Life Cycle Costing, History, Reasons, Guidelines and Application. 12/16/11

After World War II, continuing problems involving weapon system effectiveness led to the establishment of a Weapon System Effectiveness Industry Advisory Committee (WSEIAC) by the Air Force System Command. For example, Lockheed was bailed out on the C-5 cargo aircraft contract because of cost overruns. The demand for improved performance and more sophisticated systems resulted in increased complexity, additional maintenance and failure cost consequences. The committee of selected experts in industry and government provided a standard technique to appraise management of weapon system effectiveness of all phases of weapon system life. Hence, life cycle cost (LCC) analysis was one major outcome of WSEIAC in the 1960’s. The result was the Department of Defense (DOD) issuing LCC guidelines. In the mid l960’s life cycle cost (LCC) methods spread to the commercial industry as indicated by Reference l).

The life cycle cost is the total cost of ownership of a system including design, production, operation, maintenance, modification and decommission. It sums cost estimates from inception to disposal for annual time increments during the projected life involving the time value of money. The objective of LCC analysis is to devise the most cost effective approach from alternatives to achieve the lowest cost of ownership. Support costs are often 2 to 20 times greater than the initial procurement costs.

The reasons a LCC analysis is necessary are because of typical problems and conflicts observed in governments and contractors. Examples are:
l) Voting “yes or no” can result in a “biased” high cost project.
The “Grant Process” can be inefficient. Possible factors are: expensive lobbying, delays, contractual constraints, and matching funds burden.
2) limited funds of communities
3) Shareholders want to increase stockholder wealth as the only criteria.
4) Project engineering wants to minimize capital costs as the only criteria.
5) Maintenance engineering wants to maximize up time hours as the only criteria.
6) Reliability engineering wants to minimize failures as the only criteria.
LCC flexibility allows applications with capital expenditures over $20,000.

The procedure for the LCC analysis is summarized as follows:
Step 1) – Sponsor chooses each bidder’s alternative. At least 3 with the required capability are recommended for analysis.

Step 2) – Select a simple life cycle analytical model for the project and “tailor” with guidelines at a bidder’s conference. Many specified models (some with software) are available. The analysis should be unbiased. Example bidder guidelines are as follows. The same model should be imposed on all bidders. Costs not under bidder control are provided such as permitting, lobbying, regulatory, and user labor. `
Any grants should be credited to all alternatives to remove bias against a configuration. Any litigation cost should be charged to the related alternative. Select a projected life based on industry experience or planned phase-out. Determine the yearly operational profile of uptime versus downtime or dormancy. If uncertain select a “highest observed demand”. Negative values are customarily assigned for all identified costs and positive values are used for grants or profits. Bidders continue using the following steps for their candidate.

Step 3) – Collect or estimate the cost data for identified major categories. One method consists of non-recurring cost categories plus recurring cost categories. Typical non-recurring major cost categories may be studies, permitting, purchasing, concept, design, construction and acceptance testing. Typical recurring cost categories may be periodic certification, operation, maintenance, depreciation, and logistics- spares. A resultant block diagram can be called a cost breakdown structure.

Step 4) – incorporate costs into the LCC model for all major categories and add them up for each year. Multiply every yearly summation by a present value (PV) factor (e.g. 12% discount rate) to account for inflation. The result is a table which identifies all yearly costs (negative) in columns ending up with present value (PV) totals.

Step 5) – Construct LCC status curves. Each PV column total is plotted for every year to form a curve. Next add the PV column totals for all years to obtain a negative net present value (NPV) in the last year. Successive yearly column totals are added and plotted for every year ending at the NPV.

Step 6) – Construct comparison bar( Pareto) charts. – A bar can be constructed for each major category by adding its PV costs for every year to the last year. The highest bar to the lowest bar is plotted. This technique identifies “cost drivers” from the “trivial”. The cost drivers can be reviewed for possible design, procedural and overhead changes.

Step 7) – Each bidder provides a LCC report to the sponsor (i.e. CCSD). The winner is chosen based on the lowest negative NPV (Step 5). The winning bidder’s report must be defensible to the community. For example, a separate EIR.

The following illustrates the usefulness of LCC analysis for Cambria. This correlates to a desalination candidate which requires pumps to force salt water thru membranes for water treatment. Desal should be proven to have the lowest LCC among all candidates.
Reference 2) summarizes a LCC analysis for 3 water pump alternatives in a processing plant for a planned duration of 10 years. Cost details are listed in Reference 4).
Alternative 1 is to continue Solo ANSI pump operations with a 100 HP, 1750 RPM, 250 PSI, 500 GPM, pump.
Alternative 2 consists of adding a back-up ANSI pump waiting to be used when a failure is detected. The reliability of the sensing switch was assumed 1. The capital costs are: $8000 (pump), $3000 (check/isolation valves) and $2500 (installation).
Alternative 3 consists of replacing the Solo ANSI pump with a Solo API pump with the same performance. The costs are: $ 18000(pump) and $3500(installation) with 4 hours down time.

No depreciation was considered for alternative 1. Profit and tax provisions were considered for all alternatives.

Alternative 2 was the wining alternative. At the 10th year the lowest negative PV was $4,724 and the lowest negative NPV was $89,993 (Step 5). The main cost driver for alternative 2 was power. The selection of alternative 2 avoided process failures and reduced the high cost of unreliability. Electrical power consumption was clearly identified by the LCC method. The main cost driver for alternatives 1 and 3 were unreliability costs.

References

1) Earles, D.R. “LCC – Commercial Application – Ten Years of Life Cycle
Costing”. Proceeding 1975 Reliability and Maintainability Symposium,
IEEE, l975.
2) Barranger & Associates, Inc. Humble, Texas, USA – A Life Cycle Cost
Summary, International Conference of Maintenance Societies, Perth,
Western Australia, May 20 – 23, 2003.
3) U.S. Department of Defense, Life Cycle Costing Procurement Guide
LCCI, LCC2, LCC3, Washington D.C., July 1, 1970.
4) Barranger , H. Paul, and David Weber “Life Cycle Cost Tutorial”, Fifth International Conference on Process Plant Reliability, Gulf Publishing Co, Houston,TX, 1996

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Some would exclude “outside owners” from voting on the Advisory Ballot. I guess I am an “outside owner” since I vote in another county. I am a property owner and part time resident and I buy my water just like everybody else. Since none of us knows how the desal project would be paid for I think we should ignore the resident/nonresident distinction and open the vote to all property owners and rate payers.

In 2001 my wife and purchased our lot with plans to retire in Cambria by 2011. At the time of our purchase there were about 40 permits issued each year. Then came the moratorium. The CCSD Board finally took action to do something about water system and the tanks that had been left to deteriorate and developed a plan to provide a back-up water supply along with a build out cap. This plan has been carefully and is being systematically carried out.

Eventhough this plan will cause me to over $30,000 EXTRA for permits to begin custruction, I am will to do so because I know it is necessary.

However, there are those in the community who have been sucessful in stalling the plan every step of the way. Not because the want to reconsider a new water source, but because they don’t want any more homes built are looking for another way to stall the progress of the obtaining an alternate water source.

Is seems that the CCSD has liberally interpreted the last “advisory ballot” of desalination as an endorsement of a BRP without giving the advisory voters the cost of that BRP.

(The parallels to the war on terror are scary – CCSD “We need water – water will run out – business community will collapse, homes will be abandoned – desal is the answer – $10Million – or is it really $54 Million?)

Once the Board makes a fully detailed, all encompassing proposal (which it has not as of this late date) – we should have and advisory vote -OF THE RESIDENTS OF CAMBRIA – votes should only be requested from registered voters of Cambria, or, alternatively, owners of active water service accounts – these are the only persons who actually will be responsible to pay for these costs if and when such a project is actually built.

The CCSD should prepare a Project data sheet that represents their proposal ASAP so that the community can discuss the project not some amorphous technology concept.