Life Cycle Costing (LCC)

Life Cycle Costing (LCC) is the process of determining the total cost of a programme, system, good or service over its life. It counts investment or acquisition costs together with the costs of operation, maintenance, support and disposal. The result of the exercise, the total cost itself, is called the life cycle cost.

The term is used mainly in defence capability planning, major-system acquisition, asset management and green procurement. In Canadian public contracting it means a buyer can look past the purchase price and weigh what an item will cost to own and run. NATO describes LCC as an iterative analysis that begins early in a programme and continues throughout the system's life (NATO Logistics Handbook).

What a life cycle cost includes

NATO's Logistics Handbook defines LCC as the total of direct, indirect, recurring, non-recurring and other related costs. These are the costs of design, development, production, operation, maintenance and support over a major system's anticipated life span. NATO's governance material states that LCC covers a programme from implementation until the capability is removed from inventory or taken out of service. It splits the total into investment costs and running costs, and it notes that estimates of future costs carry uncertainty (NATO governance report).

Several related concepts sit alongside LCC:

• Total cost of ownership: a closely related term for the complete cost of acquiring, operating, maintaining and disposing of an asset.
• Net present value (NPV): a financial measure that can be used to compare costs occurring at different times.
• ISO 15288: a systems life-cycle-process standard that NATO adopted through AAP-48 and AAP-20.
• ISO 15686-5: a standard for life-cycle cost analysis of buildings and constructed assets, covering costs and cash flows from acquisition through operation to disposal (ISO).

Life cycle costing in federal green procurement

CanadaBuys guidance states that life cycle costing applies across all four stages of procurement: planning, acquisition, utilization and disposal. It links the approach to the federal Policy on Green Procurement. That policy applies to federal procurement activities and requires environmental performance to be considered alongside price, performance, quality and availability (CanadaBuys: Green procurement).

CanadaBuys also describes Total Life Cycle Costing as the aggregation of Product, Resource, Operating and Contingent (PROC) costs. Its stated purpose is to assess value for money by considering environmental performance together with conventional cost, quality and availability factors (CanadaBuys: Socioeconomic requirements definition).

How DND and the Canadian Armed Forces use it

The Department of National Defence addresses LCC in DAOD 3015-1, Management of Green Procurement. The directive says life cycle costing takes a broad and longer-term view by recognizing, as practicable, all costs associated with meeting a requirement. It identifies consideration of life-cycle costs, for standard goods and services and for equipment specific to DND and the Canadian Armed Forces, as a key part of achieving value for money. It also treats that consideration as an opportunity to weigh a broad range of environmental factors (DAOD 3015-1).

This makes LCC especially relevant to defence equipment and support services, where operating, maintenance, sustainment and disposal costs can change the value of competing solutions.

Comparative LCC analysis in NATO solicitations

NATO capability-development material uses LCC to compare alternative solutions. A NATO ACT solicitation document describes comparative LCC analysis as examining the costs of each alternative across its whole life cycle. It takes account of factors including affordability, interoperability, sustainment and the length of the life cycle. The same document states that cost analysis requires gathering and assessing relevant cost data from identified stakeholders (NATO ACT solicitation document).

What it means for a supplier bidding on Canadian public contracts

The lowest purchase price may not be the only cost a buyer evaluates. When a solicitation uses life-cycle or total-life-cycle costing, a bid team may need to supply more than a unit price. Depending on the solicitation, that can include expected operating or resource costs, maintenance requirements, disposal implications, environmental attributes and any other costs the buyer specifies.

Submission requirements and calculation methods are set in each solicitation, so read the evaluation criteria and pricing instructions closely. Build your cost data and assumptions early, and document them so they hold up when the buyer compares your bid against alternatives over the whole life of the asset.