BRIEFING
Life cycle costing
Professor George Norman
The starting point for any discussion of
the application of life cycle costing in
the specific context of property
management should be a precise defi-
nition of what life cycle costing is.
Life cycle costing is the process of
economic analysis that assesses the
total cost of investment in and owner-
ship and operation of the system or
product to which the life cycle costing
analysis is being applied. This process
takes the functional requirements and
operational constraints that apply to
the system or product and translates
these into a common cost measurement
known as life cycle cost. Life cycle cost
(LCC) in turn is defined as the total
cost of the system or product under
study over its complete life or the
duration of the period of study, which-
ever is the shorter. It includes the cost
elements incurred from initial invest-
ment, through ownership and opera-
tion to subsequent disposal.
344
In defining life cycle costing in this
way, explicit account is taken of the
fact that the technique can be applied
to a total system or to an individual
product. A system in this context is
defined as a bounded, physical struc-
ture that is designed to achieve a stated
objective through the interaction of the
various parts of which it consists. In
the property industry, the most
obvious example of a system would be
a complete building or set of buildings.
A product is much more narrowly
defined to cover an item that performs
specific functions or services. Typical
examples might be central heating
boilers or wall and floor finishes. The
Glossary at the end of this Briefing
defines a number of other commonly
used expressions.
The important point to be drawn
from these definitions is that life cycle
costing deals with present and future
costs and attempts to relate the two as
a basis for making decisions. In apply-
ing life cycle costing, explicit account is
taken of the total cost associated with
the system or product. In other words,
an economic comparison is made by
considering not only the initial capital
costs of the system or product, but also
the subsequent running costs and even-
tual replacement or disposal costs.
Given this amalgamation of costs
that occur at different times in the life
Property Management ■ Volume 8 Number 4
of the system or product, techniques
must be used that are capable of con-
verting these to common units of
measurement. The appropriate tech-
niques are simple estimating and
■ Time value of money
I T IS not appropriate in a Briefing of
this type to become involved in the
mathematical niceties of discounting
techniques. For the interested reader
these are extensively discussed else-
where with specific reference to the
building and construction industries 1-4
and more generally.5 It is also the case
that most microcomputer-based spread-
sheet software now includes discounting
techniques as standard. Indeed, such
software was used to perform the case
studies presented in 'Life Cycle Costing
for Construction'1 and 'Life Cycle Cost-
ing: theory and practice'.2
The important point to note is that
discounting techniques are used in
order to take account of the time value
of money. The present value of a sum
of money today depends upon the time
at which that money is expended or
received. To see why this is so, consider
the following simple example. As part
of a life cycle costing exercise, allow-
ance has to be made for the replace-
ment of a ceiling finish in five years'
time. It is estimated that this replace-
ment will cost £5,000 at today's prices.
What sum of money needs to be ear-
marked today to allow for this expendi-
ture? Clearly, this need not be £5,000
since any monies earmarked today can
be placed on deposit and so will earn
interest. But the precise sum to be ear-
marked will depend upon the timing of
the anticipated replacement of the ceil-
ing finish, which is what is meant by the
statement that money has time value.
In summary, if any meaning is to be
attached to the concept of the total cost
of a system or product, where the indi-
vidual cost components are distributed
over time, these individual cost com-
Briefing — Norman
accounting techniques known as dis-
counting techniques. At this practical
level, life cycle costing is an application
of the more general technique of
investment appraisal.
ponents must first be expressed in a
common unit, as if they all were
incurred at the same time. The process
of discounting, taking explicit account
of the time value of money, allows this
conversion to be effected.
■ Objectives
As stated, life cycle costing is an eco-
nomic process for the evaluation of the
total costs incurred in the commission-
ing and operation of a system or
product. The principal objective of life
cycle costing can be seen as either the
minimisation of the life cycle cost of
achieving a given performance, or maxi-
mising the level of performance that
can be achieved from a stated life cycle
cost target. Overall, the objective is to
maximise the return on investment and
achieve the optimal balance between
current and future expenditures.
Several areas of application of life
cycle costing can be identified:
(i) the commissioning of a new build-
ing to meet a perceived market
demand;
(ii) investment in new capital equip-
ment to achieve specific cost reduc-
tion targets;
(iii) modification of design to improve
reliability and performance;
(iv) decisions on the optimal time to
replace ageing and/or obsolescent
facilities;
(v) design of maintenance and
management strategies to optimise
performance of building systems
during their operation.
There has been a temptation to
believe that life cycle costing is applic-
able only to the assessment of 'large'
systems. This is far from being the case.
345
Property Management■Volume 8 Number 4 Briefing — Norman

Life cycle costing techniques can be later in time is the decision to imple-
applied at all of the phases of the life ment life cycle costing the fewer deci-
cycle of the system or product from the sion variables there are left that can be
initial concept to operation and main- influenced. For example, once the con-
tenance and, as has been indicated, is as cept and definition phases have been
applicable to individual products as it is completed, something like 70 per cent
to total systems. of the project's life cycle costs will have
been committed. Decisions will have
■ Timing implementation been made regarding the project's main
features such as performance, tech-
Life cycle costing consists of a number nology and the resources to be used in
of sub-processes defined by the time at the design and development phase. By
which each of the individual sub- the end of the design and development
processes is implemented. The sub- phase, it is likely that in excess of 90 per
processes are defined1 as follows: cent of the system's life cycle costs will
have been fixed. Decisions will now
Life cycle cost planning The use of life have been made on features such as
cycle costing techniques at the design materials, design philosophy and strate-
stage of a project. gies for operation and maintenance
Life cycle cost analysis The cost analysis of support. Very little leeway will be left,
buildings, systems or products in use. for example, to influence whether to
Life cycle cost management The cost opt for products that are cheap to instal
management of buildings, systems or but require frequent replacement, or
products in use. for expensive but long-lived products.
There is a close relationship between Once the project is operational, the
these sub-processes and overall system only options available to the project's
performance. In particular, their use is operators relate to maintenance strate-
related to the various life cycle phases gies and decisions on whether to
of a system or product, where five replace particular parts of the overall
major phases can be defined: system. Savings can still be achieved,
which is why life cycle costing is import-
(1) Concept and definition ant to effective property management,
(2) Design and development but in proportionate terms the major
(3) Manufacture and installation cost savings are achievable early in the
(4) Operation and maintenance project's inception.
(5) Disposal.
In other words, timing in life cycle
The first three phases typically costing decisions is crucial. The flexi-
involve achieving a balance between bility available to the decision-taker in
investment costs and operating and design trade-offs and competing design
maintenance costs while the latter two options becomes increasingly limited as
phases primarily relate to optimising the project schedule moves through the
operating costs. various life cycle phases.
It is essential that life cycle costing be The relationship between the life
implemented early in the project plan- cycle phase and the applicability of life
ning process. Only then will the deci- cycle costing is identified in Figure 2.
sion-maker be able to exert any really
strong influence either on the perform- ■ Qualitative v quantitative
ance to be achieved from a given life
cycle cost or on the life cycle cost considerations
expenditures necessary to achieve the Life cycle costing has been thought of
desired level of performance. as an essentially quantitative process
Figure 1 illustrates this point. The generating factual information on the
346
Property Management ■ Volume 8 Number 4 Briefing — Norman

347
Property Management■Volume 8 Number 4
total costs of systems or products. This
view perhaps explains some of the
reluctance to implement life cycle cost-
ing in the United Kingdom. There is a
fear that such a precise technique
undermines the independence of deci-
sion-takers and devalues their judg-
mental skills. In addition, there is a
suspicion that the accuracy of the tech-
nique is more apparent than real. After
all, the technique deals with the future
and the future cannot be predicted with
any accuracy.
The latter point will be considered in
some detail below in the discussion of
risk and uncertainty. Consider, then, the
relationship between quantitative life
cycle costing and qualitative judgment.
It has become increasingly recog-
nised,2,6 that it is wrong to believe that
life cycle costing provides definitive
answers to the choice between, for
example, competing system or product
designs. A whole range of qualitative
factors should also be taken into
account and should form an essential
part of a life cycle costing system.
The more recent recommendations,
in other words, suggest that life cycle
costing should involve a blend of quan-
titative and qualitative techniques. The
former provide a baseline cost measure
for each of the competing options,
while the latter provide more judg-
mental information on technical specifi-
cation and performance, aesthetic
considerations and intangible costs and
benefits. These two sets of techniques
should complement each other in the
final decision-making process in which
system or product design is fixed.
Decisions that are based purely on
quantitative life cycle costing measures
may be as seriously flawed as those
based upon consideration solely of the
initial costs of the system. While the dis-
counting techniques used in life cycle
costing are undoubtedly sophisticated,
they are also essentially numeric. They
must be supplemented by insights into
the operating scenario, the desired per-
formance characteristics of the system
348
Briefing — Norman
or product, the likely reliability of the
system or product and effective
resource management.
In practice this means that life cycle
costing should be seen as a two-stage
process. In the first stage the various
possible systems or products are
assessed in terms of their more qualita-
tive and technical characteristics. The
second stage calculates the life cycle
costs of the systems or products that are
chosen from the first stage. There is no
point in performing a full life cycle
costing on a system or product that
more detailed investigation would have
shown to be incapable of satisfying, for
example, technical prerequisites in-
herent in the project.
Detailed description of the first,
qualitative, stage of the life cycle costing
exercise can be found in 'Life Cycle
Costing: theory and practice'.2 Attention
will be confined in this Briefing to a
brief description of one element of that
stage. This consists of two steps, the
results of which are presented for a par-
ticular example in Figure 3.
Step 1: Technical and other criteria
Identify the criteria that are declared to
be necessary for the project to satisfy
and rank these against each other. This
is done in the top half of the matrix in
Figure 3. For example, criterion A
(bacterial/microbial resistance) is ranked
as a major preference over all other
criteria for this particular project,
denoted by the entries A-4 in the
matrix. By contrast, slip resistance is
given a minor preference over moisture
movement, hardness and compressive
strength: the entries E-2.
The raw score for each criterion is
found by adding up the scores in each
cell where a preference for that
criterion has been registered. Take, for
example, criterion G. To obtain the raw
score for G all the cells in the two
diagonals originating from G are ex-
amined. The upward diagonal contains
G-3, E/G, G-2, G-3, G-3, A-4 and the
Property Management ■ Volume 8 Number 4 Briefing — Norman

349
Property Management ■ Volume 8 Number 4 Briefing — Norman

downward diagonal G-4, G-3. This gives Relationship to quantitative measures

a raw score for G of
The techniques discussed in the pre-
3 + 1 + 2 + 3 + 3( + 0) + 4 + 3 = 19 vious section are intended to provide a
(E/G scores 1 and A-4 scores 0). reasonably objective way of selecting
between competing options. The results
The set of numbers so obtained of this exercise can also be used in con-
identifies the relative importance of the junction with the quantitative life cycle
various criteria to be satisfied by this costing for each option so selected for
particular project. These scores can be further analysis. It may be, for example,
used directly in the next step or they that the option that scores highest on
can be converted into a set of weights the qualitative measure turns out not to
on a scale of 0-10. To change a raw be the lowest life cycle cost option. The
score R into a weight W the formula is: decision-maker must then decide to
W=10R/[M(n-1)] what extent higher costs can be
accepted in view of the better qualita-
where M is the maximum score for each tive performance of the particular
criterion (4 in this example) and n is the option, where now an objective
number of criteria (9 in this example). measure of performance is available. In
Thus in Figure 3, other words, the combination of quali-
W = 10R/[4(9-1)] = 0.3125R tative and quantitative analysis gives the
decision-maker the information neces-
The resulting weights for each criterion sary to achieve an effective balance
are given in Figure 3. between system performance and
system cost.

Step 2: Scoring of competing systems ■ Life cycle cost analysis

or products
Each of the competing systems are now
scored on the extent to which they are
considered to satisfy the various criteria.
These scores are inserted in the top
part of each cell of the bottom half of
the matrix. For example, ceramic tiles
are ranked as 'Excellent' (score of 5) on
criteria A, G, H and I and 'very good'
(score of 4) on the remainder.
These scores are multiplied by the
weights identified from Step 1 to give
the entries in the lower part of each cell
in the matrix. The overall score for each
competing system is computed by add-
ing the entries in the lower boxes across
the whole row of criteria.
These overall scores identify the
systems that most closely satisfy the
most important criteria. They can be
used to select those systems that should
proced to a full life cycle costing by
selecting, for example, only the three
top scoring systems or only those systems
that score above a predetermined level.
350
Procedures
Life cycle cost analysis assesses those
elements that contribute to the total
costs of a system or product and evalu-
ates their impact upon costs during the
defined study period. There is no single
procedure that has emerged as an
industry standard in the conduct of life
cycle cost analysis. Most of those that
have been used are variants on the fol-
lowing series of steps:
(i) Identify the problem
(ii) Define the objectives
(iii) Establish targets and acceptance
criteria
(iv) Determine the study period for
the life cycle cost analysis
(v) Identify the constraints and the
limitations of the analysis
(vi) Identify controllable and uncon-
trollable factors
(vii) Consider the requirements for
and availability of data
Property Management■Volume 8 Number 4
(viii) Specify the assumptions under-
lying the analysis
(ix) Apply the life cycle costing model,
perhaps using proprietary soft-
ware
(x) Conduct sensitivity analysis and
risk analysis
(xi) Compare the quantitative results
with those from the qualitative
analysis
(xii) Check if targets are being
achieved.
Problem definition is undoubtedly
the most important first step. If the
problem is wrong specified, it will not
be surprising that the resulting solution
may well be found to be unacceptable.
The more closely the problem can be
defined, the less effort that will be
necessary in the subsequent analysis.
There is always, of course, the tempta-
tion to define the project too closely
and so to rule out a series of potential
solutions on technical grounds that
would otherwise have been considered
on a looser specification of the project.
The identification of assumptions is
also important, precisely because life
cycle costing is dealing with future pro-
jections. A proper statement of the
assumptions will aid the analysis of the
effect if these assumptions are not satis-
fied: one of the important features of
risk and sensitivity analyses of which
more will be said below.
The essential point is that life cycle
costing should be carried out in a logi-
cal and programmed fashion, with every
attempt being made to make explicit all
of the subjective and uncertain factors
that are entering into the analysis.
Methodology
The life cycle cost of a system or
product can be defined as the present
value of the sum of non-recurring and
recurring costs incurred during the
study period. This definition allows for
the possibility that some investment
costs which are non-recurring need not
be incurred during the initial construc-
Briefing — Norman
tion or installation, whereas other
investment costs may be recurring, for
example if they relate to regular, but
discontinuous, replacement of particu-
lar components.
There is no doubt that one of the
most difficult problems to be overcome
in the implementation of life cycle cost-
ing is in the development of a useable
and reliable data base. Many of the pro-
fessional consultants and government
bodies now involved in performing life
cycle costing analyses have constructed
data bases. The sharing of these data
remains rare, however, except with
respect to rather aggregate data such as
that produced by the Building Mainte-
nance Cost Information Service. This is
not surprising. There are many un-
resolved issues with respect to profes-
sional liability for the advice given to
clients on life cycle costs that would be
further complicated if reasons for in-
accuracy were claimed to arise from
inaccuracies in data provided by a third
party.
In developing a database, the data
must be collected in as detailed, as
systematic and as relevant a way as pos-
sible. For example, there is little point
in collecting data on energy consump-
tion unless this is allied with data on
floor space, occupancy and details of
building usage.
Various methods are typically avail-
able for the estimation of the individual
cost elements. Of these, the most com-
monly used are variants on engineering
cost estimation based on one of three
approaches to data generation: 1,2
(i) Standard cost factors Apply standard
cost factors, for example, of hourly
wage rates, to estimates of factor
usage derived from general busi-
ness experience.
(ii) Historic cost This is one of the most
common methods for generating
data. Use data drawn from previous
experience of similar projects or
products in assessing costs for the
current project. These data may
relate to unit costs, failure rates, or
351
Property Management■Volume 8 Number 4
general performance criteria
relevant to the current project.
They should be adjusted to reflect
any cost escalation, technological
change or variations in basic
design.
(iii) Modelling and statistical ratios It may
be possible to estimate operational
models for particular elements, eg a
model of energy consumption relat-
ing to the heat efficiency of a build- the decision-maker
ing. Alternatively, particular cost
elements may be estimated by
deriving statistical relationships
between design elements, eg main-
tenance costs as a function of sys- life cycle costing is performed by com-
tem use.
The overriding objective should be to
use the highest quality data source for
each cost element. In addition, it is
important that the data sources be
specified in the presentation of the
analysis results.
■ Sensitivity and risk analysis
Life cycle costing deals with the future
and the future is uncertain. Many of the
cost elements will be estimated from
imperfect data, particularly those relat-
ing to replacement cycles, projected
352
Briefing — Norman
performance and future materials,
energy and labour costs. Techniques
have now been developed, however,
that allow the decision-maker to use
this uncertainty in a positive and con-
structive way to improve the quality of
decisions.
Very simply, sensitivity and risk
analyses constitute an essential process
in a life cycle costing exercise. It allows
to answer a series of
'what if questions with respect to the
various options under consideration.
Their practical implementation has
been considerably eased now that most
puter analysis.7
Risk management system
The distinction between the two types
of analysis relates to the number of
uncertain variables each takes into
account. They form part of a risk
management system which relates to
life cycle costing as illustrated in Figure
4.
This system consists of three stages as
illustrated in Figure 5.
Risk identification
Every element of the cost estimating
Property Management ■ Volume 8 Number 4 Briefing — Norman

intended to show how sensitive life

cycle cost for a selected option is to
changes in each of the assumptions that
have been made in making the calcula-
tions.
and design decision-making process is It is often the case that the ranking of
subject to some degree of risk. These different options turns out to be un-
risks may affect different elements of affected by quite large changes in a
the project, such as quantities, unit parameter: there are various published
price rates, or the construction and case studies2 and a detailed description
operating schedule. The most effective of this type of analysis.6 What sensitivity
method of risk identification is to use a analysis does, in other words, is to allow
decision tree approach such as that dis- the decision-maker to concentrate on
cussed in 'Life Cycle Costing: theory improving the estimates of the much
and practice'2 and illustrated in Figure narrower range of parameters that do
6. affect project ranking.
The appropriate level of disaggrega- A limitation of sensitivity analysis is
tion will vary across design components that it is univariate: only one parameter
and systems and with the degree to is varied at a time. If there are un-
which final design decisions have been certain parameters, these are all likely
made. to vary, and not all in the same direc-
tion. This is where risk analysis is used.
Risk analysis
It is generally possible to identify a
Two approaches are used: range of values within which each esti-
mated parameter is expected to fall.
(i) sensitivity analysis; Stochastic techniques based upon
(ii) risk analysis. Monte Carlo simulation use these
Sensitivity analysis identifies the ranges to generate an overall distribu-
impact of a change in a single para- tion of the life cycle cost of the project.
meter value within the project. As its This distribution identifies the most
name suggests, this type of analysis is likely cost and the probability that cost

353
Property Management ■ Volume 8 Number 4
will lie within specified bounds. The
narrower the distribution, the less risky
is the project (and vice versa) — infor-
mation that can be fed into the more
qualitative part of the process of arriv-
ing at a final choice.
■ Life cycle cost programme
The implementation of life cycle cost-
ing, particularly in the context of the
building and construction industries,
requires the development of particular
management skills. It should take place
within an overall project management
framework in which there is effective
coordination and where the assignment
of responsibilities is clear. It is essential,
particularly in the early stages of an
organisation's use of life cycle costing,
that expertise is built up, perhaps by
assigning the analyses to a defined team
of future 'experts'.
It must be emphasised that life cycle
costing does not replace or reduce the
importance of project management.
Rather, it is part of the overall project
management function. Every project
authorised for implementation has, as
part of the associated project manage-
ment, a cost control function. Life cycle
costing forms part of this cost control
and facilitates the development of con-
sistency in cost estimation, control and
reporting.
With life cycle costing as an integral
part of project management and cost
control, specific life cycle cost analyses
can be commissioned during a project.
For example, the project manager may
wish to identify the impact of using a
different maintenance schedule, or
investigate how sensitive costs are to
variations in component reliability.
■ Tax and other issues
This section can be kept very short
since very little has been settled with
respect to tax planning within life cycle
costing or with respect to legal issues
such as professional liability.
354
Briefing — Norman
It is undoubtedly the case that tax
planning can be an important part of
life cycle costing. Different design
options will have different implications
for the tax liability incurred and these
should be built into the cost estimation
process. It is difficult to be more specific
than this, however, first because the tax
treatment of buildings is inherently
complex and, second, because it
changes from year to year and country
to country. The overriding principle to
be applied is that of consistency. If any
costs are entered into the calculations
net of tax, all costs must be treated net
of tax.
Similar comments apply to legal
issues raised by life cycle costing. There
is no legal requirement in the United
Kingdom or in the European Com-
munity generally that life cycle costing
be an integral part of the costing of a
project. In the United States, by
contrast, a number of states require a
life cycle costing as part of the tender
documentation for public projects.
Issues of professional liability and the
scale of professional fees that can be
charged for life cycle costing also
remain to be settled. They are likely to
be resolved only as life cycle costing
forms a more integral part of the cost
estimation and cost control processes
than is currently the case.
■ Conclusions
This Briefing has tried to give an over-
view of what life cycle costing is, and of
the steps necessary to effective life cycle
cost analysis. There is no doubt that
system design and operation will be
considerably enhanced by the applica-
tion of life cycle costing techniques at
the early design stage and throughout
the period of operation of the system.
Nevertheless, there remains a reluc-
tance on the part of clients and practi-
tioners in the United Kingdom to
implement life cycle costing. Part of this
reluctance undoubtedly arises from an
imperfect understanding of the tech-
Property Management ■ Volume 8 Number 4 Briefing — Norman

niques, a feeling that they are difficult References

to understand and u n d e r m i n e the deci- 1 Flanagan, R. and Norman, G. (1979). 'Life Cycle
sion-maker's ability to apply j u d g m e n t . Costing for Construction'. Royal Institution of
It is hoped that this Briefing and the Chartered Surveyors, London, England.
2 Flanagan, R., Norman, G., Meadows, J. and
additional references will go some way Robinson, G. (1989). 'Life Cycle Costing: theory
to removing these misconceptions. and practice'. Basil Blackwell Scientific Publish-
ing, Oxford.
3 Dell'isola, A.J. and Kirk, S.J. (1981). 'Life Cycle
Costing for Design Professionals'. McGraw-Hill,
New York.
4 Haviland, D. S. (1977). 'Life Cycle Cost Analysis:
Professor Norman is Tyler Professor of Economics a guide for architects'. American Institute of
and Head of Department of Economics at the Uni- Architects, New York.
versity of Leicester. He has published a number of5 Lumby, S. (1984). Investment Appraisal (2nd.
books and articles on life cycle costing and more edition), Van Nostrand Reinhold, United
generally on the operations of the building and con- Kingdom.
struction industries. This work has been commis- 6 Construction Management and Economics (1987).
sioned both by private organisations and by- Special Issue on Life Cycle Costing, vol. 5. E. &
F. N. Spon, London.
research councils and has been performed in colla-7 Brandon, P. S. (Ed.) (1987). 'Building Cost
boration with the Department of Construction Modelling and Computers'. E. & F. N. Spon,
Management at the University ofReading. London.

■ Glossary
Life cycle cost
T h e total cost of ownership of an item
taking into account all the costs of
acquisition, operation, maintenance,
modification and disposal, for the pur-
pose of making decisions (taken from
BS 3811).
Life cycle cost techniques
The techniques that are used in life
cycle costing exercises, such as discount-
ing future expenditures and revenues.
Life cycle cost plan
The use of life cycle costing at the
design stage of a project.
Life cycle cost analysis
The analysis of buildings or systems in
use.
Life cycle cost management
The management of buildings or sys-
tems in use.
Running costs (operations and main-
tenance costs, operating costs)
The total costs of the operation, main-
tenance and modification of buildings
or systems in use.
Disposal costs
The total cost o r benefit to the owner of
disposing of a system that is n o longer
required or has to be replaced.
Condition survey
The inspection of a facility/building/
system and the interpretation of data to
establish the condition of the item.

355
Property Management ■ Volume 8 Number 4
Discount rate
The investor's time value of money.
Used to discount future costs and
revenues to their present values.
Period of analysis (study period)
The period over which the investment
is analysed. The period will depend
upon the perspective of the investor.
356
Briefing — Norman
Risk analysis
The analysis of the reaction of life cycle
costs to variations in all of the para-
meters about which there is uncertainty.
Sensitivity analysis
A test of the sensitivity of an appraisal
to alternative values of one or more
parameters about which there is uncer-
tainty.