the use of life cycle costing in acquiring physical assets

7/24/2019 The Use of Life Cycle Costing in Acquiring Physical Assets

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32

Long Range Planning,

Vol. 14, No. 6,

pp. 32 to 43, 1981

0024-6301/81/060032-12 02.00/O

Printed in Great Britain

Pergamon Press Ltd.

The Use of Life Cycle Costing in

Acquiring Physical Assets

W. B. Taylor, Treasurer, Kent Ccyzty Council

Introduction

There is considerable evidence of an increasing

interest in asset management not only in this

country but also throughout the world. This may

be partly due to the worldwide economic recession

which forces companies and governments to

examine carefully their use of resources but it may

also be partly due to the rapid advances being made

in technology which underlines the importance of

the correct choice of capital asset acquisition and

operation.

Out of this growing interest has come a recognition

of the significance of considering the total cost

picture related to the acquisition, operation and

disposal of capital assets and also a realization that in

the past there has been a failure to assess adequately

the costs arising from the use of a capital asset over

the length of its life. In short there has been undue

emphasis on the initial costs of acquisition without

due consideration of subsequent costs.

This view of the management of capital assets

comes under the esoteric subject heading of

terotechnology which has been defined as a

combination of management, financial, engineer-

ing and other practices, applied to physical assets in

pursuit of economic life cycle costs.

W. B. Taylor is Treasurer of Kent County Council, County Hall,

Maidstone M El 4 1 XE.

Terotechnology is a concept of asset management

in which all the disciplines in any way involved in

the specification, design, installation, operation,

maintenance or disposal of an asset are given the

opportunity to consider the cost consequences of

their decisions at various points in its life and to

bring their professional expertise to bear in seeking

economic cost solutions. Above all terotechnology

is an attitude of mind which seeks to ensure the best

use of physical assets at the lowest total costs to the

organization. It is inlmediately apparent that the

life cycle cost concept is fundamental to this view of

asset management. It is the vehicle by which costs

arising at each stage of the life of an asset are taken

into account. Figure 1 demonstrates the life cycle

costs concept for a building with a 60 year estimated

life.

The value of life cycle costing as a management tool

is in my opinion incontrovertible because it places a

premium on the best use of resources-financial,

technical and manpower to the benefit of the

organization. It is an essential ingredient in medium

and long-term planning because it aims to ensure

the optimum value from the use of capital assets.

When one considers that the estimated value of

total national assets in 1979 at 1975 replacement

values is A530,OOOm so that maintenance costs at

say 3 per cent of capital value are of the order of

Al6,000m, it is possible to appreciate the

significance of this subject. PA Management

Consultants in a study of maintenance costs in

industry for the Department of Trade and Industry

in 1969 concluded that it would be possible to save

A5OOm per year on maintenance in industry in this

country if greater care was taken in the design and

specification of capital assets. At present day values

that figure would be A2000m.

This paper considers the application of life cycle

costing as a decision making tool in the acquisition

of capital assets and deals with the issues and

techniques involved. It also outlines a methodology


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The Use of Life Cycle Costing in Acquiring Physical Assets

33

Start

MAINTENANCE

CONSTRUCTION

Labour) Energy)

I

Year 2-60

Figure 1. Life cycle costs for a building with a 60 year estimated life

for the introduction of the technique and includes a

case study in the Appendix.

What is Life Cycle Costing?

Life cycle costing may be described as a forecasting

tool used to compare or evaluate alternative

planned capital expenditures with the aim of

ensuring the optimum value from capital assets.

The technique involves the expression of all future

costs and benefits in present day values.

The technique draws attention to the cost of

physical assets during their whole life from initial

specification to ultimate disposal and is the means

by which the cost of asset ownership may be

optimized. This approach recognizes the cost

implications of decisions made at every stage of an

assets life-span and will reflect on future decisions

and costs in the ownership of physical assets.

There is an assumption that life cycle costing is a

technique of accountants only-this is not so, it is a

concept which brings together a number of

techniques-engineering, accounting, mathemat-

ical and statistical-so that all significant expendi-

tures and incomes arising during the ownership of

an asset can be identified.

It becomes apparent that when an attempt has been

made to evaluate all significant costs arising during

the life ofa physical asset and these costs (cash flows)

are expressed in present day values, managers have

the means to quantify options and to select the

optimum asset configuration. The technique

enables managers

to consider the trade-offs

between cost elements during the asset life phases,

e.g. an increased initial cost ofequipment to secure a

future reduction in maintenance costs, and to select

the optimum solution. This aspect of trade-off is

fundamental to the concept of life cycle costs.


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Long Range Planning Vol. 14

December 1981

Life cycle costing includes a number of well known

techniques already used in capital investment

appraisal including cost benefit analysis, prepar-

ation of cash flows, discounting, sensitivity analysis

and probability theory. This is not a new concept, it

merely brings together in a coherent manner

techniques which permit managers to consider the

costs of asset management over the life of the asset

so that the value of the asset may be optimized.

The Aims of Life Cycle Costing

Having stated the general proposition let us now

look a little more deeply at the way life cycle

costing works by considering its aims. I have

already explained that the fundamental aim is to

optimize the life cycle costs of owning and using

physical assets. These include costs of:

specification,

design,

acquisition/manufacture/build,

installation,

commissioning,

operating,

maintenance,

disposal.

It seems too simple a proposition to state but when

considering the provision of a physical asset the first

step must be to consider the environment and

objectives of the enterprise over a period of time so

that the need for the asset is established at the outset.

This is an essential discipline because it is at this

stage that alternative

means of achieving the

objectives of the enterprise may be identified which

will figure in the options for which life cycle costs

will need to be prepared. It is also possible of course

that a detailed consideration of the need may

indicate certain key factors affecting the use of the

proposed asset or even in extreme cases indicate that

it may not be necessary, e.g. the provision to build a

community centre by a Local Authority when there

is available a primary school shortly to be closed.

The second step is the selection of physical assets

which match the needs at the lowest costs over the

life of the asset. In order to do this it is necessary:

(a) to predict physical asset requirements and their

cost levels;

(b) quantify the life cycle costs of alternative asset

options;

(c) determine the best alternative.

Once the best option has been determined the aim

of life cycle costing will shift to monitoring actual

costs against the predicted life cycle costs. This

continuous and self motivating system of planning

and monitoring to achieve improvements is an

essential feature of life cycle costing. Figure 2

illustrates this aspect of a life cycle costing system.

This diagram demonstrates the aspects of planning

and monitoring in the life cycle management of the

asset. Planning involves the forecasting of all costs

and an understanding of the inter-relationships

between the costs at every phase of the asset life

cycle. Actual costs and events are monitored and fed

back to assess the degree to which aims are

achieved, to enhance future designs and to improve

subsequent life cycle costing exercises. The

monitoring of actual life cycle costs against the

experience of other users of identical or similar

assets and against the claims of improved designs,

may provide an early warning of opportunities for

optimizing asset life cycle costs.

Cost Inter-relationshios

Monitoring

Figure 2. The life cycle costing system

Feedback


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35

The Costs of Physical Asset

0 wnership

In any discussion on life cycle costing and the

concept of trade-offs between initial and sub-

sequent costs, a point which is frequently made is

that it is all very well in theory but in practice there

is a major distinction between initial capital costs

which are capitalized and the subsequent running

costs which are revenue. It is claimed that

companies and public bodies faced with limited

capital budgets or costs limits do not have the

facility to increase initial capital costs on the chance

that there will be future revenue economies. There

may be some substance in this point but it does not

detract from the benefits which can arise from

trade-offs. The distinction between capital and

revenue expenditure is an accounting one which

does not affect the life cycle cost concept based on

cash flows throughout the life of the asset.

Let us look in some detail at the costs of owning

physical assets set out in Figure 3. It will be seen that

these fall into three groups, first the initial capital

costs, secondly the revenue costs of operating and

maintaining the asset during its operational life and

thirdly the cost of asset disposal which may be

revenue or capital if it is substantial. The initial costs

for example in an organization which designs and

constructs physical assets for its own use or for

resale would be:

research and development,

design and specification,

manufacturing,

quality control and testing,

monitoring performance.

It is likely that most of these costs will be capitalized

in the accounts and generally are readily available

from the accounting records.

The second group of costs are incurred during the

operational life of the asset and this would include

the costs of:

operating the assets,

including labour,

materials,

tools,

fixtures and overheads,

maintenance including spares and labour.

These costs are invariably treated as revenue

expenditure and here there is often difficulty in

establishing the true costs of operation and

maintenance.

0

apital

costs

f

Revenue

ITIc

osts

Specification

Design

Development

Manufacture/Build

Installation/Commissioning

Manuals and Training - Operations

Manuals and Training - Maintenance

A provision of Spares, Inventory,

Space, Tools, etc.

Operating Costs - Direct Materials

Direct Labour

Direct Expenses and

Overheads

Indirect Materials

Indirect Labour

Establishment Overheads

Maintenance Costs - Spares

Labour

Facilities and Equipment

Establishment Overheads

Down-time

Disposal Value

Disposal Costs - Demolition

Dislocation

Disposal

Asset Reliability

Asset Maintainability

Asset Availability

1

utput Quantity

Output Quality

Material Utilisation

Labour Utilisation

Asset Utilisation

1

t

Preventive

Repair

I

Residual Costs

Figure 3. Physical asset cost elements and interactions


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December 1981

For example, in operational costs of equipment:

downtime during maintenance or following a

breakdown, i.e. the cost of lost production;

low utilization because the equipment is not

suited to needs or because product or service is

not required;

poor performance, because the equipment does

not produce the quality of output required;

poor reliability because of design failures.

This illustrates another feature of life cycle costing

and that is the need for adequate costing data to

enable monitoring of each stage of the life of the

asset. Without this information, the exercise is

sterile because cost assumptions cannot be verified

throughout the life of the asset.

Finally there are disposal costs which may include

costs of demolition and removal, dislocation of

existing production capacity and making good a

site. Against these may be set any disposal value of

the physical asset.

Like initial costs, disposal costs are likely to be

readily available but I suspect they are rarely

considered in convential investment appraisal. Yet

the cost of disposal can be costly in social and

environmental terms, e.g. the disposal of a coal

mine or the problem of storing radio active waste.

It is in the interaction of these three groups; initial

expenditure, operation and maintenance and

disposal that trade-offs (the substitution of one cost

element for another) become significant. For

example, a higher degree of insulation provided in a

building will increase the initial costs but will

reduce future running costs. It is this interactive

nature of the cost elements which points the way to

a total assessment of life cycle costs, so that the

impact of one cost element upon another can be

weighed.

Figure 4 illustrates the relationship between the

three groupings of costs elements and the way in

which they can be varied to achieve optimum life

cycle costs.

The optimization of life cycle costs by substituting

one cost element for another can be demonstrated

graphically as in Figure 5 in relation to the

acquisition of an item of equipment.

As the acquisition costs of the equipment

represented by curve A increase the operating cost

including cost of downtime and maintenance,

represented by curve B decreases, curve C is the

total cost of acquisition and operating. The

optimum life cycle cost is the bottom of curve C.

A number of points emerge from Figure 5:

1)

2)

(3)

The lowest capital cost falls short of the lowest

life cycle cost.

Additional capital expenditure to points X-Y

results in lowest life cycle costs.

The area to aim at X-Y is that area where total

life cycle costs are lowest though it is significant

that a choice of capital and maintenance costs

between X and Y will not affect significantly

the total life cycle costs.

How to go about Introducing Life

Cycle Costs

By now the reader, given sufficient stamina, will be

getting some idea of the theory of life cycle costing

and hopefully will have recognized the good sense

of a technique which aims to spotlight the costs of a

physical asset over its life so that the life cycle costs

can be optimized. Perhaps the perceptive reader

may even have grasped the wider implications of

the technique in that it not only points up the

financial implications of the management of

physical assets but also makes a significant

contribution to the engineering, manpower and

management aspects.

Personally I have never experienced any difficulty

in persuading people that life cycle costing is

essential to proper asset management. The

difficulty arises when enthusiastic converts want to

see examples of the technique because I have found

them to be thin on the ground in this country. One

of the difficulties is that the concept is large and all

embracing-it concerns every stage of an assets life

from blue print to extinction and demands, if

developed fully, a great deal of expert staff time and

perhaps even more significantly an extensive data

processing capability rarely found in British

industry or public service.

The answer is simple. It is that life cycle costing

should be adapted to meet perceived needs of the

organization in the light of its available resources. It

is a start ifan organization recognizes the validity of

the technique for at the very least it will then

introduce it into its procedure for appraising and

selecting investment options. It may be that it will

be introduced in order to review maintenance costs

or as part of a plan to maximize the utilization of

physical assets. In each of these cases the technique

of life cycle costing is essential.

Although I recognize that few organizations will

aspire to a full life cycle costing system, in the

remainder of this paper I will set out a

methodology, highlighting what I regard as the

essential features which will, if required, permit a

piecemeal implementation.


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37

Option 1

Discounted Cost

Option 2

Discounted

cost

Capital

cost

Operating and

Maintenance Cost

Time

1

isposal Cost

Trade-off

,--__

Capital

cost

Operating and

Maintenance Cost

Time

Disposal

I

I

cost

Figure 4. Relationship between grouping of cost elements over the life span of physical assets

The Start

It may seem trite but the first step must be to

appreciate the objectives of asset management and

to relate them to the overall objectives of the

organization. Fortunately it is not difficult usually

to do this, e.g. the care and management of aircraft

can easily be related to the objectives of British

Airways but there is a danger in environmental

changes affecting the management of assets, e.g. the

provision of steel production plants at a time of

decreasing

demand. It is important that the

environment in which the concept is to be

introduced is fully appreciated.

Secondly there will be a need for management to

specify the criteria against which alternatives in

asset selection and use are to be assessed. These

criteria may include engineering, personnel and

financial considerations. These criteria will form

the parameters for the evaluation process. For

example, the engineering criteria in connection

with equipment

may include safety aspects,

minimum production capacity and maximum

tolerance for down time while financial criteria will

include an assessment of the earning capacity of the

equipment expressed perhaps as a return on capital

employed in the business or public service

provided. Similarly marketing and personnel

criteria will need to be taken into account.

Then there will be the need to identify the group

which will prepare the life cycle costing report.

Because of the implications for the different parts of


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December 1981

Total

cost

Operating Cost Inclusive

of Maintenance

Lowest

Capital

cost

Lowest

Life Cycle Cost

ASSET MAINTAINABILITY

Figure 5. The cost of asset ownership

the organization,

the team should be multi- criteria already established and other significant

disciplinary and its functions would include the

criteria, such as, in the case of a manufacturing firm,

following

:

purchasing new plant or equipment:

(i) the product demand;

o formulate the criteria for the project.

To determine the factors to be taken into

account.

To determine the data needs, sources and

validity, interpreting the data and preparation of

cost figures, preparation of reports.

To devising form and content of progress reports,

setting up monitoring system.

(ii) the finance available and cost of finance;

(iii) the manpower availability, its skill and cost;

(iv) the limits of technology;

(v) the location of the plant or equipment;

(vi) any social or ecological factors.

Preparing the Project

Now that the team has been set up, the

environment of the organization understood and

the criteria for the exercise specified, the next step is

to prepare the asset specification in outline. This

will involve considering options in design or

purchase of the physical asset in the light of the

When the user of the plant or equipment is also its

designer the team will need to produce a detailed

specification, otherwise it will need to select from

among competing manufactured assets, choosing

the product which gives the most favourable life

cycle costs compatible with the criteria, objectives

and environmental circumstances specified. This is

an extremely important stage too often done badly


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The Use of Life

both in the private and public sector. Insufficient

attention to this aspect of asset management results

in high life cycle costs, e.g. schools with flat roofs

and too much glazing giving low initial costs and

high maintenance costs, or equipment which does

not match the requirements of the user.

The life cycle costing study will only be as reliable

as the information supplied. This is a vital part of

the study and will entail production of data from

many sources including financial costing records;

records

of asset

utility asset

maintenance,

production control, of down time; and asset design

specification. These records also certainly will not

be in the form required so that there is likely to be a

need for setting up new information systems. Again

this is an area in which industry, commerce and

public bodies are weak. It is not that records do not

exist but they are rarely brought together in the

coherent form required by a study of life cycle

costing of physical assets. It is important too

because of the need for subsequent monitoring of

asset performance.

Fortunately data processing

today has reached the stage at which much of this

data can be produced from ad hoc systems on micro

or mini computers without a great deal of trouble

or expense.

Clearly the exercise will entail forecasts of future

costs and benefits and to a large extent these will be

based on past experience and expectation of

performance of the physical asset, e.g. the cost of

maintenance,

the incidence of breakdown, the

duration of down time of an item of equipment. All

these will be influenced by the history of use of

maintenance of similar equipment.

The crucial factor

is to identify the key

assumptions, i.e. those which have material impact

in the life cycle costing exercise and to test the

sensitivity of changing these. Whatever mathe-

matical techniques are used in predicting future costs

and benefits and however accurate these predictions

are, the study will still remained a projection-a

projection which will need refining as actual costs

and benefits become known.

It is possible to introduce an elementary level of

sensitivity analysis by preparing the forecast for

three possible outcomes-the most likely, an

optimistic assumption and a pessimistic view.

Considering the Options

The next stage is the consideration of options, in

design or in the purchase of available equipment.

By this stage the members of the team will have a

good idea of the objectives to be met, the

organizational environment, managements inten-

tions and the future costs and values of the proposed

physical asset. Now is the time to consider whether

there are better options available to the organiz-

Cycle Costing in Acquiring Physical Assets

39

ation. Ideally a short list of the most favourable

options should be identified for appraisal.

The Appraisal

The costing of the most favourable alternatives is

best conducted by preparing cash flow projections

of expenditure and income. A cash flow statement

will show the timing of expenditure and income

analysed over the life span of the physical asset. In

order to compare the alternative cost expenditure

and income patterns of the options considered, it

will be necessary to express them in a common

form-the common form used in life cycle costing

is the present day value, based on the concept of the

time value of money.

This concept stated simply is that a Al investment

today is worth more than a Al invested in 1 years

time. There are two obvious reasons for this-the

first is that interest can be earned by the Al invested

today so that in 1 years time it is worth more than a

Al this is referred to as the Time Theory of

Money) and secondly the effect of inflation is that

the Ll in 1 years time will buy less goods than a Ll

spent today.

Taking the interest aspect first-because the cash

flows over the life of the asset represent expenditure

and income arising in each year, they will need to be

discounted back to Year 1 to reflect the time

preference of money. This is achieved by using the

following formula

:

Let P = Principle

i =

Interest

n = Number of years

A = Accumulated amount

Now at the beginning

A=P

At the end of the first

A=P+Pi

=P l +i)

of the first year

year

At the end of the second year

A=P l+i)+P l+i)i

= l+i)

P+Pi)

=P l +i)2

At the end of the nth year

A=P l +Qn.

1)

This formula may be inverted to give the principal

which if invested for y1years would accumulate to A

pounds at

i

per cent interest so that

A

P=-.

1 + i) n

2)


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40


December 1981

Where A = Al, the formula may be stated

1-t i) = 1 +x) 1 + y)

1

p=_

(1 +i)

This formula may now be used to define the present

day value of a kl expenditure or income arising in

each year of the cash flow statement taking into

account the time theory of money.

Of course it is immediately apparent that the choice

of discount or interest on money is a crucial factor

in the calculation.

There are any number of

possibilities but perhaps the best course is to use the

rate of interest charged on borrowed money. The

example shown as Figure 6 includes a typical cash

flow statement with its present

day

value

calculation.

The reflection of the effect of inflation is altogether

a more complex issue mainly because it is so

difficult to assess future rates of inflation. One

simple way of reflecting inflation is to assume that

the interaction of interest rate and inflation will

result in a low real interest rate of say 1 or 2 per cent

and to use this as the discount factor in the

determination of the present value by using

formula (3) with i being 1 or 2 per cent.

The mathematical expression of this interaction

between interest rates and inflation may be derived

by considering the above interest rate

i

(termed the

money interest rate) as being the compound effect

of two separate interest rates, x and y, where x is

equal to (and thus compensates the investor for) the

rate of inflation, and y is the effective or real rate of

interest on the investment (which may be negative:

see below). The annual interest factor (1-t i), which

is applied to the principal P to produce the

accumulated amount A = P( 1 +

i),

is thus formed of

two subfactors multiplied together to allow for

1 +

i)

or 1 +Y) = 1+x)

i.e.

l+i) 1

___-

y = (1 +X)

It can be seen from this formula that if x is greater

than i, then

1 + i)

1+

x)

is less than 1, and hence y will be negative, i.e. if the

inflation rate is greater than the interest rate, then

the real rate of return on the investment is negative.

Example

If the present rate of borrowing is 13 per cent and

the average rate of inflation over the appropriate

period has been estimated at 11 per cent, what is the

effective rate of borrowing money?

Using formula (4), where i = 13% (i.e. 0.13) and

x = llo/;, (i.e. 0.11) then the effective rate,

(l+i) 3

y =

(1 +x)

1.13

1

1.11

= 0.018, i.e. 1.8%.

Whatever method is used it is important to bear in

mind that the rate of interest and rate of inflation are

interdependent. The cost of borrowing reflects a

projected rate of inflation. It would be inconsistent

to discount an asset life cycle cost cash flow without

first adjusting the figures in the cash flow statement

their compound effect: i.e. the annual interest factor

for inflation.

Figure 6. Example of discounted cash flow calculation for hypothetical asset with 10 year life

Start of

Year

f

1

2

3

4

5

6

7

8

9

10

11

Total

Purchase/

Disposal

of Asset

f

100,000

-10,000

90,000

Operating

Income

costs Generated

f

f

5000 -10,000

5000 -15,000

5000 -15,000

7000 -20,000

7000 -20,000

7000 -25,000

10,000 -25,000

10,000 -30,000

12,000 -20,000

7000 --10,000

75,000 -190,000

Net

Annual

cost

f

100,000

- 5000

-10,000

-10,000

-13,000

-13,000

-18,000

-15,000

-20,000

- 8000

-13,000

-25,000

Discount

Factor

(13 p.a.)

1 .oooo

0.8850

0.7831

0.693 1

0.6133

0.5428

0.4803

0.4251

0.3762

0.3329

0.2946

Net

Present

Value

f

100,000

- 4400

- 7800

- 6900

- 8000

- 7100

- 8600

- 6400

- 7500

- 2700

- 3800

36,800


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41

Outcome of the Appraisal

The appraisal will show which of the options will

provide the lowest life cycle costs consistent with

the parameters which have been laid down. It is

important to bear in mind that the choice of option

following the appraisal is not just a financial

decision. It should be made after a comparison

between many variables viewed from the different

points of view of the functional interests

represented on the team. Take for example in the

choice of equipment there might be:

Financial-initial costs and borrowing facilities

and financing costs,

future revenue conse-

quences, effect of taxation.

Engineering-maintainability, operating and

performance

characteristics, diagnostic and

repair equipment and availability of spares.

Marketing-production capacity-flexibility of

the equipment to meet changing demand for end

product or service, labour considerations.

It may be possible to introduce trade-offs between

these considerations, e.g. more expenditure on

design to save future operating or maintenance

costs, to affect the preferred option. In this respect it

is important to realize that this is the critical time in

the determination of life cycle costs because of the

extensive opportunities which may be available for

design modiftcations leading to future reductions in

cost or improvements in productive capacity or

better reliability standards. Because of the nature of

life cycle costing it will always be possible to

introduce modifications at any stage of the assets

life to optimize its value, e.g. modifications,

refurbishing, provision of additional facilities

which will enhance production, reduce mainten-

ance, or improve quality but the most critical time is

at design stage.

Another important consideration at this stage when

the appraisal has been produced, perhaps modified

and a view has to be taken of the best buy, is to test

the costing reflected in the appraisal. At best the

forecasts of demand and costs of operating and

maintaining can only be a guide and should not be

given the same validit

manufacture or pure K

as initial costs of design and

ase which are likely to be

altogether more accurate.

It is recommended that a procedure is adopted

which will isolate the critical factors and assess

changes in these factors on the costing. For

example, in considering the purchase of two pieces

of capital equipment, type A may have a higher rate

of return than type B, but type B shows a pay back

period of 3 years compared to As 5 years. In a risk

situation given a small difference in the overall rate

of return, B might be the preferred option. Utility

theory, a technique

for assessing managerial

perception of risk to reward preferences can help to

place the choice facing management into a simple

framework of risk to reward values.

Monitoring and Feedback

I

now come to the final stage in the proposed

methodology but it is certainly not the least

important of the stages. By its very nature life cycle

costing does not end with the implementation of a

decision affecting the acquisition of a physical asset.

I am almost tempted to say it really begins there

because then the collection of actual cost data

becomes possible and this is at the very heart of life

cycle costing. Actual costs and experience of

handling the physical asset must be fed back and

compared with the cost assumptions reflected in the

appraisal. Deviations from the forecasts must be

analysed and where necessary corrected to achieve

planned objectives. From this process it is possible

to accumulate better information about asset

management which will feed into the next project

and aid design, operating and maintenance policies.

There will inevitably be advances in technology

which will affect the management of existing assets

and policies for future asset acquisition. These too

will have to be fed back to the life cycle costing

team.

The major problem in this field is data capture

which I have already referred to. My own view is

that the cost of setting up a sound existing system

which will provide the details needed to monitor

the use of physical assets properly will yield

immense benefits if used in conjunction with life

cycle costing. It will also provide the means by

which post life cycle costing exercises may be

audited.

Monitoring asset life cycle costs goes far beyond

verifying achievement against expectation. It

permits the organization to keep abreast of new

opportunities for optimizing the return on physical

assets. To this end advanced technology, projected

changes in demand for the end product or service,

and changes in cost patterns will need to be

monitored and their impact measured in terms of

the management of existing assets and the design

and acquisition

of future assets. The multi-

disciplinary team will have a major role to play as a

forum for design and maintenance, operating,

marketing, finance and personnel staff, to suggest

and assess proposals for grasping new opportunities

and optimizing the cost of asset ownership.

Conclusion

I

have attempted in this paper to argue the case for

life cycle costing in the management of physical

assets and suggested a possible methodology for the

introduction of the technique of life cycle costing. I

believe that the technique has immense possibilities

which by and large have been ignored by industry


11/12

42


December 1981

and the public authorities in this country. I think

the reason for this is that firms and organizations

have been reluctant to devote resources of expert

manpower

to the technique but, even more

significantly, have not had the costing systems to

provide the data necessary to the successful use of

the technique.

conservation ofenergy. Because education establishments

are the major part of the Authoritys capital programme, a

school was selected as a pilot project to put some of the

theory into practice.

My hope is that the rapidly increasing computer

technology will remove the latter difficulty and a

realization of the significance of the technique,

perhaps as a result of reading the article, will

encourage managers to pursue the ideas outlined in

this paper to the benefit of asset management in

industry and the public sector.

The project chosen was the Ashford Godinton County

Primary School-a staged development serving a new

and expanding housing estate, and eventually to consist of

nursery unit, infants and junior schools. The first phase

was planned to be the major part of the junior school, i.e.

the communal and service areas plus 50 per cent of the

teaching area with a completion date in 1978. The

remaining teaching area was to be added later as pupil

numbers increased.

The technique is in its infancy. There is a need for

experimentation and the publication of further

studies to increase the body of knowledge on the

subject. I have little doubt that its potential in asset

management

is immense because

it has an

immediate impact on all disciplines in any

organization that owns or uses physical assets. To

the private sector where profits are the principal

goal the objective ofoptimizing life cycle costs over

the life of a physical asset would seem to be at the

very core of profit maximization. For the public

sector, seeking to meet an almost inexhaustible

demand for services with limited resources, any

practice that can point the way to achieving more

with less, has to receive serious consideration.

The terms of reference for the project limited it to single

storey solutions with the objectives of (a) incorporating

recent developments in educational planning philosophy;

(b) obtaining improved etivironmental conditions with a

low energy cost; and (c) developing an alternative to the

use of steel as the principal structural material.

Many alternative proposals were put forward for each of

the elements ofthe construction, and these were discussed,

compared and analysed in relation to existing traditional

school buildings. These investigations indicated that

significant energy savings and increased user satisfaction

could be achieved by a co-operative teamwork approach,

examining each aspect as an inter-dependent part of the

whole solution.

References

R.

J. Kaufman, L ife cycle costing-a decision-making tool for capital

equipment acquisition, Cost and Management Accountant,

March/April 1970).

2)

(3)

(4)

(5)

(6)

The finally approved scheme was put out to competitive

tender and awarded to a local building contractor in the

sum of ~225,000 approximately, a figure more than 10

per cent over the IIES permitted maximum for this size

and type of school. Once-off approval was given by the

DES on the grounds that this was an experimental project,

with a forecast reduction of some 15 per cent in running

costs, but no further approvals would be allowed until the

monitored results had been analyscd. A detailed

breakdown of costs compared with those of an equivalent

traditional design is given in the Annex to this Appendix.

R. P. Reynolds, Helping the engineer to get the best value from

maintenance expenditure,

Management Accounting,

December

1974).

Something like 20 new or newly modified design

concepts were incorporated in the project. These included

the following:

4

G. Harvey, Lifecyclecosting-a review of thetechnique, Management

Accounting, October 1976).

W. B. Taylor, The management of assets: terotechnology in the pursuit

of economic life cycle costs, KMA Occasional Paper, February

1980).

The following booklets were published by HMSO on behalf of the

Department of Industrys Committee for Terotechnology:

ManagementAspects of Terotechnology- l i fe Cycle Costing 1975).

Li fe Cycle Costing in the Management of Assets-A Practical Guide,

(ii)

(iii)

April 1977).

There are also various publications on Terotechnology and Life Cycle

Costs

obtainable

rom

the Asset Management Group, British Institute

of Management.

(iv)

ppendix

(v)

An Example of L fe Cycle Costinq

(1) In the

Autumn

of 1974 Kent County Council, concerned

by the rapid escalation of energy costs, set up a research

group to review building techniques with a view to the

(vi)

A high standard of well-distributed daylighting was

achieved with a substantially reduced total glazing

area, by using double glazed, north-facing roof-

lights, angled to keep out direct sunlight even at

summer solstice.

The orientation of the building, at 10 west of north,

was selected to reduce solar heat again through the

rooflights.

The primary artificial lighting system was installed

with over-riding photo-sensitive controls to prev-

ent use other than when inadequate natural light was

available.

The mechanical ventilation/heating system employs

exposed, ceiling level ductwork to circulate air

throughout the building. The air is withdrawn

through a series of extract ducts and in winter a

tneasure of fresh air is added before the warm air is

recirculated.

The mechanical ventilation/heating system operates

in a sealed environment with no openable windows

and each main entrance is designed in a lobby style to

provide an outer thermal zone with background

heating only.

High mass construction tnaterials were chosen for


12/12


43

the building to afford a high level of heat retention

in winter and a slow rate of solar gain in summer.

(The selected option was for a traditional cavity wall

construction comprising an external skin of facing

brickwork and an internal skin of lightweight

aggregate, insulating, concrete blockwork with

polystyrene insulatilig built into, but not bridging,

the cavity of the wall.)

(vii) A new range of modular component, integrated

furniture was designed, balancing users needs and

aesthetic considerations against cost.

(7) Detailed monitoring procedures have been established,

principally in the three fields of (a) environmental

performance; (b) acoustic performance; and (c) cost-in-

use. For the first the school is to be used as a test bed for

studies oflighting utilization, air leakage, air change rates,

environmental conditions and thermal performance ofthc

selected structural materials. For the latter, detailed

records are to be kept of all the elements of running costs

for matching with similar records for comparable,

traditionally constructed schools. The school was first

occupied in September 1978 so that 2 full academic years

history is now available, although this will be atypical due

to the low first year and second years intake.

(8) The conclusions drawn from this intensive performance

monitoring will assist in identifying proposals for

inclusion in future school designs and may assist in the

identification of cost effective modifkations to existing

schools.

nnex to ppendix

L+ Cycle Costing and Traditionally Designed Buildings

A Comparism Based on the A.&ford Codinton Project

LCC designed Traditional

building

building

&No

~000

Capital costs

Design and specification costs 41 36

Construction costs (including installation) 277 246

318 282

Running costs-for h0 year period

Operating costs

-1abour

-energy

-materials

Maintenance costs

-1abour

-materials

246

307

87

120

13

15

346

442

172

198

73

84

245

2x2

Total running costs

591

724

Disposal costs

15

15

Total costs

924 1021

Present value discounted)

626

65X

Note

All prices are in real terms, i.e. after accounting for inflation. A time preference discount rate of24

per cent per annum has been applied to the costs to produce present values.

the use of life cycle costing in acquiring physical assets

Documents