Life cycle costing—Theory, information acquisition and application

Abstract

Especially in the last two decades of an increasingly-competitive business environment, dwindling resources and an ever-increasing need to obtain value for money in all areas of corporate activity, it has become essential that all available resources be used optimally (Griffith, J. W. and Keely, B. J., Cost Engineering, 1978, September/October, 165–168). Physical assets form the basic infrastructure of all businesses and their effective management is essential to overall success. It has thus become essential to plan and monitor assets throughout their entire life cycle, from the development/procurement stage through to eventual disposal. Life cycle costing ∗ ∗ The concept is not new, and was actively promoted in the UK by the Department of Industry through its Committee for Terotechnology in the mid- to late-1970s. See Sherif, Y. S. and Kolarik, W. J., Omega, 1981, 9, 287–296 for a brief history of the concept. is concerned with optimising value for money in the ownership of physical assets by taking into consideration all the cost factors relating to the asset during its operational life. Optimising the trade-off between those cost factors will give the minimum life cycle cost of the asset. This process involves estimation of costs on a whole life basis before making a choice to purchase an asset from the various alternatives available. Life cycle cost of an asset can, very often, be many times the initial purchase or investment cost (Hart, J. M. S., Tetrotechnology Handbook, p. 22, HMSO, London, 1978; Hysom, J. L., Journal of Property Management, 1979, 44, 332–337). It is important that management should realise the source and magnitude of lifetime costs so that effective action can subsequently be taken to control them. This approach to decision making encourages a long-term outlook to the investment decision-making process rather than attempting to save money in the short term by buying assets simply with lower initial acquisition cost. It is suggested project managers should familiarise themselves with what the approach involves, to better appreciate how they might then contribute to the enhanced quality decision making which it makes possible.