DG Environment

Life Cycle Costing (LCC) Methodologies for GPP Barbara Morton 14 April 2010 Tallinn, Estonia

Outline  What is life cycle costing?  Why should we use life cycle costing?  Examples  Benefits of life cycle costing  Life cycle costing in construction  Summary

What is Life Cycle Costing?  LCC is a technique used to estimate the total cost of ownership.  It allows comparative cost assessments to be made over a specific period of time, taking into account relevant economic factors both in terms of initial capital costs and future operational and asset replacement cost.

Defining LCC  Other terms in common usage:     

Total Cost of Ownership Whole Life Costing = a wider concept – see construction Whole Life Value ‘Whole Life Value Thinking’ Through Life Cost (especially in defence)

Why should we use LCC?  The most common misconception about GPP is that green products cost more.  However, upon closer inspection, this does not necessarily hold true.

Why should we use LCC?

 The higher initial price of the greener product is more than compensated by the much lower usage and disposal costs

Using LCC 

If contracting authorities wish to ascertain which products are most cost effective for them they need to apply LCC approaches in their procurement decisions.

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This means comparing not just the initial purchase price of a product, but all future costs as well:  Usage costs (energy/water consumption, consumables such as ink or paper)  Maintenance costs  Disposal costs/resale value

Examples of LCC 

Price of compact fluorescent lamps (CFLs) is about €10 each.

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These lamps are more expensive than conventional incandescent bulbs, but they last 10 times longer and use only a quarter of the electricity incandescent bulbs use.

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Therefore they offer savings of more than €40 in utility bills during their useful life.

Examples of LCC 

When the environmental authorities in Hamburg, Germany, substituted two old inefficient lamps with one energy-efficient lamp in 300 public buildings, they reduced the annual electricity consumption by approx. 4.5 million kWh (an equivalent of approx. 2,700 t of CO2 emissions).

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Assuming a price of 5 cents per kWh, this equates to a saving of €225,000 on Hamburg's electricity bill (2).

Tools for LCC  A number of guidance papers produced in the Member States for use by government departments procuring construction works and services. • LCC software and toolkits • Scope expanding: – Carbon emissions – Other emissions

LCC in Construction 

Running costs may constitute up to 85% of total costs

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On same scale, design costs are likely to be 0.3% to 0.5% of lifetime costs

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It is through the design process that the largest impact can be made on the 85% figure

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1-5-200 principle

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So LCC should be a standard procedure for construction work

LCC in Construction

Benefits of using LCC  Typical benefits can include:  Greater transparency of future costs  Improved awareness of total costs  Evaluation of competing options  Better forecasting  Ability to plan for future expenditure

LCC Methodology for Construction 

ISO standard:

 BS ISO 15686-5: Life cycle costing  Standardized Methodology of Life Cycle Costing (SMLCC) for Construction Procurement  Life cycle cost is ‘cost of an asset, or its parts throughout its life cycle, while fulfilling the performance requirements’ (BS ISO 156865, 3.1.1.7)

LCC Data for Construction

Whole Life Cost

Non-construction Costs

Construction

Maintenance

Life Cycle Costs (LCC)

Income

Externalities

Operation

Occupancy

End of Life

Use of LCC • Study by International Institute for Sustainable Development, published 2009 • “Life Cycle Costing: A Question of Value” • Many procurers using LCC as a decision-making tool, but not systematically • Need to use LCC thinking at higher level, to inform strategic decision-making process

Summary  What is life cycle costing?  Why should we use life cycle costing?  Examples  Benefits of life cycle costing  Life cycle costing in construction

Thank you for your attention!