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What Is Life-Cycle Costing?

written by: Rupen Sharma, PMP • edited by: Michele McDonough • updated: 4/24/2013

It took us a year to develop and install our own servers. Leadership applauded our efforts. Unfortunately, the cost of maintenance surpassed development costs in the first year!!! We should have employed Life-Cycle Costing and deployed the software on vendor servers instead.

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    The Journey Begins

    When on a trek, it is important to look where you step. It is also important to look beyond your first step and get a sense of the path you’ve chosen. Some paths might have alligators, while others might only have deer. Selecting the more efficient path is the goal. Therefore, in the relatively simple project of trekking, a certain level of holistic thinking is required.

    You can well imagine the degree of holistic thinking required for complex projects. Without holistic thinking, projects will be hit by unidentified risks. Conducting a SWOT analysis is helpful in identifying risks and taking decisions. The unforeseen risks lead to additional costs that are never a part of the budget. Hence having a financial buffer cannot compensate.

    From a project cost perspective, not using holistic thinking can lead to some rather “costly” consequences. By practicing project Life-Cycle Costing, you can get a clearer picture of the real cost of ownership of a project.

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    Categories of Project Costs

    Project Life-Cycle Costing is a method for evaluating the project costs that arise from a project. We can categorize these costs into:LCC 

    • Project design and development
    • Project operation
    • Project maintenance

    Project life-cycle costing takes into account all types of project costs that can be incurred in any one of the three areas listed above over a period of time. This, then, gives you the total cost of ownership. After accounting for all the costs, critical go-no-go decisions are made. Some of the costs that are accounted for include capital investment, financing, purchase, development, and resale value over a life time of a project/technology product.

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    Examples of Projects Decisions

    Here are some examples of decisions being made by using Life-Cycle Costing.

    Construction: Suppose, you need to build a shed. You've created a precedence diagram for the project. One of the activities in PrecedenceDiagram the project is to procure wood. Take a step back here and ask yourself, “How long do I want the shed to last?” Depending on your answer, you may consider using Wood Plastic Composites (WPC) because they are more environmentally friendly, more durable, and require less maintenance compared to solid treated wood. Therefore, if you take these benefits into account, then WPC is the material to construct the shed with. If, however, you just want the shed to last a couple of years, then maybe you’d opt for cheaper material.

    As you can see from this example, Life-Cycle Costing goes beyond the development of the project. It compels you to consider the larger picture first and accordingly make decisions.

    Software Development: Suppose you are planning to deploy a Learning Management System (LMS). To get to the Life-Cycle Costs associated with this decision, you would end-up seeking answers to questions like:

    • What are the costs of developing the system ourselves versus purchasing one?
    • What are the costs of hosting the LMS in internal severs versus a vendor server site?
    • How much do we need to operate the new software? Do we need additional staff?
    • What are the associated training costs?
    • If we host it internally, can our existing application support group maintain it? If no, should we outsource the maintenance?

    As you can see, the answers to such questions can give you a clearer picture to the cost of the LMS. Life-Cycle Costing enables you to make more informed decisions. You can also use decision trees along with Life-Cycle Costing to factor in the Expected Monetary Value (EMV).