Getting Started with Life Cycle Costing

One of the positive outcomes of the energy crises and double-digit inflation of the 1970s is that they prompted building owners and managers to focus on the long-term costs of their facility investments.

Life cycle costing has developed as a popular method not only for evaluating long-term costs but for making more cost effective decisions among various facility investment alternatives. Selecting a low cost roofing system, for example, may prove more costly in the long run if it requires frequent maintenance or repair. Life cycle costing is designed to help ferret out the real costs of such investments.

Essentially, life cycle costing involves two key concepts. First, it evaluates all the costs, present and future, of the available investment options. Future costs can include repairs, maintenance, operations, parts, replacements and impacts on energy consumption, as well as the costs of financing, depreciation and taxation.

Second, it includes the time value of money. This value takes into account the changes in purchasing power over time due to inflation and/or deflation. It also considers the earning potential of money. When calculating life cycle costs, adjustments are made to allow for the time value of money.

No one can predict time values precisely, but reasoned estimates can suffice for the purpose of comparing alternative choices.

Compare Apples to Apples

Life cycle costing studies are conducted on the basis of a single type of alternative at a time, i.e., a system is compared with another system, a design with a another design, a project with a project, a location with a location, and so on.

Similarly, the alternatives should perform the same basic function at an acceptable level. Also, whatever values you specify for your comparisons should be the same for each alternative: rate of inflation, expected service life, etc.

Dealing with Uncertainty and Complexity

The uncertainty involved in projecting future costs and benefits adds an element of risk to the life cycle costing exercise. Some building owners and managers argue further that life cycle costing is too complicated or time consuming. However, the proliferation of materials available to offset the risk of uncertainty and help simplify the process fly in the face of such arguments.

Life cycle costing is not a silver bullet. It won't guarantee the best purchase or lease decision every time. But it can be used in a variety of productive ways and will certainly help improve the long term financial performance of your organization.

Ample Help Available

A leading source of help is the Building and Fire Research Laboratory's Office of Applied Economics (OAE). For over 20 years, the OAE has been developing economic methods for evaluating the cost effectiveness of energy projects in government buildings. The government’s mandate is to improve energy efficiency in federal buildings by 20 percent by the year 2000, and 30 percent by 2005 from 1985 levels.

While the OAE's efforts focus on energy efficiency, the assistance they offer can be applied across a wide range of life cycle cost analyses. The OAE's full complement of resources includes comprehensive, public domain (free) software, self-help videotapes and workbooks, workshops, technical reports and teleconferencing.

For further information, contact the Office of Applied Economics in Gaithersburg, MD. Call: (301) 975-6132; or Fax: (301) 963-9137.