Introduction
Fuller (2016) defines life-cycle cost analysis (LCCA) as an economic method for evaluating facility ownership total costs. This method takes into account all the costs of owning, operating, disposing of, maintaining or acquiring a building. According to Lee Jr (2016), the idea behind LCCA is that decisions of capital investment should be based on the investment lifetime costs including maintenance and operations, and not just on the initial cost of capital. It is particularly suitable when project alternatives which fulfill similar requirements of performance, but with different operating and initial costs, have to be compared to choose one which maximizes net savings. The purpose of LCCA is to approximate project alternatives overall costs and to pick the design which ensures the project will give the lowest overall ownership cost consistent with its function and quality. On this background, this paper focuses on discussing the factors of a life cycle cost analysis. The second section will discuss the importance and relevance of such analysis.
Factors of LCCA
LCCA takes into account various factors applied in giving decision makers financial justification. According to Fuller (2016), these factors include the maintenance and operating costs, initial costs, energy costs, residual values or disposal costs, replacement costs, finance charges and non-monetary costs, and they are explained as follows. Initial costs entail costs of capital investment for construction, land acquisition, or renovation and the acquisition of equipment needed for facility operation. Detailed estimates of initial costs are prepared at the submittal design stage based on calculations of quantity take-off (Fuller, 2016).
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Energy costs include the operational expenses for water, energy, and other utilities. They are based on current rates, consumptions, and projections of the price (Fuller, 2016). Usually, energy costs are evaluated for the building as a whole instead of individual building components because energy consumption, building envelope, and configuration are interdependent. As such, energy usage, energy prices, water costs, and energy price projections are included in the design project phase (Fuller, 2016).
Operations, repair and maintenance costs include the non-fuel expenses of operation and are usually more difficult to approximate compared to other expenditures of a building. These costs may differ from building to building, and thus, it is significant to apply engineering judgment when approximating these costs (Fuller, 2016). Replacement costs refer to the costs which would be used in the process that the facility needs to be replaced or when the economic life of the equipment comes to end. On the other hand, residual value refers to the value that is remaining at the study period end, and they can be based on resale value, scrap value, the value in place, or salvage value, or disposal costs (Lee Jr, 2016).
Other costs include finance taxes and charges and non-monetary costs. Non-monetary costs are effects related to a project for which no objective way exists of assigning the value of a dollar. These effects, by their nature, are external to the LCCA, but in areas where they appear to be important, they need to be considered in the final decision of investment and included in the documentation of the project (Fuller, 2016).
Importance and Relevance of LCCA
Davis, Coony, Gould, and Daly (2005) assert that LCCA is an important tool. First, designing renovated and new buildings with operating and maintenance costs in mind can lead to noteworthy savings as it results in increasing building performance and utility. LCCA guidelines assist project teams to calculate various costs and apply these costs to inform construction, planning, and design decisions (Davis, Coony, Gould, & Daly, 2005). Second, LCCA is normally significant when an institution wishes to carry out a project that turns out to be the most cost-effective by determining the lowest LCCA. This analysis help project team to ensure that project selection is not exclusively based on the lowest preliminary costs, but also considers all the future costs over the useful project life. In particular cases, a project may have a small initial cost, but the costs in the future associated with the project are notably high. Thus, using LCCA, the organization will not suffer from surprises that come from the costs which are unexpected in the future because this will have already been considered during project design (Vitillo, 2003).
Fuller (2016) asserts that LCCA can be used in any decision of capital investment, in which comparatively higher initial outlay is traded for impending cost obligations that are reduced. It is specifically appropriate for the building design alternatives evaluations which fulfill a required building performance level but have a differing initial cost of investment, differing maintenance and operating and repair costs, and different lives. In this manner, LCCA gives a considerably better valuation of project cost-effectiveness that is long-term than alternative economic approaches which focus only on the initial cost or on the short-run costs related to operation (Fuller, 2016).
Also, in some instances, LCCA may be useful in choosing a project from among alternatives of designs having the same performance or benefits levels to the project users over the projects usable life. If benefits differ among the number of designs available, for example, the designs may be able to accommodate various traffic levels, and then an institution cannot compare those alternative designs based on the first cost only (Vitillo, 2003). In this instance, the project analyst requires to make use of the analysis of costs-benefits, which determines the financial values for the benefits and costs.
References
Davis, M., Coony, R., Gould, S., & Daly, A. (2005). Guidelines for life cycle cost analysis.
Fuller, S. (2016). Life cycle cost analysis (LCCA). National Institute of Standards and Technology (NIST).
Lee Jr, D. (2016). Fundamentals of life-cycle cost analysis. Transportation Research Record: Journal of the Transportation Research Board, (1812), 203-210.
Vitillo, N. (2003). Guidelines for life cycle cost analysis. City College of The City University of New York.
