The important value of Life Cycle Costing

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Life cycle costing can define as the total cost throughout its life including planning, design, acquisition and support costs and any other costs directly attributable to owning or using the asset. Life cycle costing is divided into six-staged process. The first four stages which are plan life cycle costs analysis, select or develop life cycle model, apply life cycle model and documents and review life cycle results comprise the life cost planning phase. The last two stages which are preparing life cycle cost analysis and implement and monitor life cycle analysis incorporating the life cost analysis phase. Life cost analysis is used as the basis for monitoring and management of costs over an asset's life. It enables the creation, operation and disposal costs of a selected alternative to be monitored throughout its life to enable accurate and timely decision-making as to how these costs can be minimized. The reason for using life cycle costing is to determine the sum of all the costs associated with an asset including acquisition, installation, operation, maintenance, refurbishment and disposal costs. Capital and ongoing operating and maintenance costs must be considered wherever asset management, risk management, value management and demand management decisions involving costs are made.

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Case Study

Life cycle costing is currently a valuable tool in the construction industry. Selecting the materials and components of structures and pavements based on a life cycle costing can significantly decrease the lifetime cost of construction, maintenance and repair. Life-cycle costing analysis is an engineering economic analysis tool useful in comparing the relative merit of competing pavement design alternatives. This approach uses a structured methodology to account for the costs of agency activities and the effects of those activities on transportation users. By considering all of the relevant costs incurred during the service life of an asset, the life cycle costing process helps transportation officials to select the lowest total cost option and provides a means to balance user impacts with the construction, rehabilitation, and preservation requirements of the pavement itself. The Pennsylvania Department of Transportation (PennDOT) has a long and successful history of using life cycle costing analysis in its pavement selection decision process. Since the mid 1980s, PennDOT has conducted a life cycle costing for all pavement projects with an estimated initial cost of more than $1 million and other pavement projects with an estimated cost of more than $10 million. PennDOT has 15 to 20 projects each year that are of sufficient scale to warrant an life cycle costing. For these projects, PennDOT bases its design selections primarily upon life-cycle costs and includes the effects of user delay and increased vehicle operating costs due to the presence of a work zone. Because of its life cycle costing analysis policy, PennDOT has achieved significant improvements in its pavement program including improved overall performance of pavements in the state, lower costs for new pavements and rehabilitation work, improved credibility of pavement-type selection decisions with the public and industry groups. Besides that, life cycle costing analysis also gives implementation to PennDOT. PennDOT took a decidedly top-down approach to its life cycle costing analysis implementation. The department reviewed its entire pavement design and selection process. Then the PennDOT director created a special task force to review new technologies for their applicability to Pennsylvania's transportation system. Life cycle costing analysis was chosen as a methodology that met PennDOT's requirements for determining long-term agency and user costs. Working with internal experts, the Pennsylvania State University, and industry groups, PennDOT developed its Highway Geometric Design Manual and its Pavement Policy Manual. These manuals standardized all pavement design processes, including life cycle costing analysis. By the mid 1980s, these manuals were being used by every PennDOT pavement designer.

Life cycle costing provides several benefits which are PennDOT found that life cycle costing analysis process have improved the quality of all pavement design inputs and have led to better pavement designs. Secondly, PennDOT engineers have become more knowledgeable about the costs and performance of various pavement materials and activities. The life cycle costing analysis process provides opportunities to investigate aspects of pavement life beyond initial construction design. Next advantage of life cycle costing is credibility. PennDOT's well-documented centrally regulated life cycle costing analysis process improves the transparency of the pavement-type selection process and makes pavement selection decisions less likely to be contested by pavement industry groups. Besides that, PennDOT uses life cycle costing analysis as a framework for considering tradeoffs between user costs and agency expenses at the project level due to the capacity on many roadways already taxed, PennDOT has formally recognized that work zone activities cause roadway users delay and additional vehicle operating costs. Finally benefit is PennDOT standardizing its pavement design selection process with life cycle costing analysis, PennDOT established clear benchmarks for pavement performance. The asphalt and concrete industries have met the challenge imposed by PennDOT and have adapted with better and lower cost products. Additionally, contractors have lowered their bid prices in order to remain competitive in a standardized environment.

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Disadvantage of using life cycle costing analysis is life cycle costing inputs are uncertain, PennDOT has modified its pavement selection criteria accordingly. PennDOT makes pavement design decisions based upon the information supplied by its life cycle costing process. However, life cycle costing analysis inputs, such as agency costs and pavement performance, cannot be predicted with complete certainty. Secondly, PennDOT has relied on both expert opinion and historical data to develop LCCA inputs. PennDOT recognized its lack of systematic data as a potential implementation roadblock, and specifically decided to use documented expert opinion before it had a source of properly analyzed historical data. At the same time, existing databases were investigated for their ability to supply these inputs. By developing the process at the same time as data sources, PennDOT was able to implement its LCCA program much earlier than it would have if the process and inputs had been developed sequentially.

PennDOT practices continuous process improvement with its pavement selection decision process. While the existing pavement selection method has achieved what was only hoped for 20 years ago, the department has decided to contract for a review of its processes. This review will be independent of the department and conducted by pavement experts not employed by PennDOT. Specifically, the review will examine the role of user costs and the accommodation of uncertainty in the analysis. Although PennDOT does not anticipate any major changes in its selection method, the benefits that the life cycle costing analysis program brings improved credibility, improved designs, and lower costs. There are such that PennDOT wishes to ensure their continuity.