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.Expand this comment »

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.

Life Cycle Costing for Project Planning

Life cycle costing looks at the cost of the whole life of the product, not just the cost of the project.

A product has two major groups of life cycle phases, the project phases that conceive, design, produce, and deliver the product, and the Operations and Maintenance (O&M) phases where the owner operates, maintains, and decommissions the product.

Some products also have phases where proof of concept testing, design refinement, and prototyping overlap with O&M phases.

(A lot of PMs forget decommissioning. As an extreme example, think about how a chemical or nuclear waste site might require maintenance and protection for the nest 500,000 years.)

The project scope should define the design philosophy. The customer may want a cheap, disposable product, so the design team would not put much effort into designing for low maintenance, low manning, or long service life.

On the other hand, Operations costs such as building more units, maintenance, training users, expansion and modification, providing consumables, transporting, installing, and disposing of waste can far outweigh the initial costs.

The scope statement and the nature of the product will guide in deciding which aspects, if any, of life cycle costing to include in project planning.

The Lobbyist on the Project Management Team

You are the project manager in an aircraft manufacturing company developing a new range of supersonic fighter planes. Since government approval and involvement are essential, you hire a lobbying firm to get government support to prevent unnecessary changes in your project. Which process is this an example of? (Source unknown)

While aircraft manufacturers conduct some research into designs and materials that they can incorporate into new aircraft, governments usually sponsor development of fighter jets.

 

Scope creep happens in almost all defense projects.

 

For example: 

• The Defense Department wants the aircraft to provide certain capabilities for the Air Force.
• Then the Navy wants compromises in the design so the jets can take off from carriers.
• The Army and Marines add their particular use cases.
• Allies want introperability with their systems.
• Later, one politician wants to cut costs,
• another wants the aircraft to use inadequate landing gear designed by the manufacturer in his home town,
• and over 600 politicians and thousands of bureacrats want to influence the project.
• Meanwhile, competitors and the nation's adversaries develop new technologies to which the designers must respond.
• And one of the political parties, along with the press, begin mocking your aircraft by calling it an Imperial Tie Fighter.

If you let it, the politics will multiply the cost twentyfold, drag out the schedule an extra 15 years, and make your company a laughingstock. By the time of the first production run, the aircraft will already be obsolete.

 

The same sort of changes can happen in any project. One way to control the risk of scope change is to refuse to make changes, but too little flexibility can create customer dissatifaction and cost you future business.

 

For a better way to reduce the risk of scope creep, maintain close personal relationships with the stakeholders, keep them informed of the costs of changes, and negotiate agreements that best serve the business case.

 

The PM cannot always do this, so the company hires a lobbyist with exceptional people skills and knowledge of the bureacratic systems. The lobbyist uses various methods to convince the politicians and bureaucrats to resist tinkering with the project requirements.

 

In process terms, hiring a lobbyist does not proceed from the Project Communications Management processes. Lobbying does not contribute directly to producing the product or providing a service. A first pass through the Identify Stakeholders and Plan Communications processes would assume everything goes as planned and would focus on required reporting and coordination. The lobbyist's job goes far beyond that.

 

If the team identifies scope creep as a risk, they make a note to consider it later when they follow the Identify Risks process. They would, at that time, add recruiting a lobbyist to the Risk Management Plan portion of the integrated Project Management Plan.

 

Don't forget that, as a member of the project team, the lobbyist becomes a stakeholder. For example, the team must add the lobbyist's tasks to the WBS and estimated costs during the next iteration of project planning. They must also consider the lobbyist's information needs during the next iteration of the Project Communications Management processes.

Handling a Customer's Wishes

Under what circumstances might change requests to the project's scope be denied? How can i handle a customer's wishes if the scope change is not approved.

Short answer: The Project Manager's (PM's) job is to handle the project's requirements, not to handle the customer's unfunded wishes.

Scope changes always affect schedule, cost, quality, resources, and/or risk. A PM will not approve a change that negatively affects those constraints unless it is necessary in order to meet other, higher-priority constraints. 

Obviously, if adding a bell means going over budget and falling behind schedule, the PM will disapprove it. On the other hand, if the customer will not accept the project because the whistle toots with the wrong tone, then the PM may approve spending more to tune the whistle. 

Remember, these are business decisions. At some point, the penalties for cancelling a project may cost less than the cost of completing it.

The above deals mostly with changes requested internally. If the customer requests a change, the PM will present the customer with the effects (cost, schedule, ...) of the change. The customer then bears responsibility to sponsor or reject the change. 

As always, this is a business decision. Even if the customer will bear the cost, extend the schedule, and forgive any realized risks or impacts on quality, the available whistle-tuners may have been committed to another project (inadequate resources), or the loss of reputation (even though the customer specified the wrong tone) may hurt the business in the long run.

To "handle the customer," get out your requirements traceability matrix and present the effects of the change on the scope. Then present the effects of the change on cost, schedule, etc.

Copyright (C) 2012, Richard Wheeler. Permission granted for use not involving publication.