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Life Cycle Cost System

In the current competitive business environment with reducing capital and increasing demand for budget justification, there is a pressure on management to be able to rank projects or works in the order of maximum return on investment.

Budget Rationalisation

One of the key activities in determining life cycle costing is to consider the immediate cash flow and the ability to achieve the "optimal" investment program.

Budget rationalisation is the process by which this is achieved.

A life cycle cost system would offer the following functionality for budget rationalisation:

  • Rank all expenditure (investment opportunities) on a current cost/benefit of the business of the organization
  • Rationalise these expenditures (works) to suit the available budget
  • Place balance of works on backlog program
  • Revise backlog each year
  • Equilibrium replacement programs
  • Identify works which give the organization the greatest benefit from a known works/renewal budget
  • Present value cost benefit analysis.

Decisions have to be made as to whether the asset has to be maintained, renewed, or replaced at different stages during the life of an asset.

The effectiveness of the different options in terms of time frame also differ. A replacement work will be "effective" until the asset expires its effective life, whereas a rehabilitation work will require the asset to be rehabilitated again within a shorter time frame.

It is therefore important that the following inputs be included in assessing the relative merits of the various options:

  • The capital cost required for each option
  • The timing when that capital investment will be required
  • The benefits that will be derived from each treatment option
  • The effectiveness (time frame) of the different treatment options.

Links to Operations and Maintenance Management Systems

To ensure that the whole of life costs are captured for an asset, it is imperative that the life cycle costing system be linked to the operations and maintenance management information systems.

The inputs will include:

  • Direct and indirect operating costs, eg electricity costs (direct), rates (indirect) etc
  • Direct and indirect maintenance costs, eg parts and staff costs (direct), contract management (indirect)
  • Administration and overheads allowances
  • Depreciation.

Intangible Costs and Benefits

Benefits that can be derived from asset works involve both tangible and intangible benefits.

It is fairly simple to estimate the former, but intangible benefits such as asset life extension, improved level of services and risk cost reduction are no less important, and should be quantified as far as possible.

The life cycle costing system should be able to capture these costs and take them into account in the assessment.

The prioritisation program should be based on sound risk management practices that should consider the consequences of failure and the ultimate risk cost to the organization.

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