Introduction to LCC | Reliability Engineering | Life Cycle Assessment

ProM@in Technical Note Subject: Author: Date: Rev: Introduction to Life Cycle Cost analysis Per Hokstad and

Jørn Vatn, SINTEF 2001-09-30 1

1.1 Objectives of the note The main objectives of the Technical note are to: • Provide an LCC model to be used in the overall economic evaluation of railway equipment (the "product"), with focus on the possibility of making cost comparisons of different options.

This note is based on work performed under the REMAIN project sponsored by EU. 1.2 Definitions Definitions of a few basic concepts are given below. These are based on IEC 300-3-3Part 3, Section 3: Life cycle costing (IEC), and the NORSOK Standard: Common requirements Life Cycle Cost. Life Cycle (IEC): Time interval between product conception and its disposal Life Cycle Cost: The total cost to the user of the purchase and installation, and the use and the maintenance during the life cycle (IEC gives the shorter version: "Cumulative cost of a product over its life cycle".) Dependability (IEC): A collective term is used to describe the product’s availability performance and its influencing factors, i.e. reliability performance, maintainability performance and maintenance support performance. 1.3 List of abbreviations The following abbreviations are used in this report. CM CON CONSYS DEL HAZ IEC INV LCC General: Corrective Maintenance CONdition Monitoring System (turnout) with the inclusion of CON equipment/product Delay Cost (over life cycle) Hazard Cost (over life cycle) International Electrotechnical Committee Investment cost of the system or equipment/product (primary investment) Life Cycle Cost


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Maintenance and Operating Cost (over life cycle) NORSOK Standard, LCC Preventive Maintenance Reliability Centered Maintenance Reference system (turnout) without condition monitoring Technical Committee (within IEC) Investment: Annual Investment Cost (i.e. split on total life cycle) Equipment and Material Purchase Cost Engineering Cost Installation Cost Initial Spare Parts Cost Initial Training Cost Disposal and reinvestment Cost Maintenance/operation: Annual Administrative Cost Annual Maintenance and Operating Cost Annual CONdition based monitoring Cost Annual Corrective Maintenance Cost Annual Energy Consumption Cost The Man-Hour Rate for maintenance Annual calendar based PM Cost Delay: Annual Delay Cost Long term Delay Costs Number of Long term Delays per year Number of Short term Delays per year Short term Delay Costs Hazard: Annual Hazard Cost Hazardous/accidental Event Cost Number of Hazardous/Accidental Events per year Discounting: Base year. All costs are discounted back to this year The year for start of operation (≥ t0) Lifetime. The number of years from t0 until disposal of the product/equipment The number of years in operation (from t1 until year of disposal), = n - (t1-t0). Annual rate of return (interest rate minus rate of inflation)




t0 t1 n m k

Some further abbreviations are used "locally" in the LCC model, e.g. see the maintenance models, Sections 2.4.2-2.4.4.


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The objective of this chapter is to present and discuss a model for cost evaluation to be used in the overall economical evaluation of railway equipment. The chapter is divided into nine sections, which comprise the following: • Standards for LCC modelling. Section 2.1 presents and discusses the status with respect to international standards on LCC. The standards form the basis for the modelling of acquisition cost. LCC modelling aspects. Section 2.2 presents the suggested overall breakdown of the total LCC into various categories. Investment cost model. The suggested capital cost model is presented in Section 2.3. Maintenance and operating cost model. The operating /maintenance cost model is presented in Section 2.4.. Delay cost model. The suggested unavailability (i.e. delay) cost model is presented in Section 2.5. Hazard cost model. The cost inferred by accidental events (rebuilding, clean-up, personal injuries, environmental threats) is presented in Section 2.6. The simple formula for discounting, used in the present report, is summarised in Section 2.7. Main features and limitation of the REMAIN LCC model is presented in Section 2.8. The practical use of LCC models in the acquisition of new equipment for railway companies is shortly discussed in Section 2.9, essentially based on reported experience with the acquisition of the high speed train X2000 to the Swedish State Railway.

• • • • • • • •

2.1 Standards for LCC Modelling As a basis for the modelling of acquisition cost, the status with respect to international standards on LCC has been checked out. Within IEC (the International Electrotechnical Commission), there is a technical committee working with this topic. The technical committee is no. 561 (TC56) with the title Dependability. An international standard was

It should be noted that although the TC56 is within IEC, the International Electrotechnical Commission, it is recognised also by other standardisation bodies to cover a much wider area than the electrotechnical within the area of dependability.


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etc. 1995).2 LCC Modelling Aspects This Section presents an overview of the LCC model. As stated in IEC (1995). ref. There are no conflicts between the suggested LCC breakdown structure given in the IEC documents and in the NORSOK standard. Section 3: Life cycle costing (see the reference. These elements should be such that they could be individually assessed. SINTEF has earlier developed models for life cycle cost. The standard is based on P-CR-002 “Common Requirements . fuel/energy. 2. overhead.issued in 1996. Part 3: Application guide. IEC 1996). In IEC (1996) an approach is given which breaks down the total cost along three axes: • • • Cost category (“who”): The cost category of applicable resources such as labour. adapted to railway applications. 2. For the present purpose. which provides a general structure applicable for all products. In the newer versions of the IEC documents. IEC 1987.2. The scope of O-CR-002 is to “standardise LCC calculation methods necessary to establish the facility design that gives the maximum return on investment”. the identification of the elements and their individual scopes will need to be determined for the specific exercise. IEC. which give more detailed information regarding the LCC modelling for production facilities. The NORSOK breakdown structure is however preferred as the basis for the present application. Product/work breakdown structure (“what”): Breakdown of the product to lower indenture levels. 1994). The referred SINTEF-work based the LCC-modelling on the breakdown of the LCC given in the 1987 document. and the scope of the standard is to provide guidance on the general application of the LCC concept. 1987). the focus in this report will be on the requirements in O-CR-002.1Principles of LCC breakdown In order to obtain the total life cycle cost. transportation/travel. An earlier version of the standard is the referenced. materials. this suggested breakdown structure has been taken out. which present general aspects with respect to the calculation of LCC. The modelling was then based on an even earlier version (“committee draft”) of the IEC standard (ref. we suggest to essentially apply the first two of these axes. entitled IEC-300-3-3: Dependability Management. The product/work breakdown is in the following denoted physical 3UR0#LQ Introduction to LCC p4 of 31 .e. it is necessary to break the total cost down into a series of cost elements that together make up the total (i. The NORSOK standardisation work group have issued a draft standard with the title “Life Cycle Cost for Production Facility”. a cost work package). Lydersen and Aarø (1989). reference number O-CR-002 (NORSOK.Life Cycle Cost” (NORSOK. The costs are first split into cost categories. Life cycle phase (“when”): The time in the life cycle when the work/activity is to be performed. The suggested model for breakdown in cost elements in the NORSOK standard will be used as the basis for the economic evaluations in this report. Hence.

2Breakdown into Cost Categories The classification into cost categories (see Figure 2.2. investment costs (prior to start of operation) and 2.2 and 2.5 concludes with a discussion on how the objective of the cost evaluation affects the LCC model to be applied. maintenance/operating and "risk" costs occurring regularly during operation (all costs being discounted to a chosen "base year".1) will also (indirectly) be accounted for as the cost categories will distinguish between 1. According to NORSOK (1995) the total LCC can be divided into three major areas.2. Figure 2. In Sections 2. the categorisation of the first two breakdown axes are discussed.2. Section 2.2.4).breakdown of the equipment.3 below. Section 2.2) is based on the breakdown structure of the total LCC suggested in NORSOK.2. capital cost. Note that disposal (removal and recycle) cost and reinvestment cost will not be included in the present model. The third axis: life cycle phases (Figure 2. see Section 2. operating cost and 3UR0#LQ Introduction to LCC p5 of 31 .1 Use of LCC in various project phases (from IEC).2. assuming that these will not distinguish significantly between various options (and since also data could be difficult to obtain for these costs).4 presents formulas for the discounting of costs. 2. and must of course be carried out individually for each type of equipment.

In the notation of the present report the cost of ownership equals MAIN + DEL + HAZ. LCC Categories LCC Life Cycle Cost INV Investment Cost Equipment and Material Purchase Cost Engineering Cost Installation Cost Initial Spares Cost Initial Training Cost Disposal and Reinvestment Cost MAIN Maintenance and Operating Cost Corrective Maintenance Cost Calendar based PM Cost Condition based PM Cost Operating Cost Energy Consumption Cost DEL Delay Cost Short Term Delay Cost Long Term Delay Cost HAZ Hazard Cost Human Safety Cost Environmental Threat Cost Cleaning Cost Rebuilding Cost Figure 2. we here refer to this as the maintenance. to separate all costs prior to start of operation. based on the cost breakdown of Figure 2. and an alternative could be to split LCC into the three main categories: 1) investment. 2) maintenance/operation and 3) risk.2) LCC = INV + MAIN + DEL + HAZ Observe that the sum of the delay cost and the hazard cost could be referred to as the risk cost. Here we use the term Investment cost rather than capital cost.3-2. (cf. the cost of deferred production could more generally be referred to as (production) unavailability cost.2. As operating cost is mainly maintenance cost. Hence the total LCC equals LCC = CostInvestment + CostMaintenance + CostDelay + CostHazard or. which in the present railway application essentially equals the delay cost. Finally. Further. will be presented in Sections 2. Actually. IEC also split into just two main categories: 1) acquisition cost (or investment cost) and 2) cost of ownership (or life support cost). 3UR0#LQ Introduction to LCC p6 of 31 .6. see Figure 2. The LCC model.2 LCC breakdown into cost categories. Figure 2.2. we include Hazard cost (costs related to accidents).deferred production.

As an alternative to physical breakdown.. also a physical breakdown of the product (equipment/system) under analysis is required. The level of appropriate physical breakdown could be a matter of concern.. the overall LCC breakdown will be as indicated in Table 2. a different degree of breakdown level could be used for the various cost categories.2.2.1. Note that special support and test equipment should be included as a specific subsystem.. Given an appropriate physical breakdown of the product ("system") into subsystems A. Example of physical breakdown of equipment (i.1. C. see Figure 2. However. but the physical breakdown structure is regarded more appropriate for the present application.3.2. Note that the overall level of detail must be sufficient to cover all four cost categories of Figure 2. B.2. "product") Table 2. Physical breakdown SYSTEM Subsystem A A1 A2 Subsystem B B1 B2 B3 Subsystem C C1 Figure 2. LCC breakdown according to cost category and physical breakdown (with illustrative numbers) Cost Physical breakdown Sum Category Subsystem A Subsystem B Subsystem C INV 10 000 2 000 500 12 500 MAIN 5 000 1 100 400 6 500 DEL 1 000 400 100 1 500 HAZ 500 500 21 000 Sum 16 500 3 500 1 000 3UR0#LQ Introduction to LCC p7 of 31 .2. .e.3Physical Breakdown Structure As discussed in Section 2. the work breakdown structure could have been used.3.

e.2. This will imply that no discounting is required for the investment cost. All costs are discounted back to this year t1 = The year for start of operation (>t0) m = The number of years in operation. (which simply equals the cost of "year 0". All payments are made (say) in the middle of the year in question. discounting all costs to the year prior to the start of production (i. In this simplified approach. giving the following total discounted cost over the life cycle ∑ 6 ⋅( 1+ N ) W =0 W Q −W In a simplified analysis we could ignore disposal and reinvestment cost. Discounting formula Let St = Net cost during year no. is defined (IEC) as the interval between product conception and its disposal. Then the discounted cost of year t (=net present value) equals St / (1+k)t. n =Lifetime. This equals the number of years from t0 until disposal of the product/equipment ( = t1-t0+m) In a simplified analysis. HAZ) are assumed to have constant contributions throughout the lifetime.4The Life Cycle and cost discounting The Life Cycle of the product. Thus. for year 1. t after t0. Some time instants must be defined: t0 = Base year. All other costs (i. This shall here be given as the difference between the interest rate and the inflation rate (this interpretation represents a slight approximation). up to and including year m. i. 3UR0#LQ Introduction to LCC p8 of 31 . The LCC is the predicted total cost over this period. St . using base-year prices. S0 ). t0 = t1-1. made t years after t0 shall be discounted back to the base year to take into account the time value of money. we also let the base year. Here t = 0 corresponds to the base year itself. Any cost. we let t0 = t1-1.e. and thus all investments are made in year 0. DEL. INV.2. k = The annual rate of return to be used for the assessments. MAIN.e. which is the year prior to start of operation. For these contributions we multiply the annual costs with a discount factor f to get the total cost over the lifetime. suggested in the present report. Note that all costs are measured in real terms. operation of the line). In that case we consider an idealised model where all investment costs are restricted to occur in the years from t0 to t1-1 prior to operation.

Consequently. we do not put efforts into finding the ultimate answer with respect to the total cost of the equipment. training. On a more detailed level to evaluate the cost efficiency of inclusion of (part) of the condition monitoring equipment for turnouts. the Investment cost (INV) is here broken down into the following cost elements: • • • • Equipment and materials Purchase Cost. As indicated in Figure 2. it is sufficient to determine quite rough estimates of the total cost.3 Investment Cost Model The investment cost includes of course the acquisition of the technical system (including investment in the required maintenance equipment) but also documentation. applicable for visualising the order of magnitude of the relative cost (differences).(1+k) )] / k.2. 2.1.I = ∑( 1 + N ) -m P −W and we get f = [1 . From the above it is seen that the cost model to apply here should be refined with respect to visualising cost differences. (ISC) 3UR0#LQ Introduction to LCC p9 of 31 . So if the annual cost is denoted S. Parts of this analysis go beyond what is considered a typical LCC analysis. Another important factor to take into account when the cost model is established is the objective of the cost evaluation to be performed. Rather. (ENC) INstallation Cost. engineering/installation. Here more detailed results.g. the total discounted cost for the m years of operation is S ⋅ f . (EPC) ENgineering Cost. that is 6 1 − (1 + N ) − P N W =1 Observe that this equals S⋅ m when k = 0. (INC) Initial Spares Cost.5How the Task Objective Influences the Model Selection. In the present application there are ideally two objectives of the cost evaluations to be performed: • To provide an evaluation of the differences in cost performance between two options (here exemplified by considering turnouts with/without condition monitoring equipment). spare parts and any other project-related cost (e. travelling). These are based on rather rough cost estimates as being available in an early phase of the development (corresponding to a typical application of LCC in the acquisition phase). as obtained from the RCM analysis (see Vatn 1998) are utilised. • The presentation of the LCC method given below is based on the first of these two objectives (the second purpose will be handled separately in Chapter 4). 2.

adding up to give the total investment cost of the product.4. (ITC) DIsposal and reinvestment Cost.) 2.• • Initial Training Cost. INV = EPC + ENC + INC + ISC + ITC + DIC Note that for each category any administrative costs shall be included. spare parts consumption cost and the logistic support cost.4. (DIC) Thus. when appropriate. AMC. the costs related to the above five categories are obtained for each subsystem. Figure 2. To summarise. PMC and CONC) are further split into • • • Man-hour cost Spare parts consumption cost Logistic support cost All administrative costs and training costs related to the various maintenance activities are included in the fourth category. The above five cost categories are discussed below (Sections 2. (ECC) These costs adds up to AMC = Annual Maintenance and operation cost: AMC = CMC + PMC + CONC + ADC + ECC The annual cost.2Corrective maintenance cost The annual corrective maintenance costs are the sum of man-hour cost (for performing the corrective jobs).2-2.4 to give the total maintenance and operating cost over the life cycle (MAIN). The various Maintenance Costs (CMC. the total investment costs equal INV = EPC + ENC + INC + ISC + ITC + DIC 2. Using the physical breakdown of the system.2. (CMC) Calendar based PM Cost.4 Maintenance and Operating Cost Model 2.4. Let 3UR0#LQ Introduction to LCC p10 of 31 . The cost elements to be included in the annual maintenance and operation/administrative cost (after start of operation) are.1General.2: • • • • • Corrective Maintenance Cost. (All man-hours not included in the three first categories are included in ADC. in addition to the capital costs. (ADC) Energy Consumption Cost. ADC. should be discounted as shown in Section 2. cf. (CONC) ADministrative Cost.4. (PMC) CONdition based PM Cost.6).

Note that this rate includes all man-hour costs for operator.NCM = Number of failures per year requiring Corrective Maintenance (Total failure rate) MHCM = The number of Man-Hours required for repair (CM). wages. including travel. SPCM = Spare Parts cost per repair (Corrective Maintenance) LSCM = Logistic Support cost for Corrective Maintenance per year The annual corrective maintenance cost are then calculated from the formula Corrective Maintenance Cost = CMC = NCM x (MHCMxMHR + SPCM) + LSCM 2. The above formula demonstrates how the cost of PM increases when the number of PM actions increases. where • MTTR = Mean Time To Repair (in hours) • NC = The Number of men required to do the Corrective job (including "safety crew") MHR = The Man-Hour Rate for maintenance. fault finding.g.3Calendar based preventive maintenance cost The annual calendar based PM costs are the sum of man-hour cost. 3UR0#LQ Introduction to LCC p11 of 31 . total time.4. life/health insurance. This is given as MHC = MTTR ⋅ NC. the cost related to each type of job/interval must be found individually and summed to get the total cost. testing etc. facilities. spare parts consumption cost and the logistic support cost. taxes. Let NPM = Number of calendar based PM actions per year MHPM = Number of Man-Hours per calendar based PM action MHR = The Man-Hour Rate for maintenance SPPM = Spare Parts cost for calendar based PM per year LSPM = Logistic Support cost for PM per year The average annual man-hours costs for calendar based PM equals Calendar based PM Cost = PMC = NPM x (MHPM x MHR + SPPM) + LSPM If there are various calendar based PM actions (servicing) being performed at different intervals. e.

Now the average annual man-hours costs for condition based PM equals CONdition monitoring Cost = CONC = MHCON ⋅ MHR + SPCON + LSCON 2. when relevant.4. for maintenance are included.4.5Administration cost The annual cost of administration.g. operation and training Cost per year = Number of man-hours for administration/operation/training per year x Man-hour rate for administration/operation/training This cost includes all man-hours costs not included in the various maintenance activities (Sections 2. operation and training is denoted ADC = ADministration.4. essentially delay costs. may also infer costs related to the operation of the trains.6Energy consumption cost The annual cost ECC = Energy Consumption Cost per year shall include the cost of fuel required and e. Note that it is here assumed that PM will not cause delay.2-2.4. 2.2. unavailability costs are here grouped into the following two categories: 3UR0#LQ Introduction to LCC p12 of 31 . associated CO2 tax. spare parts consumption cost and the logistic support cost.4.g.4. 2. Let MHCON = Number of Man-hours for CONndition based PM per year MHR = The Man-Hour Rate for maintenance SPCON = Spare Parts cost for CONdition based PM cost per year LSCON = Logistic Support cost for CONdition based PM per year Note that included in the above costs are the costs of operating and maintaining any condition monitoring equipment (as R2000). Thus. 2.5 Delay Cost Model Unavailability of the equipment due to failures requiring unplanned corrective maintenance.4Condition based preventive maintenance cost The annual condition based PM cost is the sum of man-hour cost. all administration/training costs required e.7Disposal cost Observe that the Disposal and Reinvestment cost (DIC) is not included in the present model. Thus.4).

This cost is mainly that of losing reputation (and thereby future passengers). fatalities) cost of hazards to environment cost of possible rebuilding (after accidental event) cost of clean-up (after accidental events) In addition to actual accidents (collision/derailing). i. requiring certain measures to be taken by the railway company in order to be able to get through the traffic. These costs are e. Long Term Delay Cost. i. and the cost of alternative means of transportation for passengers already on the delayed train. up to 30 minutes) while corrective actions are carried out. together with the expected long term delay costs related to each event (other costs are to be included in the hazard cost.2. Now introducing NSD = Number of Short term Delays per year caused by failure of "product" in question SDC = Short term Delay Cost (cost per delay) NLD = Number of Long term Delays per year caused by failure of "product" in question LDC = Long term Delay Cost (cost per delay) Then it follows that ADC = Annual Delay Cost is given as ADC = NSD x SDC + NLD x LDC This annual delay cost is discounted as shown in Section 2. lost income due the cancellation of trains. • The first cost category could be quantified by predicting the number of trains per year that are delayed more than (say) 5 minutes by a failure requiring corrective maintenance. see Section 2.6 Hazard Cost Model Failure/unavailability of equipment may also cause hazardous events (possibly giving incidents/accidents).g. financial compensation to passengers.g. we here also include hazardous events like landslide. related to safety.4. are often not included in the LCC.g. to give the total delay cost (DEL) over the lifetime. cost due to any unavailability of rather long duration.6). These costs. personal injuries. but could also include economic compensation to passengers if the railway company provides a guarantee on the maximum length of a delay.• Short Term Delay Cost. The second category could be caused by accidents/incidents due to failure of the equipment in question. The frequency of such events per year must be estimated.e.e. 2. costs of delays of relatively short duration (e. 3UR0#LQ Introduction to LCC p13 of 31 . giving the hazard cost: • • • • cost of hazards to humans (e.

t1. t1=t0+1. the annual costs of maintenance/operation (AMC). Of course it is possible to calculate LCC without including cost of risk.(1+k). Using this approach it will not be required to specify the cost per (statistically occurring) fatality. the frequency of accidents). But in that case some loss of safety measure should be calculated in addition (e.g.2) LCC = INV + MAIN + DEL + HAZ As pointed out in Section 2.partly because it involves putting a price on human lives. However.4 costs must be discounted back to the base year.2. are the same for all m years of the operation for the product. Further. 2. Introducing NHE = Number of Hazardous/accidental Events per year caused by failures of the "product" in question HEC = Cost of one Hazardous/accidental Event.(1+k). Section 2. and then multiplied with the estimated cost per event (without specifying in detail the various contributions to this cost). so that the overall decision could be based on two measures: LCC and accident frequency. the year prior to start of operation. This annual hazard cost is discounted as shown in Section 2. Figure 2.m ] / k 3UR0#LQ Introduction to LCC p14 of 31 . So in this case the total LCC equals (cf.m ] / k to give total costs.2. Finally. delay (ADC) and hazards (AHC).7 Simplified case for discounting of cost contributions Using the present breakdown into cost categories. In the somewhat simplified LCC calculation suggested in the present report. being somewhat controversial. Here it is suggested to include cost of risk in the LCC model in a rather rough way. i.2. The period of operation is exactly m years (from 1st of January in year 1 until 31st of December in year m). Then Annual Hazard Cost is given as AHC = NHE x HEC. the overall LCC is found from (cf.4) LCC = INV + [ AMC + ADC + AHC ] x [ 1 . respectively. and these costs are then multiplied with the discounting factor f = [ 1 . The number of hazardous/accidental events per year (or per 1000 years) is estimated. we let the total investment costs (INV) be given directly in terms of a cost invoiced in "year 0" (t0). we let the year for start of operation. t0.4. to give the total hazard cost (HAZ). it is important in some way to make visible also these costs for loss of safety.e.

(1+k)-m ] + [ AMC + ADC + AHC ] of the two concepts are compared. and in that case.8 Main features of the REMAIN model In this Section we point out some of the features and limitations of the REMAIN model for LCC analysis • • The REMAIN model restricts to infrastructure equipment (i.e. the annual costs. when k=0) we get that annual investment costs equals AIC = d(k. m) x INV And annual LCC is written as LCCANNUAL = d(k. By introducing the discounting factor d(k.the yearly costs (maintenance. and is not aiming at obtaining very accurate total cost estimates. . Observe that AMC + ADC + AHZ equals the annual cost of ownership (life support cost).the discount factor is constant through the lifetime .This is the simple discounting formula used in the calculations of the REMAIN LCC model.(1+k)-m )] (= 1/m. In that case the annuities should be compared (total cost split over the m years of operation). The comparison of two concepts is more problematic if the concepts have different lifetimes (i.disposal cost of equipment by end of its life cycle is not included • 3UR0#LQ Introduction to LCC p15 of 31 . The main objective is rather to provide reasonable estimates of cost difference (for use as decision support). .(1+k)-m )].e. We remind that disposal and reinvestment costs are not incorporated in the above formulas. m) = k / [1 .g. possible modifications required for use on rolling stock has not been investigated). .. applying a questionnaire that allows data to be provided at various levels of detail (i.e. different values of m). The REMAIN model is rather simple. as e. LCCANNUAL = INV x k / [1 . Thus. the LCC is multiplied with k / [1 . The REMAIN approach suggests a flexible method for data collection. m) x INV + ( AMC + ADC + AHC ) = AIC + AMC + ADC +AHC 2. adapting data collection to the resources available and to requested accuracy of the results).it focuses on comparison between two options. operation etc) are fixed.

at least in a rough way. if that is preferred. which is reported to be a success. These papers provide the information presented in the present Section. Establishment of the LCC model Determination of the operational profile Request for proposals Evaluation and amplification of the proposals Negotiations with tenderers Contract with LCC guarantee Delivery Verification A few of these points are commented below. However. when the resources (and data) to carry out such a detailed analysis is not available. The following factors must be included in the request for proposals. 8. such a more simple (and less costly) approach would be advantageous in order to provide a first prediction of costs. However. 1994. due to the large amount of (detailed) information required. 3. 5. it is sensible.9. 7. 2.9 Use of LCC in the acquisition of new railway equipment There is still not a widespread use of LCC in the acquisition of railway equipment. the REMAIN approach focuses on annual LCC. the discussion in Chapter 3). Of course safety might be judged separately. and also for establishing a reference for the reliability and LCC evaluations of the tenders. similar system. Obviously. 3UR0#LQ Introduction to LCC p16 of 31 .g. 2. it might also lead to reduced lifetime (e. e. see Burström et al. and Akselsson and Burström.g. for both parties (customer and supplier).1General approach for acquisition The following steps are recommended in the acquisition process: 1. by a turnout being destroyed in a derailment). also when the number of years in operation (m) differs for the two options. for a fair comparison of two options it is judged essential also to have safety in mind. In order to make such a comparison meaningful. In particular. Not only can a somewhat lower safety lead to hazard costs as indicated in the REMAIN model. The use of the REMAIN method is then an option. see Burström et al 1994. 4. as these effects might easily be underestimated. the Swedish State Railway used the LCC approach in the acquisition of their high speed train X2000. However. 2. also to visualise the economical effects of possible differences in safety. the user is free not to include the hazard cost in the LCC analysis. When establishing the LCC model it is recommended to carry out a pre-study on an existing. 6. The REMAIN approach allows comparison of LCC for two different concepts. training of the LCC team.It is realised that the inclusion of Hazard costs in the REMAIN model is somewhat untraditional. to decide whether a more detailed analysis is required or worthwhile (cf. The use of LCC analysis is often seen as a burden. 1994. both for validation of the model.

e. • The LCC calculation model must be provided with the request for proposal. necessary of maintaining the offered equipment. However.g. The number of faults causing an unplanned workshop visit directly after arrival at the end station should not exceed 750. the definition of this being a stop on the line for more than 15 min without possible restart.2Contractual requirements and verification The contract will among other things contain rules for project realisation. maintenance costs. and average or maximum repair time. maximum no. How this will be done should be outlined already in the request for proposals.g. resulting in a prediction on the balance between PM and CM. In the X2000 project the contract included guarantees concerning both reliability performance and LCC: 1. The LCC value as calculated according to the agreed LCC model should not be exceeded by more than 10 per cent. In the X2000 project the contract stated that the contractor had an undertaking to conduct verification of reliability. Reliability and maintainability performance guarantees are also desirable. An availability performance programme shall be carried out. It should be guaranteed that a specific LCC value must not be exceeded. of failures requiring CM. and a procedure agreed on in the contract. If the tenderer identifies missing resources or equipment. • Operational profile of the equipment. A specific maintenance analysis was also carried out. • The present maintenance organisation should be described. The number of stopping failures should not exceed 12 per million km. (Contractual status had indicated about 450. Inform that missing data or the failure of the tenderer to guarantee properties of the product implied by the supplied data may be a reason for rejection of the tender.g. must be carefully specified. involving continuous analyses of alternative technical solutions during the engineering phase. also using previous experience with similar equipment to estimate e. • Supplier responsibility for availability performance. this should be stated in the tender. (Contractual status had indicated about 11 stopping failures pr million km. This means that during the engineering phase continuous analyses concerning reliability and maintainability performance should be carried out. 3UR0#LQ Introduction to LCC p17 of 31 . • Expected guarantees from the suppliers should be stated.9. and their impact on LCC assessed. giving all customer parameters. e. thus to be included in a tender.• Principles of the LCC evaluation. The contract also included a contractor commitment to carry out an availability performance programme. • Data necessary for the evaluation. 2. a guarantee is not much worth unless its fulfilment can and will be verified. The customer (railway company) performs the LCC calculations according to the stated model. maintainability and LCC. for example the change procedure. and guarantees.) 2.) 3.

since all events resulting in any maintenance action. For the purpose of reliability performance verification. It was demonstrated that the LCC technique is an efficient tool to achieve low total cost and high reliability.As in this case where strict reliability and LCC requirements are stated in the contract. from contract to verification. either theoretically or in practice.3Benefits of using LCC The referred LCC application (X2000) is reported to be a success. By continuous and systematic analyses throughout the whole process. but the customer should at least reserve the right to demand verification of any data provided by the supplier. and that has also been the means to control the LCC. all (failure) events are carefully reported and logged. The supplier is of course responsible only for failures resulting from the vehicle itself. In the X2000 project there was a verification period of six months. The LCC method has also advantages for the supplier. The benefits for the customer are obvious. Verification of PM actions could be rather expensive to perform. Each report was classified regarding relevance to the verification and regarding consequence. are considered. LCC. The supplier also gets a tool for evaluation of different technical solutions since availability 3UR0#LQ Introduction to LCC p18 of 31 . no matter how simple and unimportant they might be for the actual service. for both parties (customer and supplier). A much better defined product is achieved already at the time of contract signing. 2. and customer and supplier together decide whether or not any event is a relevant irregularity. All reports were considered relevant unless any of the following cases were fulfilled: • • • • The failure was caused by incorrect handling The failure was secondary failure. caused by another reported failure The failure was caused by equipment not within the delivery The failure was due to usage of the train beyond its specification. There was no doubt that lower failure rates and shorter repair times were achieved than would otherwise have been the case. "Failure" in this text is given a very wide meaning. the result was a very reliable product. and in this period every event involving a maintenance action was registered. Energy consumption also ought to be verified. enabling the most favourable solution regarding LCC to be chosen. An insight into the customer’s intended use of the product and the value placed on different costs is obtained. If a low LCC is predicted and subsequently verified the customer will benefit from low support costs for the entire life of the system. and the supplier will be committed to do a good job with emphasis on availability performance. Maintainability performance (repair times) may be verified through repairs of a number of randomly chosen failure modes. All relevant costs of different technical alternatives are calculated. reliability and maintainability verification implies that the equipment is very carefully followed up during a reasonable period of normal operation. there is a prerequisite for a successful project that LCC and reliability considerations are integrated into the normal design process.9.

Finally. if evidence of a thoroughly evaluated product can be obtained.performance can be valued in economic terms. 3UR0#LQ Introduction to LCC p19 of 31 . this can be used in marketing.

We conclude that (for case A) The cost effectiveness of R2000 essentially is determined by k m ∆INV ∆AMC Here ∆INV= increased investment costs by introducing R2000. and also reduce the delay and hazard costs. assumption 2 will hardly affect the conclusion (unless the estimates are very wrong). In the present chapter we restrict to discuss the conclusion of case A (Section 3. cf. and -∆AMC= reduction in annual maintenance cost. as the estimates of ADC and AHC were so small for case A. COST EFFECTIVENESS OF THE CONDITION MONITORING CONCEPT In order to conclude on the cost effectiveness of introducing condition monitoring equipment (here R2000).(1+k)-m] d(k. m) = k / [1 . Both assumptions of this approximation are considered conservative in the sense that R2000 might possibly extend the lifetime (increase m) of the turnout. we might perform some sensitivity analyses. Vatn (1998). Approximation: Assume that 1.3. assumptions 1 and 2 infer that the difference in the annual LCC of REFSYS and CONSYS equals ∆LCCANNUAL = d(k. where also an overall optimisation of the maintenance strategy is considered. Further. ∆ADC = ∆AHC ≈ 0 (here and in the following we use the notation that -∆ADC = reduction in annual delay costs by introducing R2000. and ∆AHC is defined similarly). m) = 1/m. The question of whether some but not all sensors are cost effective requires more detailed analyses. m) x ∆INV + ∆AMC where as before d(k.2) on the cost effectiveness of introducing R2000. Further. the main question is: “How sensitive is this conclusion to variation in the input data?” Here we restrict to carry out this discussion by considering the following approximation. As input data are always uncertain. m is not changed by introducing R2000 2. we conclude that R2000 results in cost reduction (∆LCCANNUAL< 0) when 3UR0#LQ Introduction to LCC p20 of 31 . when k = 0 Thus. we can actually conclude that this is the case. So if R2000 is found cost effective even under these assumptions.

106 0.045 0.087.077 0.061 0.0614 x 19 200 = 1 180 once more demonstrating the cost effectiveness of introducing R2000.063 8% 0. it is observed that: • Lower limit of m and upper limit of k provides upper limit of d(k.082 10% 0.025 0.0614 ∆INV = 19 200 giving -∆AMC = 2 300 > 0. m) k M 20 years 30 years 40 years 50 years 0% 0.073 0. when the reduction in AMC is larger than the increase in discounted investment cost) Example: For case A. we have the following values (see Section 3.032 4. Detailed discussion of -∆AMC is required to conclude on the cost effectiveness on introducing CON Regarding item 1.067 0. we claim that: 1. m) This is illustrated in Table 4.033 0.054 0.1 Values of d(k. m and ∆INV : Gives (upper limit) for the Right Side of the inequality above 2.-∆AMC > d(k.087 0. then it follows that d(k. Table 4.037 0.1.2) ∆AMC = -2 300 d(k. m) x ∆INV (that is. For instance it is seen that if k ≤ 6% and m ≥ 20 years. m) ≤ 0.061 0. Good estimates are usually available for k.051 6% 0. m) = 0.5% 0.102 0.101 3UR0#LQ Introduction to LCC p21 of 31 .020 2% 0.102 0.089 0.117 0. In general.050 0.084 0.

Thus. m) ≤ 0.g. the outlined approach for cost comparison is of course quite general.Example on how to arrive at a firm conclusion with respect to cost effectiveness: 1. m and upper limit of ∆INV. e. is required to conclude with respect to the cost effectiveness of R2000 Here we have used the possible acquisition of R2000 for a turnout as an example. 2. 3UR0#LQ Introduction to LCC p22 of 31 .: • k ≤ 6% and m ≥ 20 years: It follows that d(k. often it is the case that: Essentially a discussion on reduction in annual maintenance cost. It follows that R2000 is cost effective if -∆AMC > 0. Provide estimates (limits) of k. -∆AMC.087 x 20 000 = 1 740 Generally it should not be too hard to obtain good estimates for the right side of the above inequality. However.087 • ∆INV ≤ 20 000 giving an upper limit of the right side of the inequality above.

1990 Norwegian Petroleum Directorate. “Common Requirements . September 1995. 1. 1990. Draft 1. Akselsson and B. Strategic Maintenance Planning in Railway Systems (RESMAP). “Life Cycle Cost Prediction Handbook.59. Lydersen and R. Burström et al. IEC. pp 166 . ISBN 82-14-00451-9. 1996 International Standard. “Regulations concerning implementation and use of risk analyses in the petroleum activities”. Vol. Vatn. NORSOK. 1994. Instn. 3UR0#LQ Introduction to LCC p23 of 31 . 1994. 1989 S. REFERENCES IEC. “Draft . G. IEC. Akselsson and Burström. NORSOK. Computer-Based Process Safety Systems”. 1994 H. 1987 Draft IEC/TC 56.Life Cycle Cost”. Ericsson and U. IEC 300-3-3. Burström. Proc. “Dependability management . N7034 Trondheim. Aarø. 208. pp 51 . Burström. Life cycle cost procurement of Swedish State Railways’ high-speed train X2000. Norway. 1994 B.Part 3: Application Guide . SINTEF Report STF75 A89024. Technical Report STF38 A98425. 1995 NORSOK O-CR-002. Kjellson. IEC. First edition 1996. NPD. 1998. SINTEF. SINTEF Industrial management. Engrs. Proceedings Annual Reliability and Maintainability Symposium. 1994 NORSOK P-CR-002. December 1994.4. Mete. Rev. Verification of Life-Cycle Cost and Reliability for the Swedish High Speed Train X2000.Concepts. 1987. 1998 J. 1989. procedures and applications”.Section 3: Life Cycle Costing”.Life Cycle Costing .171. “Life Cycle Cost for Production Facility”. Vatn.

Questionnaire for LCC input data The following pages present the questionnaire particularly developed in REMAIN for obtaining input data to the LCC analysis.5. APPENDIX. 3UR0#LQ Introduction to LCC p24 of 31 .

2 NSW The number of turnouts being the basis for the assessments Man-hour rate.1 The average life length of a turnout (from installation to disposal) Number of turnouts. 1.1.4 The interest rate used for economic planning in the company. 1. 1..) k "Interest rate". insurance. The real (nominal) interest rate should be compensated for the effect of inflation: Provide the interest rate minus the rate of inflation! Value Comments 3UR0#LQ Introduction to LCC p25 of 31 . General Data Entry Parameter No. 1. . Symbol Description m Number of years in operation..3 MHR The total cost associated with an employee (wages. canteen.. taxes.

(Primary) Investment Data Entry Parameter No.6 INV Total cost.5 ITC Total cost required for initial training of personnel for operation of one turnout Investment Cost. 2. prior to start of operation for one turnout Value Comments 3UR0#LQ Introduction to LCC p26 of 31 . Symbol Description Equipment and Material Purchase 2. 2. 2.4 ISPC Total cost for initial spare parts of one turnout Initial Training Cost. 2.2 ENC Total engineering cost for one turnout Installation Cost.1 EPC Cost.2.3 INC Total installation cost for one turnout Initial Spare Parts Cost. 2. Cost for one turnout Engineering Cost.

3. 1) Second term only is included in the LCC analysis of turnouts Comments 3UR0#LQ Introduction to LCC p27 of 31 . including preparedness.2 PMC Maintenance (PM) Cost. Administrative Cost.6 AMC Cost. Calendar based Preventive 3.1-3. Annual Maintenance and Operating 3.g. Total annual cost for condition based PM of one turnout. Symbo Description l Corrective Maintenance Cost. Maintenance and Operating Cost Data (yearly costs) Entry Parameter Value No.3 CONC Condition based PM Cost.3. Total operation and maintenance cost per year for one turnout. Total annual cost for calendar based PM of one turnout.5 ECC Total annual energy cost for one turnout. 3. training.3. e. 3.1 CMC Total annual cost for corrective maintenance of one turnout. Energy Consumption Cost.4 ADC All annual costs of one turnout in addition to those of 3. 3.

1. 3.1. Total number of man-hours.3 SPCM Total average cost of spare parts during the repair of one failure Logistic Support Cost for CM.1 Corrective Maintenance (CM) Data (detailing the data given in 3.1) Entry Parameter Value Comments No.3) 3UR0#LQ Introduction to LCC p28 of 31 . testing after repair. fault finding. 3.2 .1.2 MHCM Number of man-hours required for each failure repair. 3.4 LSCM Total annual cost for logistic support for corrective maintenance of one turnout (i.1 NCM requiring Corrective Maintenance (CM). Symbol Description Number of failures per year 3. for one failure (=Mean Time To Repair multiplied with the number of men required to do the job) Spare Parts Cost per repair. CM cost in addition to those following from 3. including travel.3.. etc. Total number of failures per year for one turnout.e.

Symbol Description Number of calendar based PM actions per year. Spare Parts Cost per calendar based 3.2.e.2 . travel. 3.2 MHPM Number of man-hours required for each calendar based PM action.4 LSPM Total annual cost for logistic support for calendar based PM of one turnout (i.3) 3UR0#LQ Introduction to LCC p29 of 31 .g. Total average cost of spare parts during the PM of one turnout.2. Logistic Support Cost. Total number of calendar based PM actions per year for one turnout. 3.3 SPPM PM action.2) Entry Parameter Value Comments No. Total number of man-hours for PM of one turnout. Calendar based Preventive Maintenance (PM) Data (detailing the data given in 3. calendar based PM cost in addition to those following from 3.2.3. including e.

Logistic Support Cost.3) 3UR0#LQ Introduction to LCC p30 of 31 .3 Condition based Preventive Maintenance Data (detailing the data given in 3. including e.3) Entry Parameter Value Comments No.3. 3. Total average cost of spare parts required for Condition based PM per year. Spare Parts Cost required for 3. Condition based PM cost in addition to those following from 3.3.e. Symbol Description 3.2 .3.g. for one turnout.3.3. travel. for one turnout.2 SPCON Condition based PM per year.3.3 LSCON Total annual cost for logistic support required for Condition based PM of one turnout (i.3.1 MHCON Number of man-hours required for Condition based PM per year Total number of man-hours required for condition based PM per year.

Value Comments 3UR0#LQ Introduction to LCC p31 of 31 . caused by an average "long term delay". Number of Long Term Delays per 4. Exclude very short delays. Delay Cost Data (yearly costs) Entry Parameter No.1 NSD Year. 4.4. Symbol Description Number of Short Term Delays per 4.2 SDC Total cost per delay.3 NLD Year. e. caused by failure of one turnout. Total no. that e. caused by failure of one turnout. Total no. Long Term Delay Cost. caused by an average "short term delay".g. 4. (include delays of duration up to say 1 hour. (include delays that require specific measures to be taken. will not require alternative transportation). of events per year resulting in "short" train delays. Annual Delay Cost. 4. Short Term Delay Cost.5 ADC Total annual cost related to unavailability/delay caused by one turnout.g. providing alternative transportation). which are not expected to incur any cost. of events per year resulting in "long" train delays.4 LDC Total cost per delay.

caused by one turnout.3 AHC Total annual cost related to hazardous/accidental events. Comments 3UR0#LQ Introduction to LCC p32 of 31 . 5. Total no. Hazard Cost Data (yearly costs) Entry Parameter Value No. caused by failure of one turnout. personal injuries. 5. ("How much is the company willing to pay to avoid such an event"?) Annual Hazard Cost. fatalities. A hazardous event is an accident causing a threat to human safety. Includes e. Hazardous/Accidental Event Cost. of hazardous events per year. Symbol Description Number of Hazardous/Accidental 5. material/environmental damage and cleaning/rebuilding costs after accidents.2 HEC The total cost caused by one "average" hazardous-/accidental event.g.1 NHE Events per Year. environment or material damage.5.

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