Life Cycle Cost (LCC)

When evaluating bids, the sticker price tells only part of the story. Life Cycle Cost analysis pushes you to look beyond acquisition costs and consider what you'll spend operating, maintaining, and eventually disposing of whatever you're buying. It's a cornerstone of value-for-money procurement in the federal government.

How It Works

The Treasury Board's Guide to Costing defines this as all costs associated with an initiative from initial conception through its entire life span. That means purchase price, yes, but also training costs, energy consumption, maintenance contracts, upgrade expenses, and end-of-life disposal. For a vehicle fleet, you'd factor in fuel efficiency, repair frequency, and resale value. For software, you're looking at licensing fees, integration costs, support contracts, and migration expenses when the system eventually needs replacing.

Here's the thing: the Government of Canada Supply Manual references this approach indirectly through its emphasis on value-for-money in Chapter 5 and evaluation criteria in Annex 4.1. The Directive on the Management of Procurement makes it more explicit, requiring that procurement processes consider total cost of ownership and life-cycle costs where applicable. The Policy on Investment Planning goes further for major assets under construction, mandating LCC consideration in investment decisions.

You'll see LCC analysis most often in complex procurements where operational costs dwarf the initial purchase. PSPC and DND use it extensively for military equipment, where a piece of hardware might serve for twenty or thirty years. SSC applies it to data centre equipment and telecommunications infrastructure. The analysis typically involves creating cost models that project expenses across the expected service life, discounting future costs to present value. No specific dollar thresholds trigger mandatory LCC analysis—departments apply it based on project complexity, risk, and the likelihood that long-term costs will significantly impact the best value determination.

Key Considerations

• Data quality matters more than model sophistication. You need realistic estimates for maintenance intervals, energy costs, and failure rates. Vendors may lowball operating costs to make their bid look attractive.

• Discount rates significantly affect the analysis. Future costs look smaller when discounted to present value, which can bias decisions toward cheaper upfront options with higher operating expenses. Treasury Board guidance provides standard rates.

• Don't confuse this with Total Cost of Ownership, though they're closely related. TCO often focuses on direct costs to your organization, while LCC can include broader economic and environmental impacts depending on the evaluation framework.

• Shorter-than-expected service lives undermine the entire analysis. If you assume fifteen years but replace equipment in eight, your cost projections were fiction. Build in sensitivity analysis for different lifespan scenarios.

Related Terms

Value for Money, Total Cost of Ownership, Best Value

Sources

• Government of Canada Supply Manual - See Chapter 5 and Annex 4.1

• Guide to Costing - Treasury Board of Canada Secretariat

• Directive on the Management of Procurement

The analysis takes effort upfront, but it prevents expensive surprises down the road. Factor in enough time during procurement planning to gather the data you need for a credible assessment.