Life-cycle cost (LCC)

In one line

You do not buy a piece of equipment on price alone: what matters is what it costs to keep it running throughout its entire useful life.

What it is

Etchegno's thesis explains it with an everyday example: you do not buy a car for its initial price, although that is an important variable, especially with limited capital; you do it by analyzing the life-cycle cost, which is nothing other than the maintenance and operating costs over time plus the initial cost. In sum, it is the cost over the asset's useful life, the operating losses from its unavailability, the quality of its design and manufacture, its safety-related components, its consumption efficiency and others. The thesis uses it as a management criterion: the goal of the maintenance organization is availability at the lowest total life-cycle cost of the asset, and that is why it proposes incorporating maintenance and reliability engineering into a plant's project phase: it has an initial cost, but it decidedly impacts the total life-cycle cost.

The Basque Government guide defines life-cycle cost analysis (LCC) as the analysis that reflects all the costs attributable to a product or service from the moment the idea is conceived until the end of its useful life, and it clarifies that in this analysis the main driver of decisions is cost (unlike environmental life-cycle analysis, which reports on environmental impacts).

What it is for

• Choosing between equipment: comparing an option that is more expensive to buy and cheaper to operate against another that is the reverse.
• Justifying maintenance and reliability: losses from stoppages enter the calculation, so reducing failures has a calculable value.
• Deciding on replacement or renovation of an asset that is already costly to maintain.
• Negotiating with suppliers with complete data, not just the list price.

How it is calculated

LCC = acquisition and installation price + annual costs over the useful life (operation, maintenance, losses from stoppages) − residual value at the end.

Since future costs are not worth the same as today's, they are brought to present value with a discount rate: the cost in year t is divided by (1 + rate) raised to the power of t. This is standard engineering economics practice; the Basque guide uses it (it calculates the net present value) in its bus example. With a rate of 0, the calculation is a simple sum. The definitions of the cost categories (purchase, operation, maintenance, losses from unavailability) are Etchegno's.

Compare them

Real example

The Basque guide reproduces an LCC of two public transport buses in Germany, commissioned by the European Commission in 2007: a EURO 4 model and a natural gas (CNG) one, both for up to 80 passengers, calculated for a 10-year life and 60,000 km per year (600,000 km of service as the functional unit). The cost categories: investment, taxes, fuel, maintenance (materials and labor) and disposal cost at the end of life (resale value). To arrive at the net present value, a discount rate of 4.4% was used. The result: the natural gas bus was 11% more expensive in investment, but its total cost at 10 years turned out slightly lower (by 4%), thanks to lower fuel costs. According to the guide's table, the totals were 884,657 dollars for the EURO 4 and 849,029 for the natural gas one.

Another example from the guide, with washing machines: the version with water recirculation cost more in planning, R&D and manufacturing, but consumed less water, and the total cost (including social costs) turned out 23.5% lower. Both cases are consumer or transport products; they show the logic, not values for industrial equipment.

The calculator comes with two made-up pieces of equipment (one cheap to buy and one efficient) so you can see the same effect: the cheaper one to buy ends up costing quite a bit more over the ten years.

Template to use

The LCC Excel spreadsheet compares two options with year-by-year detail. Data you need to gather before filling it in:

Data	Where it comes from
Acquisition and installation price	Supplier quote, civil works and assembly
Annual operating cost (energy, supplies)	Datasheet and consumption of similar equipment
Annual maintenance cost	Manufacturer's plan and the history of your similar equipment (see maintenance costs)
Annual loss from stoppages	Expected downtime hours × cost of one lost hour of production (see MTBF and MTTR)
Residual value, useful life and rate	Used-equipment market, renewal policy and the company's cost of capital

Benefits

• It avoids deciding by purchase price, which is usually a minor part of the total cost.
• It makes the value of reliability and good maintenance visible.
• It is a common basis for talking with finance, purchasing and operations.

Limitations to keep in mind

• It depends on estimates ten or twenty years out; it is worth testing variants (with different annual costs and rates) and checking whether the conclusion holds.
• Losses from stoppages and residual value are the most uncertain data and, often, the ones that weigh the most.
• It assumes constant annual costs; an aging piece of equipment usually costs more to maintain each year.
• The Basque guide's examples come from other sectors; they serve as a method, not as reference values.

In summary

LCC is the complete account of an asset: purchase plus annual costs, discounted to present value, minus residual value. The equipment that is cheapest to buy is rarely the cheapest to own, and that is where maintenance and reliability have numerical arguments.