Whole life cycle costing
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Whole life cycle costing is a mathematical technique that is used to appraise the long term cost implications of a procurement decision. It takes into account not only the capital (up-front) costs which normally dictate the decision to procure, but also the hidden cost such as operational (energy, facilities management), maintenance, finance and residual costs of the asset over the whole life. It is an extension to the original concept of terotechnology and Life Cycle Costing that are widely used in many procurement scenarios including manufacturing, construction, defence, energy, healthcare and education. The methodology is based on the application of specific economic measurement instruments such as Net Present Value (NPV) and Net Savings (NS) and is calculated using a base discount rate (this may be nominal or real).
The terminology Whole Life Cycle Costing (also known as Whole Life Costing) is perhaps unique to the United Kingdom, and particularly in the construction industry where is it widely regarded as good practice as part of the overall value for money assessment of a procurement scenario.
Whilst the concept of Whole Life Cycle Costing is relatively new, the underlying principles are simple and well versed. When acquiring a new car for example, we may consider the costs of ownership (fuel economy, insurance, maintenance, availability of replacement parts etc.) when deciding between options. Implicitly then, we consider the long-term costs of ownership in the decision-making process. Furthermore, it could be argued that the larger the capital cost of a product, the more important it being to consider these long-term costs. Buildings are a prime example of high cost purchases, yet consideration of long-term costs is often not treated with the sufficient attention it demands.
Value for money is a concept that is frequently considered when an individual or an organisation is seeking to make a purchase or investment. When acquiring a new car for example, we may consider the costs of ownership (fuel economy, insurance, maintenance, availability of replacement parts etc.) when deciding between options. Implicitly then, we consider the long-term costs of ownership in the decision-making process. Furthermore, it could be argued that the larger the capital cost of a product, the more important it being to consider these long-term costs. Buildings are a prime example of high cost purchases, yet consideration of long-term costs is not treated with the sufficient attention it demands. The past 30 years have seen many attempts to encourage a holistic approach to what is in effect “whole life” cost analysis, but with limited success, particularly in the United Kingdom. One such technique that is currently emerging in the industry is Whole Life Cycle Costing (WLCC).
[edit] Basic Concepts
Whole Life Cycle Costing (WLCC) is a concept that is relatively new to the construction industry, albeit based upon the foundations of analytical techniques that have been in existence for some time. It is in essence an evolution of Life Cycle Cost (LCC) techniques that are now commonly used in many areas of procurement. Like LCC, The primary purpose of WLCC is to aid capital investment decision-making by providing forecasts of the long-term costs of construction and ownership of a building or structure. However, unlike LCC, it is also a dynamic approach, and can provide up to date forecasts on cost and performance throughout the life of the building. Some of the ideas behind the justification for WLCC are synonymous with key issues in today’s construction industry:
Meeting clients’ expectations: clients (especially in the public sector) now require buildings that are efficient during and after construction. WLCC techniques can demonstrate real cost savings in design solutions
Sustainability: achieving sustainable design solutions relies on the consideration of long term operational costs and performance of building components
Monitoring performance of constructed assets: for example, are PFI/PPP projects really cost effective? Only by considering the whole life cycle costs can this be assessed. Using WLCC also supports benchmarking and key performance indicators
Monitoring cost effectiveness of constructed assets: WLCC provides the means by which to constantly review this and base future capital investment on this information
Lean construction: by considering long-term cost and physical performance, waste is minimised both during construction and through the life of the building
[edit] Development of Whole Life Cycle Costing
Prior to the 1970s, most clients, developers and professionals involved in building procurement made capital investment decisions solely on the basis of capital cost. Outside of the construction industry, it was appreciated though in some quarters that making decisions solely on capital cost could be folly. They believed that by possibly spending more in capital cost, the long-term would realise substantial cost savings when compared with a cheaper alternative. This school of thought was known as “Terotechnology”, and it was in effect the beginnings of whole life cycle cost theory. Within the construction industry nevertheless, Terotechnology was largely ignored. Some of the reasons behind this included an ignorance of the importance of whole life cycle costs, lack of available data and data collection mechanisms, and moreover, the fact that those providing the capital generally had no interest in the subsequent operational costs of the building. In the early 1970s, the term cost-in-use began to appear in the industry and the literature. Cost-in-use refers to the expenditure related to the operation of an asset. Although not related specifically to the construction industry, it was recognised that the underlying principles of cost-in-use could apply to buildings and critical structures. What cost-in-use failed to consider though was the necessity for accurate future cost forecasting. It became clear then that some kind of technique was required to facilitate this. It was not until the mid to late 1970s that Life Cycle Costing (LCC) emerged as a solution to this problem. LCC fostered a wide-ranging approach to cost appraisal, encompassing all perceivable costs from construction through to eventual disposal – “the whole life”. Using a variety of forecasting techniques, the analyst was able to demonstrate how increased capital cost could be offset by long term cost savings. LCC sounded good in theory, but the practical implementation within the construction industry did not reflect this. In terms of the enlargement of life cycle costing theory, the major factor which frustrated its’ development was lack of good quality cost-in-use and performance data. This proved to be the principle dissatisfaction with those who showed some willingness to employ life cycle costing techniques.
In 1971, the Royal Institution of Chartered Surveyors established the Building Maintenance Cost Information Service (BMCIS) as a method of collecting operational and running cost data. Its main aim was to adopt a single classification system, which could then be disseminated among subscribers in a common demeanour. Although, the BMCIS went some way to addressing the implementation problems of life cycle costing, it did not address the need for a coherent framework and structure in which to deal most effectively with this information.
In 1977, the then UK Department of Industry published “Life cycle costing in the management of assets” which presented one of the earliest definitions of LCC:
“A concept which brings together a number of techniques – engineering, accounting, mathematical and statistical – to take account of all significant net expenditures arising during the ownership of an asset. Life cycle costing is concerned with quantifying options to ascertain the optimum choice of asset configuration. It enables the total life cycle cost and the trade off between cost elements, during the asset life phases to be studied and for their optimum selection use and replacement”
Since 1977, LCC has become widely reported on, with a diversity of models and techniques existing. In 1983, two eminent researchers in LCC, Roger Flanagan and George Norman developed a framework for collecting data, which could then be used to build up the life cycle cost of a project. By 1992, LCC was a familiar concept to building economists throughout the world, and as such became a recognised standard in the UK under British Standard BS3843 (1992):
"The costs associated with acquiring, using, caring for and disposing of physical assets, including feasibility studies, research and development, design, production, maintenance, replacement and disposal; as well as all the support, training and operations costs generated by the acquisition, use, maintenance, and replacement of permanent physical assets"
In 2000, this definition was revised and incorporated into ISO
