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23 March 2013

Life Cycle Costing for Projects

Defining Life Cycle Costing

Life cycle costing (LCC) looks at the cost of the whole life of the product, not just the cost of the project. A product has two major cost phases, the project phase that designs and produces the product, and the O&M phase where the owner operates, maintains, and decommissions the product.

(A lot of Project Managers (PMs) forget decommissioning. As an extreme example, consider how much it will cost to maintain and protect a nuclear waste site for the next 500,000 years.)

The design philosophy is part of the project scope.  The customer may want a cheap, disposable product, so the design team would not put much effort into designing for low maintenance, low manning, and long lifespan.

On the other hand, the customer may need the product to last a long time.  Operations costs can include:
  • building more units
  • maintaining equipment
  • training users
  • expanding, upgrading, or re-purposing the product
  • providing consumables
  • procuring replacement and spare parts
  • transporting, installing, or disposing of waste
Operations can far outweigh the initial cost.

The scope statement, the Statement of Work, the nature of the product, industry standards or government regulations, and the user needs can guide decisions about what aspects, if any, of life cycle costing to include in project planning.

What LCC Means to the Project

Considering operations and maintenance costs requires including, as part of the scope, performing the project in such a way as to keep O&M costs down for the customer.

For example, easy access to a car's timing belt decreases the amount of labor the owner has to pay to have it replaced, and using a steel widget instead of an iron one results in fewer failures due to corrosion.  Such steps will increase the cost of the project, but they may decrease the customer's total cost of ownership.

Considering operations and maintenance costs also requires estimating the cost of the entire product life cycle.

A point exists where spending more on reducing O&M costs would not cut total cost of ownership.  For example, making windshields out of the material they use in Soyuz windows might mean never having to replace cracked glass after a bird hit, but it would cost more than the rest of the car.

For this reason, the project will include a trade study that estimates the total of both the project cost and all the costs incurred by the customer after product delivery.  As its goal, the study will recommend ways to minimize the total cost.

What LCC Means to the Project Manager

The PM should consider the following steps to ensure project success:
  • Make sure the customer considers cost of ownership and agrees to LCC goals.
  • Ensure that project scope and project requirements clarify LCC goals.
  • During project planning, account for the effects of those requirements on the project.
  • Oversee a trade study to determine the best compromise between project cost and O&M costs before project planning is finalized.
  • Make sure the customer understands cost tradeoffs between a cheap project and a project that produces a product with characteristics such as longer life, less expensive maintenance, and greater safety.
  • Get approval of the LCC strategy from the customer and authorization to follow that strategy from the project's sponsor or management.
Please let me know in the comments if you have any corrections or additions.

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