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LCC?

LIFE CYCLE COSTING • At the start of any project it is important to


By understand the costs involved
Ch. QS. Gayan Fernando
B.Sc. (Hons) in QS
P.G. Dip. in CL&DS, Dip. in Arb., A.M.I.Q.SL.
• Traditional methods simply look at start-up
costs, cash flow and profit (or loss)
• With more complicated projects, it is
necessary to understand the likely costs and
cash flow throughout the life of the project

Initial Cost

Disposal Operational
Cost Life Cycle Cost

Cost
Analysis

Occupancy Maintenance
Cost Cost

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1. Construction
2. Maintenance costs
Construction works costs
Other construction related costs Replacement
– Design fees, Planning costs, planning Refurbishment and adaptation
gain contributions etc
Redecorations
Maintenance

3. Operation 4. Occupancy costs

Cleaning Reception and customer hosting


Utilities Security
Administrative costs Car parking charges
Overheads costs
Taxes

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LCC CALCULATING PROCES
5. End of life costs Identity cost element

Determine time for each cost element


Disposal costs
Reinstatement cost Estimate value of each element
Demolition
Calculate NPV of each element, for every
year (over its time period)

Calculate LCC by adding all cost


elements

NET PRESENT VALUE PRESENT VALUE


• The difference between the present Value of a Single Cash Flow
value of cash inflows and the present • Present Value = Future Value
value of cash outflows (1 + discount rate)n

Value of an Annuity
NPV = PV (Cash inflow – Cash outflow)

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DISCOUNT RATE CALCULATING LCC
– Refers to the rate of change of true value of
LCC = I+ Repl+ E+ OM & R + O – Res
money over time, considering fluctuations in both
investment interest rates and the rate of inflation • I - Present value of initial cost
• Repl - Present value of replacement cost
– Discount rate is approximately equal to the interest • E - Present value of energy cost
rate (cost of capital) minus the inflation rate • OM & R - Present value of non energy
operation, maintenance and repair cost
– More accurately calculated by 𝑟 = ( − 1)
• O - Present value of other costs
– r = real discount rate, d = interest rate, i = rate of
• Res - Present value of residual value
inflation
less disposal cost

Example 1: Example 2:
A client seeks your advise on a cladding for his A client seeks your advise on a floor finish for his
building based on following information. building based on following information.
Information Cladding A Cladding B
Information Type A Type B
Initial cost 10 Mn 12 Mn
Initial cost 200 Mn 300 Mn
Redecorating cost 2 Mn @ every 4 years -
Cleaning cost 7.5 Mn @ every 05 7.5 Mn @ every 06
Renewal Cost 3 Mn @ every 10 years - years years
Maintenance cost - 2.5 Mn @ every 10
Cost for Repair - 6 Mn (at 10th Year) years
Life Span 15 30
Resale value - -

Life span 20 years Building Life span 30 years


Discount rate 10% Discount rate 10%

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Example 3:
A client seeks your advise on a LCC of two projects
based on following information. ADVANTAGES OF LCC
Information Project A Project B
• Evaluation of competing options in purchasing
Initial cost 200 Mn 200 Mn
• Improved awareness of total costs
Maintenance cost 15 Mn @ every 05 18 Mn @ every 10
years years
Annual energy cost 20 Mn 22 Mn
• More sensible than other methods

Replacement cost 8 Mn (every 10 years) 5 Mn (every 20 years)

Resale value 130 Mn 140 Mn

Building Life span 50 years


Interest rate 12%
Inflation rate 4%

DISADVANTAGES OF LCC
• LCC is time consuming
• LCC involves lot of effort in calculations
• The assumption is that the product, as known, has
a finite life-cycle THANK YOU
• The accuracy of data is often doubtful
• It has a high sensitivity to changing requirements