How Life Cycle Costing can reveal the real costs of asset?

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How Whole Life Cycle Costing can reveal the real costs of an asset?

October 3, 2022 Civil Bites 0 Comments

Introduction

Technologies are progressing rapidly, and there is a consequent lack of current components and devices, requiring industries to continuously update and modify current technologies to ensure their long-term use. As a result, decisions made during the early planning, design, and upgrade phases can significantly impact a system’s Total Cost of Ownership (TCO). Life cycle costing calculates and records expenses incurred throughout an asset’s lifespan (LCC).

What is the Whole Life Cycle Costing?
A technique for conducting economic analysis known as life cycle costing looks at all costs involved in developing, running, and maintaining a building project over a predetermined time frame. An essential part of the complex decision-making process is optimising the life cycle cost of a project, equipment, or construction. So, essentially, life cycle costing is a technique for estimating the overall cost of a physical asset throughout its life.

Life-Cycle-Cost-2
Whole Life Cycle Costing

Using LCC As a Base For Decision-Making

So, we may infer that an asset’s whole life cycle cost is a robust foundation for decision-making. With the help of this knowledge, one can:

  • First, consider both current and previous resources.
  • Determine if an asset’s economic life has run out and if a replacement is necessary.
  • Evaluate future resource needs.
  • Enhance the design system.
  • Compare acquisition costs.
  • Choose between supply sources.

How to Calculate the LCC of an Asset?

  • Determine the projected lifetime operating cost.
  • List additional fixed expenses like interest and insurance.
  • Calculate the equipment’s net acquisition cost, considering available incentives and choices.
  • I compared the advantages and consequences of the various design options to determine the best choice for the project.
  • Calculate the expected depreciation rate for the equipment.
  • Perform a structured cost study that demonstrates which expense sources have the most significant impact on your overall costs.
  • With the key sources of expenditures made evident, it is possible to pinpoint the baseline design’s primary areas of concern for change.
  • Calculate the estimated lifecycle cost using the estimated holding and operating costs.

How to Maximise the Benefits of Your Life Cycle Cost Analysis?

  • Begin the Whole Life Cycle Costing Calculation as soon as possible
    The LCC works best when it is put into practice early in a project before important choices have been made.
  • Involve the Whole Team
    Get the entire team to work on life cycle costing, especially when developing alternatives to guarantee that the project’s full potential is realised.
  • Keep Applying the LCC to the Project
    To ensure accuracy and high-quality analysis, LCC should be considered a continuous process repeated several times throughout the project’s stages.
  • Merge Life Cycle Costing with Life Cycle Analysis¬†
    Do this to ensure you choose the optimum action for your cost and carbon reduction project.

The Impact of Life-Cycle Cost Analysis on Value Engineering

Life-cycle cost analysis can be a significant practice in value engineering. You may decide which solutions provide the highest value in the short and long terms by considering the project from a broad viewpoint.
Value engineering involves more than merely lowering the project’s overall cost. Value engineering aims to maximise your money and project value for a long-term investment that fits your business’s financial goals.
It’s crucial to work with a construction team that not only comes up with innovative solutions to value engineer the project but also thoroughly explains it to them so the owner can make an informed choice.

The Benefits of Whole Life Cycle Costing 

  • Long Term Worth
    Even if initial expenses are not greatly decreased, an LCC assures that your project has the maximum value feasible. It offers a method for locating and resolving problems with the original design. Greater durability, reduced maintenance costs, fewer concerns, cheaper operational costs, and even a longer building lifespan are all benefits of an LCC’s lifetime view.
  • A Comparison of The Long-Term Costs of Two Different Designs
    As stakeholders try to ensure they invest in a structure that produces the best long-term economic results, comparing alternative designs is becoming increasingly popular. This tactic is particularly useful for exposing projects with modest upfront costs but substantial ongoing expenditures.
  • Accurate Planning and Decreased Risk
    It can be said that whole life cycle costing is a tremendous long-term planning tool. You may successfully minimise unexpected circumstances and lower financial risks with a perfectly done LCC.
  • Product Redesigning¬†
    When an organisation does not achieve its profit target, management may try to lower product costs. One effective way of cutting costs is to approach the engineering team to modify the product by removing some functionality. This is possible in the early phase when the product has not been produced in a bundle. On the contrary, management remodels the product by including new features to increase its lifespan and profit. Various researchers concur that approximately 2%-6% of a facility’s annual operating budget should go toward preventive maintenance.
  • Maintenance And Repair Costs are Calculated Precisely
    Buildings and their owners can suffer if maintenance and repair expenses are not forecast accurately. You can get a complete cost division accustomed to your facility using whole life cycle costing.

Costs Included in Whole Life Cycle Costing

  • Training Costs
    Training costs are incurred by a business to teach employees how to generate new products.
  • The Cost of Design and Research
    Even if the business does not generate a sale, we must pay all our initial expenses. There are associated costs with surveys, product testing, the creation of sample products, and so forth.
  • Production Costs
    It is the production-related expenses such as direct materials, direct labour, and overhead.
  • The Cost of Marketing and Advertising
    Although it will be significant during the initial stages and thereafter decline, some items necessitate continuing promotion. Life cycle costing must be a part of each of them.
  • Disposal Cost
    After the product’s life, the company may be required to clean and restore the production site.

Final Thoughts

Investing in an asset is not as easy as doing online shopping, where you go to the store’s online page, click, and deliver the product. Regarding business operations, there are thousands of details involved in asset investment. The business owner must ensure that he is investing in an asset that will reap benefits in the future. Designs are compared, costs are determined and evaluated, and based on these two aspects, the value of an asset is identified.
Whole life cycle costing entails various costs and is done to maximise your money and project value for a long-term investment that fits your business’s financial goals. This is how cost comparisons, design alternatives evaluations, and value optimisation define the real cost of an asset. Whole life cycle costing is not only the real cost calculation of an asset but also the foundation of complex decision-making.

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