What is Lifecycle Costing?
 
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Buying a car with the lowest purchase price is often not the best financial decision. There are many post-purchase costs that should be considered, including:

  • Running Costs (e.g. fuel, oil, tyres etc.)
  • Support Costs (e.g. servicing, repairs, spares etc.)
  • Replacement Costs (e.g. depreciation, disposal etc.)

Even when purchasing a car, it may be important to consider Modification Costs covering, in effect, the subsequent implementation of new requirements; these could include the fitting of a tow-bar or air-conditioning.

Life Cycle Costing (LCC) is the discipline for analysing all the costs of ownership so that the lowest total cost can be achieved.

A fundamental objective of most major system procurements is usually that total costs over the complete life-cycle should be as low as possible - given that the system requirements (including performance) are achieved.

The procurement of major systems differs from the private purchase of a car in many key ways; typically the acquisition and in-service costs are derived from different budgets. Sometimes they are considered to be parts of the separate Capital and Revenue cost budgets respectively. There is a growing recognition that increased acquisition costs can lead to lower overall life-cycle costs, and therefore emphasis is now placed on LCC assessment rather than simply selecting the system with the lowest purchase cost.

The quantification of life-cycle costs can be achieved through the development of cost models that may be based on bespoke or commercial LCC tools. The models cover the level of detail necessary to understand and control costs, including cost discounting and sensitivity to interest rates and other costs (e.g. manpower costs).

 
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Last modified 24/06/08 by maia@eaglevector.com