Life-cycle cost analysis

Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective option among different competing alternatives to purchase, own, operate, maintain and, finally, dispose of an object or process, when each is equally appropriate to be implemented on technical grounds. For example, for a highway pavement, in addition to the initial construction cost, LCCA takes into account all the user costs, (e.g., reduced capacity at work zones), and agency costs related to future activities, including future periodic maintenance and rehabilitation. All the costs are usually discounted and total to a present-day value known as net present value (NPV). This example can be generalized on any type of material, product, or system.

In order to perform an LCCA scoping is critical - what aspects are to be included and what not? If the scope becomes too large the tool may become impractical to use and of limited ability to help in decision-making and consideration of alternatives; if the scope is too small then the results may be skewed by the choice of factors considered such that the output becomes unreliable or partisan. Usually, the LCCA term implies that environmental costs are not included, whereas the similar Whole-Life Costing, or just Life Cycle Analysis (LCA), generally has a broader scope, including environmental costs.

To help building and facility managers make sound decisions, the US Federal Energy Management Program (FEMP) provides guidance and resources on applying LCCA that permits the cost-effectiveness of energy and water efficiency investments to be evaluated (see NIST Handbook 135). This document includes an introduction to LCCA.

Life cycle cost can be conducted in two approaches: deterministic and probabilistic method.

Example^[1]: A building owner contemplates installing a photo-voltaic (PV) system on the roof of the building. The PV system comes with a 20-year labor and material warranty, but the current roof does not have another twenty years left in its service life, which means that if the PV system is installed on the existing roof, there will be an added cost ($4,000) of detaching and resetting the new PV system for a re-roofing scope within the time frame of the PV warranty. The building owner then gets three re-roofing bids from three different roofing contractors; a low bid, a medium bid and a high bid. The bids in this particular case are reflective of the quality of both workmanship and material.

1. The low bid is from an inexperienced roofer proposing the installation of the cheapest roofing materials on the market. (15 year life expectancy) $14,000

2. The medium bid is from a roofer with good reputation and trusted by material manufacturers. (25 year life expectancy) $16,000

3. The high bid is from a renowned roofing contractor who proposes a high quality roofing material. (35 year life expectancy) $18,000

When performing life-cycle cost analysis it should be apparent that the low bid is not the ideal bid for this particular situation, as the building owner will end up paying at least $18,000 ($14,000 for the first re-roofing + $4,000 detaching and resetting the new PV system for the second re-roofing + the costs of the second re-roofing) for a roof that will not exceed the life of the PV warranty and have half the life expectancy of the high bid roof. Either the medium or high bid should be chosen for a long-term economic solution.