Basic Principles of Life Cycle Costing PDF

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Basic Principles of Life Cycle Costing

Introduction
In a modern open cut mine, large mining equipment accounts for over 75% of the annual operating budget.
Understanding the cost and performance of this equipment is therefore cru cial in managing the mines cash
flow and production output. Life cycle costing is a methodology to understand and control future costs.
This simplistic example shows how to build a basic life cycle cost model for an 85T off highway mining haul
truck.
What is Life Cycle Costing?

Life Cycle Cost Analysis (LCC) is a mature business discipline that was developed to improve the cost
effectiveness of equipment procurement by estimating the full cost of ownership of a specific asset or project
for its entire economic life. The method offers important benefits, including:
Identifies all costs associated with a project or investment, from concept to retirement
Allows managers to consider possible trade-offs between capital and operating expenses, especially
in terms of up-front costs which may result in long term advantages
Offers a framework with which to design and assess the actual operating strategy for the asset
Life Cycle Cost Analysis is a powerful tool in assessing alternatives, which has made it very common in the
procurement of mining vehicles. LCC includes the cost of acquisition, operation, m aintenance and disposal
for the economic life of an asset.
Life Cycle Cost = Capital Cost + Operating + Maintenance Disposal
Where:
Capital Cost = Sum of all net costs associated with acquiring and assembling the equipment on site.
This includes the price of the machine (net of trade-in), freight, assembly, commissioning costs
including testing to meet local regulations, and training. It should also include costs of changes or
additions to other assets in order to service or accommodate the new vehicles, such as new shop
bays, tools, or road modifications.
Operating = Cost of operating the equipment, primarily fuel, tyres, and wear items. In some cases the
Basic Principles of Life Cycle Costing.docx
cost of an operator is included in the analysis if one alternative enjoys such a significant produ ctivity
advantage that fewer machines (and operators) are required.
Maintenance = Includes regular preventative maintenance, lubrication, repairs, and major

component overhauls.
Disposal = Net proceeds from disposal, including sale price and demobilisation costs (freight is
usually the buyers responsibility). There is a rule of thumb that the residual value of a mining

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machine seldom exceeds the cost of demobilisation and should therefore always be assumed as
zero; however this is not always correct depending on location and market conditions.
LCC vs Maintenance Strategy

LCC captures all costs necessary to operate equipment for its useful life while the maintenance strategy is the
arrangement of tasks, costs and intervals specific to maintaining it. The maintenance strategy is a direct input
to the LCC model.
That inter-relationship is important. Since LCC represents the entire cost structure for a machine and can
easily account for production and risk, it is an ideal tool for performing sensitivity an alysis. Alteration to the
maintenance strategy can be assessed in the proper context of the impact on other aspects of machine
operation, for example by trading off the costs of additional maintenance against improvements in machine
performance.
LCC provides the rational framework to model equipment operation, taking account of all pertinent cash
flows for the life of the machine. It allows management to take a holistic view of physical assets, considering
the full impact of the operating environment. The most useful models estimate costs based on a rational
assessment of risk relative to operating circumstances. They support investment analysis to the extent that
sustained productivity, rather than simple production, is the measure that drives decisions at the mine.
One should note that the term maintenance strategy often refers to the entire business strategy for running
the maintenance organisation; its the operating plan devised to produce specific results. Any functional area
can (and should) have a strategy; a mines maintenance department generally has a mandate to produce one
thing equipment uptime. LCC models are an ideal tool to represent the relationship between uptime, cost
and production to support strategy development.
Basic LCC Model

The following is an example of a basic LCC model for an 85 Ton haul truck.
Term/Utilisation
Physical Life Ultimately, physical decline of structural and mechanical elements of a truck makes it
unusable. Constant repairs keep it from being productive, while frame instability renders it unsafe. It is
generally accepted that 70,000 hours is the physical limit for a truck to be in primary production, or roughly
ten years operating 20 hours per day, though some mines report that improvements in frame inspection and
testing has extended life to up 90,000 frame hours.
Economic Life May be different than physical life due to factors such scale or when in the mines
development the equipment is introduced to the site. The economic life is generally the investment horizon

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for that specific asset, for example a truck introduced during the development phase that will only be on site
for a few years.
In this example, assume the 85T truck is a development unit; the term for LCC analysis is 5 years and
35,000 SMU.
Capital Costs
Item
Purchase
Unit Price
Units
Total
$1,500,000
$1,500,000
Freight
$50,000
$50,000
Assembly
$25,000
$25,000
Commissioning
$10,000
$10,000
Training
$10,000
$20,000
Tools, Shop Mods
$100,000
$100,000
Pit & Road Mods
$20,000
$20,000
Total
$1,725,000
Acquisition
Acquisition costs include all costs to acquire the asset. Things to consider in the acquisition costs are
purchase price, optional extras, equipment modifications, freight, commissioning, training, special tooling
requirements, workshop modifications and pit and haul road upgrades or modifications.
Disposal
Factors that affect disposal value include (assumptions in parentheses)
Age at Disposal (5 years, 35,000 Hours)
Condition (Good; well maintained)
Location (Remote)
Market for Used Trucks (Excellent)
Estimated Net Residual = 40% of Purchase Price = $600,000
Operating Costs
Operator
Costs should be calculated using the fully loaded cost of employing an operator, including wages, benefits,
training, etc.

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Operator costs vary by region, but a range of $40 to $70 per hour is reasonable.
In this example, assume the operator costs $40 per hour.
Fuel
Fuel consumption is influenced by altitude, grade, load, road condition, maintenance, and operator training.
Altitude specifically de-rates an engine, meaning that more fuel is consumed to achieve a rated horsepower.
Roads and loads, to the extent that they increase effective rolling resistance, also increase fuel consumption.
Fuel costs are location-specific.
Table 2: Fuel Consumption (L/hr)
Class
Low
Medium
High
85 ton
45
60
90
150 ton
80
95
150
200 ton
100
120
180
240 ton
130
155
200
360 ton
160
220
280
In this example, assume that a medium application and a fuel price of $0.70 per liter:
Fuel Cost per Hour = 60 x $0.70 = $42.00 per Hour
Tyres
Tyres are generally supplied on a contractual basis at an agreed price per tyre with suppliers committing a
certain number of units during the contract period.
Factors that influence tyre life include:
Haul road design, construction and maintenance grades and surfaces should be designed and
managed to reduce rolling resistance and wear
Haul length and speed tyre failures are often caused by heat, which is increased by travel speed
and distance
Payload tyre life is directly related to load; a continuous 10% overload will reduce tyre life by 10%
Inflation tyre inflation is also a key determinant of life, as over-inflation increases heat and tread
damage, while under-inflation increases rolling resistance and wear
Load and Dump area maintenance poorly maintained load and dump areas increases tyre damage
from spills
Proper tyre specification incorrectly matching tyre material, size and tread to road conditions/haul
distance reduces tyre life
Operator training operators need to understand the effect of speed, and overloading on tyre life.
They also have a critical role to play in reporting spills

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Tyre life is highly dependent on application and is currently subject to intense management due to
shortages. Below is an accepted summary table of expected tyre life:
Table 3: Expected Tyre Life on Haul Trucks
Low
Medium
High
1000-2000
2000-4000
4000-6000
In this example, assume that a medium application (3000 hour life) and a price of $25,000 per tyre:
Tyre Cost per Hour = 6 x $25,000/3,000 = $50.00 per Hour
Other Consumables
Other consumables include operating materials that are regularly to the equipment such as wear items and
ground engaging tools such as ripper teeth and cutting edges.
In this example, a haul truck, wear items are usually represented by box repairs, which will be handled under
maintenance.
Other Consumables = $0.00 per Hour
Maintenance
Maintenance costs are the direct expenses associated with servicing the truck in order to ensure its
mechanical integrity so it can produce. Generally mine employees are responsible for day-to-day
maintenance activities, while the supplier handles warranty repairs and tasks requiring significant off-site
resources or proprietary technical skills. These services are managed together by the mines Maintenance and
Purchasing Departments.
Maintenance costs are controllable and predictable. Haul trucks should have a formal equipment plan, which
describes the maintenance strategy for the vehicle including service intervals, expected minor and major
component service lives, sources of supply, on-hand inventory plan, and a condition monitoring strategy to
assist maintenance and reliability engineers. The key to managing maintenance costs is to maximize the level
of planned, preventive activity and to carefully record and assess results through disciplined use of work
orders associated to specific pieces of equipment and subassemblies.
From the equipment plan, Life Cycle Cost Analysis requires a reasonable estimate of the annu al maintenance
expenditure for each truck. These estimates usually categorise costs as:
Running Repairs minor leaks and breakage, inspections, alarm investigation, welding, usually
undertaken in the field and completed in less than one shift
Scheduled Preventive Maintenance (PMs) lubricant and filter changes, adjustments, scheduled
inspections, minor part replacements. Planned and coordinated to be performed during scheduled
shop visit

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Box Overhauls - Re-plate, repair any structural problems, modifications. Wear rate depends on
payload material, though 15,000 hours is a typical interval
Major Components Planned major repairs to components and systems. Scheduled to occur
concurrently wherever possible in order to minimize downtime, and often managed using exchange
components rebuilt offsite.
Items to include in estimating maintenance costs are parts, materials, labour (both internal and external),
freight, special training and tools.
For our Example:
Running Repairs - Typically $2 to $5 per hour for an 85T truck, assume $3.00 per hour
Preventive Maintenance (PM) - Typically $3 to $6 per hour for an 85T truck, assume $4.00 per hour
Box Overhauls - Materials and Labour for box overhaul = $50,000, Repair is performed at 15,000 hours =
$3.33 per hour
Major Components
Table 4: Typical 85T Truck Component Schedule
Component
Installed Price
Engine
Benchmark Hours
$/Hour
$100,000
12000
8.33
Transmission
$50,000
12000
4.17
Wheels (2)
$40,000
12000
3.33
Differential
$20,000
20000
Brakes (4)
$40,000
15000
2.67
Struts
$30,000
20000
1.5
Total
$21.00
Total Maintenance Cost per Hour:
Running Repairs
$3.00 per hour
Preventive Maintenance
$4.00 per hour
Box Overhaul
$3.33 per hour
Major Overhauls
$21.00 per hour
Total
$31.33 per hour
Table 5: Representative Haul Truck Maintenance $/Hour

Class (Tons)
Low
Medium
High
85
$20
$30
$40

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150
$40
$50
$60
200
$50
$70
$100
240
$90
$120
$150
360
$120
$200
$250
Summary
The total life cycle cost per hour is then the summary of the elements above.
Life Cycle Cost =
Capital Cost
Operating
Maintenance
Disposal
$1,725,000
Fuel = $42.00/hr
Tyres = $50.00/hr
Operator =
$40.00/hr
$31.33/hr
($600,000)

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This can be expressed as a cash flow as shown in the table below.
Year
$
Capital Cost
Disposal
Hours
Operating:
Operator
Fuel
Tires
Operating (total)
Maintenance:
Running, PM
Box Overhaul
Engine
Transmission
Wheels
Differential
Brakes
Struts
Maintenance (total)
Total O&M Costs
Cash Flow
$
LCC
$
1,725,000
5
$ (600,000)
35,000
7,000
14,000
21,000
28,000
$40.00
$42.00
$50.00
$280,000
$294,000
$350,000
$ 924,000
$280,000
$294,000
$350,000
$ 924,000
$280,000
$294,000
$350,000
$ 924,000
$280,000
$294,000
$350,000
$ 924,000
$280,000
$294,000
$350,000
$ 924,000
$7.00
$49,000
$49,000
$49,000
$50,000
$49,000
$49,000
$
$
$
1,725,000
6,550,000
$ 49,000
$ 973,000
$ 973,000
100,000
50,000
40,000
$ 239,000
$ 1,163,000
$ 1,163,000
$
$
$
$
20,000
$
40,000
$
30,000
$ 189,000
$ 1,113,000
$ 1,113,000
100,000
50,000
40,000
$
$ 239,000
$ 1,163,000
$ 1,163,000
40,000
$ 89,000
$ 1,013,000
$ 413,000
About iSolutions
iSolutions is a leading provider of asset management solutions to mining and construction companies.
Our flagship software package, AMT, utilises the Framework methodology and is recognised as a market
leader in maintenance management, life cycle costing, budgeting and maintenance strategy optimisation.
Established in 1997, we specialise in providing mining companies, OEMs, dealers and contractors with the
know-how, processes, systems and training to achieve Asset Management Excellence.
Our solutions are used across mining and construction assets to improve equipment uptime and long term
productivity, and to reduce life cycle costs.
With offices in Australia and South Africa, we have a proven track record managing large, global projects.
Our blue chip customers include; Caterpillar Dealers, Newmont Mining, Downer EDI Mining, Newcrest
Mining, Komatsu, Wesfarmers, Glencore and BHP Billiton.

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Contact Us
Contact
Stuart Burckhardt
Chief Marketing Officer

Telephone
+61 2 9966 9096
Email
sales@isipl.com
Web
www.isipl.com

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