What is life cycle cost?
Life cycle cost is the cost that is associated with the project from the beginning of the project to the end of its useful life and beyond. It includes the cost of acquiring the project, operating it, and disposing of it at the end of its useful life. It may even include money spent after the project's useful life that is a result of the project's existence and effects.
Normally the cost of a project is considered only from the beginning of the project to its end. This is reasonable because the project team is formed to carry out the work of creating the project, deliver the deliverables, and do it within the schedule and cost goals of the project. This is really a narrow view because there are many costs that may occur for the stakeholders as the result of decisions made within the project but occurring after the project has been completed. Life cycle cost considers all these costs.
For example, the project team is able to reduce cost by limiting the number of design reviews. The result of this may be that the design is compromised. The compromised, nonoptimal design may cost the stakeholders many times the money saved by limiting the design reviews. The cost of this will not necessarily occur until the project is delivered and the project team disbanded. Life cycle cost would include this cost.
Life cycle cost is quite important in the justification of projects. The total cost of a project should be considered over the entire life of the project and not just within a fixed period of time.
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The cost and benefits of the project must be considered over the life of the project. By this we mean that we must consider all of the effects of the project from beginning to end. If we were building a nuclear power plant and we were to consider only the cost of building the plant and operating it for the twenty-five or so years it would be in operation, we would be very naive. There is tremendous cost associated with decommissioning a nuclear power plant and cleaning up the area where it was in operation and disposing of the radioactive materials that are left. Today we have a legacy of nuclear power plants where this was not done very well. In the 1960s and 1970s many nuclear plants were built with little regard for what would have to be done when they were worn out. Little consideration was given to the disposal of spent nuclear waste, and we still have no workable plan for disposing of it. Many of these facilities probably would not have been constructed if the full cost had been recognized at the beginning of the project.
When project decisions are made, we must consider the effect of these decisions outside the direct area of the project. When cheaper materials are used for a project, it will usually result in a shorter useful life or a product that is more fragile and has higher maintenance costs. Sometimes the application and the desires of the stakeholders are that the cheaper product be made regardless of the future maintenance cost and the shorter useful life. This can be a valid decision.
The important obligation of the project manager and the project team is that the customer and the stakeholders be made aware of these options and that informed decisions are made with the realization that money saved today may cost more in the long run. This again points out the importance of doing a good project justification.
In project justifications, the period of time that should be considered in justifying the project must be long enough to include the recognition of the life cycle costs until they reach a steady state or go to zero. By doing this in our project justifications we assure that all of the costs of the project are considered. If the client wants the project done at a minimum cost, the justification will show the increases that are going to occur after the project is delivered.
For example, suppose we could do a project two different ways. If we do the project the first way, we will spend the money to make the project robust and long-lasting, which will result in minimum maintenance costs. If we do the project the second way, we will minimize costs by using the minimum amount and strength of material and design the project for minimum cost and sacrifice future maintenance costs. Suppose the first method of doing the project could deliver the project for $2,000,000 and the future maintenance costs were estimated at $100,000 per year for the fifteen years of the project's useful life. The second method could deliver the project for $1,500,000 and the estimated maintenance cost would be $200,000 per year.
As can be seen in this very simplified example, the life cycle cost of the project is much lower if the cost is not minimized in delivering the project.