference to a building, machinery, or a structure. Preventative maintenance costs can be things like oil changes, or tuckpointing brick faces on a building. These are factored in to help prevent an unwanted repair cost.
Operating costs are also known as operational costs, or operational expenses. An operational cost is any resource used by a business to maintain its existence. As such, an operational expense is normally ongoing, and lasts for the entire life cycle being analyzed.
These are any costs directly related to asset disposal. The actual costs can vary. If related to infrastructure, then the costs can be high.
There are additional costs that may occur, as well. These would be specific to projects or structures, and taken into consideration using a detailed analysis.
What Is the LCCA Process?
LCCA must be performed during the initial stages of the design process. If it is done any later than this, it cannot be used to consider alternative designs. The purpose of LCCA is to inform decisions. When costs are too high, design alternatives must be researched.
Listed below are the various stages of the LCCA process.
1. Develop Design Alternatives
Once you know the cost of your project or building, alternative designs should start to be designed. The alternatives need to deliver the same outcome and performance objectives. This stage is less about comparing apples to oranges. It's more about trying to consider anything else that may work for your building or project.
2. Define the Schedule
All initial and future activities need to be defined and scheduled. Until these are scheduled or taken into account, none of the other alternatives can be planned for. This is part of the cost analysis for your project, as well as the alternatives to your project. Remember, time is money. Scheduling is crucial.
3. Estimate the Costs for Alternatives
Every alternative should have the costs estimated and analyzed. If this part of the process is skipped, you won’t know if your current project is the best method.
4. Find the Present Value
Each alternative needs to have a present value assigned to it. To do this, you must use the method of “discounting.” Specific costs are assigned to each item on the alternative schedule. The costs are converted to present dollars after costs have been assigned.
Once you’ve obtained your results, it’s time to analyze them. This allows you to directly compare the costs of alternatives to the current project. This is the best way to determine if the current project is going to be cost effective.
Overall, LCCA is a method to find the lowest cost option at your disposal. It is weak, however, as it doesn’t accommodate many options. It lacks the scope to understand available budgets, political considerations, and diversification. All of these things are not included in LCCA’s perfect view of the world.
LCCA is an excellent way of determining what the lowest possible option is for your project. However, it doesn’t provide a lot of flexibility. As such, there are other methods that may be better suited to your business. To find more information like this, check out our resource hub! There are many articles just like it.