The extended lifespan and high expense of buildings are the end product of construction projects. Therefore, all decisions relating to construction projects are made with long-term and noteworthy effects.
Life cycle costs (LCC) generally include an initial investment (typically construction costs) and ongoing expenses (regular payments such as energy, utilities, cleaning and maintenance, as well as irregular costs for renewal or replacement). Some life cycle costing techniques also take demolition expenses into account.
Finding the most affordable product design solutions involves using the life cycle costing methodology, which is frequently advised. In the design stage of buildings generally, life cycle costing is becoming a method that is utilised increasingly often.
What is life cycle costing?
Life cycle costing is a technique to help with the cost of ownership estimation. The procedure is ready to assist the decision-making process for building investment projects. Life cycle analysis is particularly beneficial for early-stage project cost estimation of total costs.
A report focusing on life cycle costing was published after proper research. As a result, the total costs incurred throughout a building are represented as life cycle costs or LCC.
Life cycle costing process
Performing a life cycle cost assessment (LCCA) can help you gain a better understanding of how much a business will pay on acquiring a new asset. To calculate the life cycle costing for an asset, you’ll need to estimate these expenses:
- Purchase
- Installation
- Operation
- Maintenance
- Finance (include interest and other such costs)
- Depreciation
- Disposal
You will need to add up all of these expenses associated with different stages of the asset’s life cycle to find the total life cycle costing. You can choose to use past data for accurate cost prediction. Try starting with fixed costs, which refer to costs that stay the same from month to month, to simplify the process. You can estimate variable costs after that.
Life cycle costing process for intangible assets
The process of life cycle costing can also be conducted to find out the cost of intangible assets, which are non-physical properties like business’s brand and your patents. It’s more challenging to determine the life cycle costing for an intangible asset as compared to that of a physical asset. Nevertheless, it is still possible. To do this, you need to add the costs of obtaining and maintaining this intangible asset. For instance, obtaining a patent can cost thousands of dollars. Plus, you’ll need to pay fees for maintaining your patent and hire a lawyer to help you get one. All of these costs will have to be added to determine the whole life cycle cost.
Life cycle costing assessment example
Here is a small example of life cycle costing assessment that can help you understand the concept better. Suppose you want to get a new printer for your business. Let’s add up the associated costs:
Purchase: You buy the printer for Rs 30,000.
Installation: You pay an additional Rs 5,000 for installation and set up.
Operation: You have to buy paper and ink cartridges to operate the printer. So, you’ll have to spend around Rs 10,000 on these supplies. Also, consider Rs 2,000 the electricity charges for operating the printer.
Maintenance: In case of any damage of functional flaws, let’s assume that repair costs will amount to Rs 3,000.
Finance: If you purchase the printer with a credit card, you’ll have to pay a monthly interest of around 3.5%. Even if you pay it off in a month, you still have to pay 3.5% of Rs 30,000 i.e. Rs 1,050.
Depreciation: Let’s predict that the printer will lose its value by Rs 3,000 each year.
Disposal: Let’s assume that it will take around Rs 500 to find someone to dispose of the copier properly once you’re done with it.
After adding all of these costs, you’ll find that while you are purchasing the printer for Rs 30,000, its life cycle cost will cost your business over Rs 54,000.
Execution of life cycle costing
Several essential factors comprise LCC in construction:
- Perform a structured cost study that pinpoints the expense sources that significantly impact your comprehensive costs.
- It is likely to determine the top areas for refinement in the baseline layout if the key funding sources are clear.
- Compare the advantages and consequences of the many layout alternatives to select the most suitable technique for the project.
Life cycle costing: Strategies for maximising value
- Throughout the project, keep repeating the Life Cycle Costing. LCC should be viewed as a continuous process to ensure accuracy and high-quality analysis. Estimates should be made repeatedly as the project moves through its phases and should be kept updated.
- Perform the Life Cycle Costing early. The LCC is most effective in the early stages of a project before significant decisions have been taken.
- To make the optimal choices for your project in terms of cost and carbon reduction, incorporate LCC with LCA (Life Cycle Assessment).
- Get the entire team involved. Mainly when developing alternatives to guarantee the project’s full potential is achieved.
Advantages of life cycle costing
- Long-term worth: Even if initial expenses are not significantly decreased, an LCC assures that your task has the maximum value feasible. It offers a method for locating and resolving problems with the actual layout. Good durability, less upkeep, fewer dangers, cheaper operational costs, and even a longer building lifespan are all benefits of an LCC’s lifetime view.
- Risk reduction and trustworthy preparation: LCC is an excellent tool for long-term planning. You can successfully avoid surprises and lower financial risks with an adequately executed LCC.
- Certification points for green construction: LCC credits are a common component of green building certification programmes, and in some of these programmes, LCC is a required credit.
Disadvantages of life cycle costing
- Due to advancements in new technologies, life cycle costing analysis has grown excessively complex.
- Operating costs will increase with the duration of the project.
- Lacks sufficient knowledge of how to use LCC calculations to save money and increase profitability.
- Insufficient and inaccurate data because of the advancing technologies; data limitations.
Applications of life cycle costing
- Any capital investment choice in which comparatively higher initial costs are exchanged for lower future cost responsibilities can be subject to LCCA(Life Cycle Cost Analysis). It is especially well suited for evaluating design choices that meet a necessary level of building performance but may have different initial investment prices, operating, maintenance, and repair costs, as well as potentially varying lifetimes. Compared to other financial processes that evaluate initial or short-term functional expenses, LCCA significantly outperforms them in assessing a project’s long-term costs.
- It is possible to do LCCA at different levels of complexity. Its complexity can range from a “back of the envelope” study to a complete analysis with well-documented input data, supplemental economic evaluation measures, and detailed uncertainty assessments. The size of the effort should be adjusted based on the project’s requirements.
FAQs
How can LCC be applied when making construction decisions?
A technique for examining the economics of all costs associated with developing, running, and maintaining a construction project over a predetermined time frame is called life cycle costing (LCC). Once we have the expenses and savings, we can immediately compare these areas and make decisions knowing all the facts.
What significance does life cycle costing have?
Businesses that use long-term planning frequently employ life cycle costing. They can maximise their long-term gains thanks to it. A company that does not value LCC highly may be able to purchase assets for less money. However, they fail to consider any expenses that can arise during the asset’s useful life.
What distinguishes life cycle costs from whole cycle costs?
Whole life costs are life cycle expenses in addition to non-construction expenditures like site costs, finance costs, leasing costs, etc., and earnings like sales income, income loss, etc. Consequently, life cycle costs solely apply to the building, whereas whole life costs apply to the entire development.
What drawbacks are there to life cycle costing?
There are instances when using the life-cycle concept in your firm is challenging. The price may be very high.
How are life cycle costs determined?
PV Residual Value – LCC = C+PV Recurring LCC stands for life cycle cost. The cost of construction in year zero is C. The present value of all recurrent expenses is known as PV recurring. The current value of a residual value is known as PV residual value.