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Improved Awareness. Application of LCC techniques provides management with an improved awareness of the factors that drive costs and the resources required by the purchase. It is important that the cost drives are identified so that most management effort is applied to the most cost effective areas of the purchase. Additionally, awareness of the cost drivers will also highlight areas in existing items which would benefit from management involvement.
Improved Forecasting. The application of LCC techiniques allows the full cost associated with a procurement to be estimated more accurately. It leads to improved decision making at all levels, for example major investment decisions, or the establishment of cost effective support policies.
Additionally, LCC analysis allows more accurate forecasting of future expenditure to be applied to long-term costings assessments.
Performance Trade-off Against Cost. In purchasing decisions cost is not the only factor to be considered when assessing the options (see VFM briefing). There are other factors such as the overall fit against the requirement and the quality of the goods and the levels of services to be provide. LCC analysis allows for a cost trade-off to be made against the varying attributes of the purchasing options.
2.4 Who Will Involved?
The investment decision maker (typically the management board) is accountable for any decisions relating to the cost of a project or programme. The Self-regulatory organizations (SRO) is responsible for ensuring that estimates are based on whole life costs and is assisted by the project manager, as appropriate, together with additional professional expertise as required.
The cost of ownership of an asset or services is incurred throughout its whole life and does not all occur at the point of acquisition. The figure give an example of a spend profile showing how the costs vary with time.
In some instances the disposal cost will be negative because the item will have a resale value whilst for other procurements the disposal, termination or replacement cost is extremely high and must be taken into account at the planning stage.
Acquisition costs are those incurred between the decision to proceed with the procurement and the entry of the goods or services o operational use.
Operational costs are those incurred during the operational life of the assets or service
End life costs are those associated with the disposal, termination or replacement of the assets or services. In the case of assets, disposal cost can be negative because the asset has a resale value.
A purchasing decision normally commits the user to over 95 per cent of the through-life costs. There is very little scope to change the cost of ownership after the item has been delivered.
The principles of LCC can be applied to both complex and simple projects though a more developed approach would be taken for say a large PFI project than a straightforward equipment purchase.
For guidance on the application of Life cycle costing and cost management to property and construction projects, seeâ€¦
LCC involves Identifying the individual costs relating to the procurement of the product or service. These can be either one-off or recurring costs. It is importance to appreciate the difference between these cost groupings because one-off costs are sunk once the acquisition is made whereas recurring costs are time department and continue to be incurred throughout the life of the product or services. Furthermore, recurring costs can increase with time for example through increased maintenance costs as equipment ages.
The type of costs incurred will vary according to the goods or services being acquired, some examples are given below.
Examples of one-off costs include:
Implementation and acceptance;
Transition from incumbent supplier (s);
Changes to business processes;
Withdrawal from and disposal.