LCC

YUSUF OZFATIH BOLUKBAS

HUSEYIN ANIL KARABULUT

IntroductionWhy use Life Cycle Costing?Growing pressure to achieve better outcomes from assets means that ongoing operating and maintenance costs must be considered as they consume more resources over the asset’s service life

What is life cycle costing? The Life Cycle Cost (LCC) of an asset is defined as: " the total cost throughout its life including

planning, design, acquisition and support costs and

any other costs directly attributable to owning or using the asset".

Life cycle costing modelLCC model is an accounting structure containing terms and factors which enable estimation of an asset's component costs

LCC: the Design Stage

Design Service Life Planning

Existing structures: It focuses on the rest of service life, maintenance and replacement costs.

New structures: It requires some mathematical assessments of components’ service lives.

LCC: the Design Stage

Effects to be considered:

Physical Economical Functional Technological

LCC: the Design Stage

Certainty of service life can’t be exactly determined unless all influencing factors are taken into consideration.

LCC: the Design StageDesign Environmental Life-cycle

Assessment

Resource depletion Waste Air Pollution Land Pollution

LCC: the Design Stage

Products are required to have:

Waste minimization Lower emission Sustainability

LCC: the Design Stage

Design step of LCC is very important with:

types of materials, the quality of the design, contracting and procurement method Operating maintenance and

rehabilitation costs

LCC: the Design StageFramework for LCC budget estimation covers these steps:Understanding client objectivesDefining cost breakdown structure (CBS) Developing LCC assumptionsBudgeting for LCC risksData collectionLCC budget estimate calculation

LCC: the Design StageRisk analysis and management

General risks: Political risks Economical risks Environmental risks Social risks

LCC: the Design StageDesign project specific risks:

project finance, design processes, costing and estimation processes preconstruction decision making construction and operation processes

LCC: the Design Stage

Design risk response measures:

risk avoidance: taking less risky decisions risk reduction: allocating additional

resources risk retention: insurances risk transfer: transfer obtained risky

situation for experts of it

DATA REQUIRED FOR LCC CALCULATION

Types of Life cycle

data

Physical Data• Superficial floor area• Window area• Types of heating systems• Functional areas• Walls and ceilings• Number of occupants

Performance Data• Maintenance cycles• Thermal conductivity• Cleaning cycles• Occupancy time and gas

Cost Data• Acquisition cost• Capital cost, taxes• Inflation, discount rate• Management, operating,

replacement, cleaning, maintenance cost etc.

Quality Data• Condition of sanitary

fittings• Pipe work furnishing• Fabric road surfacing

Occupancy Data• Occupancy profile• Functionality• Hours of use• Particular feature

EVALUATION OF LCC METHODS

Simple payback Discount payback method (DPP) Net present value (NPV) Equivalent annual cost (ECA) Internal rate of return (IRR) Net saving (NS)

SIMPLE PAYBACK

What does it calculateCalculate the time required to return the initial investment.The investment with the shortest pay-back time is the mostprofitable one Advantage Quick and easy calculation. Result easy to interpret DisadvantageDoes not take inflation, interest or cash flow into account

DISCOUNT PAYBACK METHOD

What does it calculateBasically the same as the simple payback method, it just takes

the time value into account

Advantage Takes the time value of money into account

Disadvantage Ignores all cash flow outside the payback period

NET PRESENT VALUE(NPV)

What does it calculateNPV is the result of the application of discount factors, based on

a required rate of return to each years projected cash flow, both in and out, so that the cash flows are discounted to present value.

Advantage Takes the time value of money into account. Generates the

return equal to the market rate of interest. It use all available data

Disadvantage Not usable when the comparing alternatives have different life

length. Not easy to interpret

EQUIVALENT ANNUAL COST(ECA)

What does it calculateThis method express the one time NPV of an alternative as a uniform equivalent annual cost

Advantage Different alternatives with different lifes length can be compared

Disadvantage Just gives an average number. It does not indicate the actual coast during each year of the LCC

INTERNAL RATE OF RETURN(IRR)

What does it calculateIt is possible to calculate the test discount rate that will

generate an NPV of zero. The alternative with the highest IRR is the best alternative

Advantage Result get presented in percent which gives an obvious

interpretation Disadvantage Calculations need a trail and error procedure. IRR can be just

calculated if the investments will generate an income

NET SAVING(NS)

What does it calculateThe NS is calculated as the difference between the present

worth of the income generated by an investment and the amount invested.

Advantage Easily understood investment appraisal technique

DisadvantageNS can be only use if the investment generates an income

NET PRESENT VALUE(NPV)

The most suitable approach for LCC in the construction industry is the net present value (NPV) method.

NPV = C + R – S + A + M + EC = investment costsR = replacement costsS = the resale value at the end of study periodA = annually recurring operating, maintenance and repair costs

(except energy costs)M = non-annually recurring operating, maintenance and repair

cost (except energy costs)E = energy costs

REFERENCES

Whole Life-cycle Costing, Abdelmalim Boussabaine and Richard Kirkham, 2004

http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0005/5099/life_cycle_costings.pdf

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