Life Cycle Costing
Life Cycle Cost is defined in the AWWAAmerican Water Works Association Asset Management Definitions Guidebook as “A methodology that provides an estimate of the total capital, operating, and maintenance costs of an Asset over its operating life. Relevant costs include planning, design, acquisition, installation, maintenance, Rehabilitation, financing, retirement/ decommissioning/ disposal and any other costs directly attributable to operating or using an Asset.”
Life Cycle Costing, in accounting terms, is the process of compiling all the costs the asset will incur over its lifespan. These costs include the initial investment, future additional investments, annually recurring costs, and salvage or disposal costs. Managing the life cycle of the assets helps to expand their ability to serve for as long as possible. The information collected about the assets allows systems to better understand at what point in the asset’s life it currently stands, which increases system efficiency and Level of Service.
Life Cycle Costing is an important concept in asset management because it allows the system to place an emphasis on holistic, long-range costs. An organization that does not pay attention to Life Cycle Costing can only optimize the immediate purchase cost and does not have the ability to fully understand costs that will need to be expended during the time the asset is in service, including all operation, maintenance, repair, monitoring, and rehabilitation costs. Ignoring “opex” (operating expenses) while focusing only on “capex” (capital expenses) puts a utility in a compromised position and prevents the utility from optimizing its life cycle cost. A system that selects a particular option might find the replacement of parts is more expensive than it thought or requires additional operator training or an increased staffing level. A few examples from systems around the U.S. are presented below.
- A small drinking water system that installed an adsorption system for arsenic treatment only to find out the media needed to be replaced every 6 months, rather than every 2 years, at a cost of $35,000 each.
- A medium sized drinking water utility that was provided a water system that needed to be operated with in-person operators 24/7/365, instead of its previous operating schedule of day shift operators only.
- A large wastewater system that discovered that a replacement part for its disinfection unit was available only from Germany. The part was extremely expensive to replace.
It is critically important during this component of asset management to examine the overall life of the asset and the costs associated with each component of that asset’s life. It is also important to understand the assets’ role as a part of the collective. Life Cycle Costing is the intersection of asset management and managing assets. Life Cycle Costing requires strategically managing the entire system while also considering the most effective and efficient management for each individual asset as it proceeds through its life. Life Cycle Costing is where strategic asset management – making decisions about the collective set of assets – meets managing assets – making individual decisions about each asset. Both aspects are important to a well-run, efficient, and effective system, and it is important to understand the difference between them.
Optimal asset Life Cycle Costing requires the use of historical data such as condition, performance, maintenance, risk, and cost. Therefore, data must be collected and utilized to drive the decision making of the system. Think about where existing data can be found and where future records should be kept.
The phases of an asset’s life cycle include every time a decision or expenditure is made related to the asset. Therefore, it is important to recognize that an asset’s life starts long before it is put into operation. The beginning of the asset’s life is when it is first contemplated as part of planning or conceptual design. The next part of an asset’s life cycle is design. Once design is complete, the next phase is construction or installation. Once the asset is installed, it is ready for operation. The next phase of the asset’s life includes the maintenance activities (all types of maintenance, except corrective which is covered in the next phase under repair). If and when the asset fails, the next three stages of the asset’s life come in: Repair, Rehabilitation and Replacement. Which of these activities occurs depends on the nature of the asset failure and many other factors. It is also possible for an asset to experience all of these at some point during its overall life. At some point, the asset will no longer be in service and will undergo its last life cycle phase – decommissioning or disposal. Throughout the asset’s life, it is necessary to have sufficient funding to allow the asset to provide the required level of service. Without sufficient funding, it might not be possible to intervene as needed during the asset’s life, and the asset might fail prematurely, reducing the overall cost efficiency.
The risk analysis is foundational in the decision-making for asset operation and maintenance and in determining when to repair, rehabilitate or replace a given asset. The risk analysis identifies assets that are high, moderate, and low risk. Basing decisions regarding operation and maintenance intervention on asset criticality allows the system to optimize limited funding. Risk can also guide the decision-making process in terms of repair, rehabilitation, and replacement. In general, lower-risk assets and those that are moderate risk based on a high probability of failure and a low consequence of failure, can run to failure and be repaired after the failure. High-risk assets are likely to be replaced early, before a failure occurs, to prevent the negative consequences from happening. Moderate risk assets (based on high consequence but low probability) can be monitored to determine when a failure might be likely to occur, and then the system can rehabilitate or replace the asset prior to the failure. These actions are broad generalizations; the repair/rehabilitate/replace decision can be made for each asset individually based on cost, technology, underlying condition of the asset, type of consequence and many other factors.
Understanding the assets’ life cycle allows for the development of Long Term Plans such as Capital Improvement Plans. Life Cycle Costing allows the system to look longer term and plan for the financial need to replace assets. The asset replacement should be included in a Capital Improvement Plan.
Life Cycle Costing allows the system to think about assets individually and collectively. With the data and knowledge gained through the previous core components of asset management, systems can determine the best strategy for the assets, both individually and collectively, to meet the desired Level of Service at the optimal Life Cycle Cost.
Robust Life Cycle Costing strategies and decision-making take time to develop, including collecting the data and analyzing it. However, systems can make progress in the early stages by beginning to question existing maintenance practices to determine what is being done because it has always been done that way rather than because it is the optimal way to do the maintenance activity.
Another question to ask is whether the maintenance activity has a role in meeting the Level of Service. Making revisions in practices can impact optimizing costs and personnel time. Life Cycle Costing involves many facets within the organization at different points in the asset’s life, which provides an opportunity to involve a wide audience.
Green Infrastructure is in the early phases of tracking data to enable a roust Life Cycle Costing analysis. It might not be possible at the beginning of implementing a green/gray (or just green) asset management program to implement full Life Cycle Costing strategies, but similarly to the discussion above there are opportunities to begin the process of improving Life Cycle Costing practices right away. Over time, as green infrastructure practice matures, it will become easier to implement Life Cycle Costing strategies. In the early 2000s, gray infrastructure was in the early phases of Life Cycle Costing and had similar needs to develop the data. But now, in the early 2020s, much progress has been made. This evolution is fully expected for green infrastructure as well. The details will come as the infrastructure ages and grows.
The importance of life cycle costs – Kevin Campanella, P.E., Assistant Director Asset Management, Department of Public Utilities, City of Columbus, OH