CONSIDERATIONS IN LIFE CYCLE COST ANALYSIS
Life cycle cost (LCC) is the total cost of ownership of an item, computed over its useful life. To rationally compare the worth of alternative designs, or different ways to do a job (accomplish a function), an LCC analysis is made of each. For those who follow the
VE job plan, a life cycle cost analysis is very easy to perform because the total impact of each recommended VE alternative is an integral part of the total calculations. In reality, an LCC study uses VE techniques to identify all costs related to the subject (functional) area, and VE’s special contribution can be the selection of the best alternatives to be “life cycle-costed.”
LCC is the development of all significant costs of acquiring, owning, and using an item, a system, or a service over a specified length of time. LCC is a method used to compare and evaluate the total costs of competing solutions to satisfy identical functions based on the anticipated life of the facility or product to be acquired. In performing a value study, an LCC analysis is performed in the development phase of the value engineering job plan to determine the least costly alternative.
The value of an item includes not only consideration of what it costs to acquire it, but also the cost to use it or the cost of performance to the buyer for as long as the item is needed. The buyer, not the seller, pays the life cycle costs and therefore must determine value. One measure of value to the buyer is the calculated total cost of ownership.
Costs of repair, operations, preventive maintenance, logistic support, utilities, depreciation, and replacement, in addition to capital cost, all reflect on the total value of a product to a consumer. Calculation of the LCC for each alternative during performance of a value study is a way to judge whether product quality is being maintained in sufficient degree to prevent degradation of reliability, performance, and maintainability.
Life cycle cost analysis requires the knowledge of several economic concepts. One of these is the concept of equivalent costs in relation to time. Equivalent costs are typically developed by equating all costs to a common time baseline using interest rates to adjust for variable expenditure years. One must also hold the economic conditions constant while the cost consequences of each alternative are being developed. That is, the same economic factors are applied to each alternative using a uniform methodology.