Life cycle cost

Life cycle cost is equal to sum of all the estimated costs associated with a product, service or system over its life span starting from conceptual planning at the beginning to schematic design, detailed design, construction or production, operation and maintenance till its disposal at the end of the life span. The concept of life cycle costing lies in designing/producing the products, services or systems with systematic identification of both recurring and nonrecurring costs during various phases of their life cycle and estimating the cash flows during these phases over the life cycle. The economic evaluation of an alternative on the basis of life cycle cost results in a detailed analysis of the of both present and future costs and thus helps in taking the right decision regarding the selection of the most economical alternative. For construction projects, it is important to accurately estimate all the cost components during various stages of the project life cycle.

The life span of a product, service or system depends on the different phases starting from conceptual planning to its disposal. The end of life cycle may be governed by economic requirement or by functional requirement and depends on specific product, service or system. The economic life of a product/system is normally shorter than its physical life. The product/system may still be functional (over physical life) but may not be economical for the entire life period and may be replaced. The details about the replacement analysis of an asset are already stated in Module 4.

The life cycle cost of a product, service or system increases, if the design changes are made during later stages of the life cycle. The cost of design change increases with each stage of life cycle with lower cost during the early stages. Further the flexibility in design changes during the early stages is more as compared to that in the later stages of life cycle. Thus the potential for cost savings is more during the early stages of the life cycle and thus the selection of the most economical alternative and the effective design procedure during the design stage results in higher cost savings. Thus it is essential to have a detailed design of the product/system (as per the required technical specifications and operational requirements) during the design stage of life cycle and to avoid or minimize the design changes during production and operation stages of life cycle to have a minimum impact on the life cycle cost of the product/system.

The life cycle cost analysis is more useful for selecting the alternatives for products, services or systems having longer life periods namely, infrastructure projects and projects involving more research and development components. The economic evaluation of alternatives using life cycle cost analysis can be carried out by finding out the equivalent worth of the each alternative by including all the cash flows occurring over various stages of life cycle by present worth analysis and selecting the most economical alternative that results in minimum life cycle cost.