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Demystifying Life Cycle Costing and Total Cost of Ownership

This week on the blog we're demystifying two of the more complex budgeting concepts in capital planning: Life Cycle Costing and Total Cost of Ownership.

Life Cycle Costing (LCC) and Total Cost of Ownership (TCO) are some of the more buzz-y financial terms right now in the disciplines of facilities management and capital planning. They are also commonly referred as whole-life costing, cradle to grave, or womb to tomb.

Total Cost of Ownership and Life Cycle Costing are closely related analysis methodologies that are meant to reveal various useful lifetime costs that are a result of the ownership and utilization of certain types of assets. Along with purchase costs, Total Cost of Ownership also incorporates substantial costs for deploying, operating, upgrading, and maintaining physical assets.

 

Life Cycle Costing the total cost of ownership over the life of an asset (1)

Total Cost of Ownership refers to the sum of all costs incurred throughout the lifetime of owning or using an asset; they typically go beyond the original purchase price. TCO enables decision makers to look at asset procurement in a more strategic way (beyond the lowest bidder) and to level the playing field when choosing among competitive bids where the lowest priced bid may or may not be the least costly asset to procure.

Life Cycle Costing is a technique to establish the total cost of ownership. It is a structured approach that can assist management in the selection process. It can take into account any costs that the selection team feels are appropriate. Maintenance, asset disposal, training, cost of upgrades, energy consumption, resources used in manufacture and cost of duplicate service during installation are all examples of costs that could be included in an LCC analysis.

In short, TCO and LSS are methodologies for calculating the whole cost of a system from inception to disposal. It includes the financial cost, which is relatively simple to calculate, as well as the environmental and social costs, which tend to be more challenging to quantify. Typical areas of expenditure which are included in calculating the LCC include planning, design, construction and acquisition, operations, maintenance, renewal and rehabilitation, depreciation and cost of finance and replacement or disposal.

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