Life cycle costing: a review of published case studies
Eric Korpi*
Timo Ala-Risku
Helsinki University of Technology
Department of Industrial Engineering and Management
P.O. Box 5500
FIN-02015 TKK
FINLAND
*Corresponding author: Eric.Korpi@tkk.fi,
phone: +358-40-8360527, fax: +358-9-4513665
1
Life cycle costing: a review of published case studies
Abstract
Purpose: Despite existing life cycle costing (LCC) method descriptions and practicable
suggestions for conducting LCC analyses, no systematic analyses on actual
implementations of LCC methods exist. This article reviews reports on LCC applications
to provide an overview of LCC uses and implementation feasibility.
Methodology/Approach: A review of LCC cases reported in academic and practitioner
literature. Case reports were compared against each other and against the defining articles
in the field.
Findings: Most of the reported LCC applications were far from ideal. Compared to the
methods suggested in the literature many of the case study applications: (i) covered fewer
parts of the whole life cycle, (ii) estimated the costs on a lower level of detail, (iii) used
cost estimation methods based on expert opinion rather than statistical methods, and (iv)
were content with deterministic estimates of life cycle costs instead of using sensitivity
analyses.
Research limitations/implications: This review is limited to reported LCC applications
only. Further research is encouraged in the form of a field-based multiple-case study to
reveal context-specific dimensions of LCC analysis and implementation challenges in
more detail.
Practical implications: This review highlights the difficulty of conducting a reliable
LCC analysis, and points out typical problems that should be carefully considered before
drawing conclusions from the LCC analysis.
Originality/value of the paper: First systematic analysis of LCC applications that gives
directions for further research on the LCC concept.
Paper type: literature review
Keywords: Life cycle cost, Life cycle costing, LCC, product life cycle, literature review,
multiple-case analysis
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Introduction
“The life cycle cost of an item is the sum of all funds expended in support of the item
from its conception and fabrication through its operation to the end of its useful life”
(White and Ostwald, 1976). Such life cycle costs of a product can be many times the
initial purchase or investment costs (Woodward, 1997), and according to several sources
70-90 % of these total life cycle costs become defined already in the design phase
(Bescherer, 2005; Dowlatshahi, 1992; Lindholm and Suomala, 2005). Yet initial
investment costs are most often used as the primary and sometimes the only criteria in
purchase decision (Lindholm and Suomala, 2004; Woodward, 1997). In spite of the
obvious long-term benefits of the life cycle costing (LCC), its adoption has been
relatively slow (Lindholm and Suomala, 2004; Woodward, 1997). Possible reasons for
the slow adoption include the lack of standard or formal guidelines and the lack of
reliable past data (Ardit and Messiha, 1999).
The amount of cross-case studies in the field of life cycle costing is extremely low and
most of them either are limited to a single industry (Ardit and Messiha, 1999; Lindholm
and Suomala, 2004; Sterner, 2000) and/or just cover some superficial features of life
cycle cost analysis like the adoption rate (Hyvönen, 2003; Lukka and Granlund, 1996).
The purpose of this study is to explore with a multiple-case analysis based on a literature
review, what are the business contexts where LCC is used and what kinds of methods are
applied to LCC analyses. Although the findings of this review represent only the reported
LCC case studies, the results nevertheless indicate (i) the extent of attention of academics
studying LCC, and (ii) the variety of LCC applications and resulting complication of
LCC methods.
Based on literature related to LCC methods we formulated a framework for analyzing
published LCC cases. Using several publication databases we identified relevant LCC
case studies for our analysis. The most interesting results of these analyses are presented
in this paper with the following structure. In the next section we will discuss the literature
of life cycle costing and the dominating methods of doing life cycle cost analysis. The
third section presents the research design used to gather data and analyze the case studies.
The following section will go through the results of our multiple-case analysis. The fifth
section considers the limitations of the study and after that the conclusions of this
research are discussed. In the final section future research suggestions are given.
Literature review
Background
LCC was originally designed for procurement purposes in the U.S. Department of
Defence (White and Ostwald, 1976) and is still used most commonly in the military
sector as well as in the construction industry (Woodward, 1997). The adoption of life
cycle thinking has been very slow in the other industries (Lindholm and Suomala 2004).
Public sector has also been a relevant promoter for life cycle cost calculations
(Woodward, 1997).
3
There are relatively few articles written about the frequency of LCC use and the results of
these articles are somewhat heterogeneous. In a Finnish study only 5 % of large industrial
companies had used life cycle costing (Hyvönen, 2003). In a Swedish building industry
study 66 % of the companies used life cycle costing to assist on decision making (Sterner,
2000) and in a U.S. study 40 % of city administrations used life cycle cost analysis when
assessing their building projects (Ardit and Messiha, 1999).
In addition to LCC there are other traditions taking a wider perspective on product life
cycle. Most notable of these are total cost of ownership (TCO) and life cycle assessment
(LCA).
“Total cost of ownership (TCO) is a purchasing tool and philosophy which is aimed at
understanding the true cost of buying a particular good or service from a particular
supplier” (Ellram, 1995). It is often used for two purposes: supplier selection and supplier
evaluation (Bhutta and Huq, 2002). Thus, it focuses mainly on transaction costs and the
costs of the operational phase are not considered (Lindholm and Suomala, 2004). Another
tradition that has a life cycle perspective is life cycle assessment (LCA), but it
concentrates on environmental issues and is not really concerned with the cost aspect
(Emblemsvåg, 2001).
From our perspective, LCC is the most relevant cost management method, as TCO
neglects operations and maintenance costs, and LCA promotes environmental impacts
instead of being a costing tool.
LCC purposes
Life cycle costing is said to focus primarily on capital or fixed assets (Ellram, 1995).
Asiedu and Gu (1998) on the other hand state that life cycle costing can be used for all
sorts of products: The purpose and nature of the analysis however depends on the
product.
As discussed above life cycle costing was originally designed for procurement purposes
i.e. to be used from a point of view of a client. Many of the most prominent LCC
methods (Fabrycky and Blanchard, 1991; Woodward, 1997) are intended to be used to
support design decision making, but nevertheless from a client’s perspective. From a
manufacturer perspective, Dunk (2004) presents motivational factors for using LCC:
Manufacturers with a strong customer-focus may recognize LCC as a customer service
leading to competitive advantage. However, the ability of a manufacturer to perform lifecycle costing is affected by the quality of information available.
A useful frame of reference detailing LCC purposes that accounts for both client and
supplier perspectives is presented in (Barringer and Weber, 1996):
•
Affordability studies- measure the impact of a system or project’s LCC on long
term budgets and operating results.
•
Source selection studies- compare estimated LCC among competing systems or
suppliers of goods and services.
•
Design trade-offs- influence design aspects of plants and equipment that directly
impact LCC.
4
•
Repair level analysis- quantify maintenance demands and costs rather than using
rules of thumb such as “ …maintenance costs ought to be less than _?_% of the
capital cost of the equipment”.
•
Warranty and repair costs- supplier’s of goods and services along with endusers need to understand the cost of early failures in equipment selection and use.
•
Suppliers sales strategies- can merge specific equipment grades with general
operating experience and end-user failure rates using LCC to sell for best benefits
rather than just selling on the attributes of low, first cost.
Life cycle costing methods
Durairaj et al. (2002) have presented and compared different life cycle cost analysis
methods in their article. Some of the methods presented in the article are extremely
narrow by scope and hence are not useful for a general analysis. Out of the eight methods
three were found to be relevant in describing life cycle costing methods. We used these
three publications (Emblemsvåg, 2001; Fabrycky and Blanchard, 1991; Woodward,
1997) and another defining article in the field of life cycle costing (Asiedu and Gu, 1998)
to build the framework against which we compared the methods used in the case studies.
Life cycle is usually divided from an individual product’s perspective into three or four
steps. Fabrycky and Blanchard (1991) used a four-step division to categorize the costs of
an individual product (Figure 1). Despite this formal categorization, LCC has been
criticized for lack of consideration of design costs (Ellram and Siferd, 1998).
Research and
Development
Cost
Production and
Construction
Cost
Operation and
Maintenance
Support Cost
Retirement and
Disposal Cost
Figure 1. Life cycle cost categories (Fabrycky and Blanchard, 1991)
Life cycle cost analysis is a forecast of the future. That’s why different cost estimation
methods must be applied. The use of different cost estimation methods depends on, for
example, availability of data and the phase in which the calculations are done (Fabrycky
and Blanchard, 1991). Fabrycky and Blanchard introduce three different ways to estimate
costs: (i) estimating by engineering procedures, (ii) estimating by analogy and (iii)
parametric estimating methods. In estimating by engineering procedures costs are
assigned to each element at the lowest level of design detail and then combined into a
total for the product or system. The problems with this method are the need of detailed
data and hours of effort needed to perform the calculations. However, estimating by
engineering procedures might result in an accurate estimate if all the needed data is
available and the estimator doesn’t cut any corners.
In estimating by analogy, as its name already states, the cost estimator draws analogies
between different products or their features. Estimating by analogy can be done either on
system level or on task level. Maybe the most significant problem of estimating by
analogy is the high degree of judgment required. This is the cheapest of these three
methods because not much data is needed, but also the most inaccurate, especially if the
5
analogies are drawn on a system level. The experience and expertise of the estimator are
crucial, if accurate estimates are desired. This method is suitable for new products when
extensive databanks are not available.
Parametric estimation utilizes different statistical techniques and seeks for the factors on
which the life cycle costs depend. Parametric method requires quite a lot of data.
According to Fabrycky and Blanchard (1991) this method should be preferred in most of
the situations.
Also more advanced methods of cost estimation have been suggested for life cycle
costing. Emblemsvåg (2001) suggests activity-based costing (ABC) to be used in life
cycle cost analysis. However, ABC is not easily adopted to be used in conjunction with
unique investments, because it requires extensive activity-cost databases.
Since LCC takes into account future costs, the time-value of money needs to be
accounted for in the calculations (Fabrycky and Blanchard, 1991). That’s why future cash
flows should be discounted to present value especially if the life of the asset is long. In
fact, many LCC methods (Fabrycky and Blanchard, 1991, Woodward, 1997) take also
inflation into account. Nevertheless, choosing the right discount and inflation rate for the
situation might be a challenge, and it also may have a notable effect on the LCC results.
All of the defining articles in the field of life cycle costing (Asiedu and Gu, 1998;
Emblemsvåg, 2001; Fabrycky and Blanchard, 1991; Woodward, 1997) acknowledge the
stochastic nature of LCC calculations. These sources suggest sensitivity analyses to be
done in order to cope with the uncertainty. Some of the methods (Emblemsvåg, 2001;
Fabrycky and Blanchard, 1991) also suggest the use of monte carlo simulation to deal
with the uncertainty.
There are at least two commercial standards intended to assist on life cycle cost analysis.
One is intended to be used only in the building industry (ASTM international, 2002) and
the other is suitable for more general use (International Electrotechnical Commission,
2004). There are also some military and public sector standards and handbooks on LCC.
Research design
Our research started by establishing potential categories according to which the case
studies could be classified. This step was based on an extensive literature review. Some
of the categories were used to classify the operating environment and others the methods
used in the life cycle cost analysis. The next step was to decide how to collect the
material and to actually choose the case studies suitable for the review. After that the
articles chosen were classified according to the different categories on operating
environment and LCC methods. In this classification phase lots of judgment was needed
because many of the issues we investigated were not clearly reported in the case studies
and thus had to be interpreted from the text. In the next phase, interactions between all
the different categories were investigated in order to find out: (i) What kinds of
characteristics of the operating environment encourage the adoption of life cycle costing,
(ii) What are the main purposes for conducting LCC, (iii) How do LCC implementations
conform with the methods suggested in literature, (iv) How do the characteristics of the
operating environment affect the methods used in LCC analysis. In this article the most
relevant findings of these analyses are presented.
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Data collection
Based on our literature review, the literature in the field of life cycle costing was quite
fragmented. Therefore, we decided to use several databases instead of individual journals
to identify LCC case studies. The databases chosen for the review were AIP Scitation
American Society of Civil Engineers, ABI Inform: ProQuest Direct, EBSCOhostdatabases, Elsevier: ScienceDirect, Emerald Library, Google Scholar, IEEE XPLORE,
JSTOR, Springer Verlag: LINK and Wiley Interscience. The databases were chosen
according to our access to different databases and according to the contents of these
databases. In the review, we sought for articles dated after the defining book of Fabrycky
and Blanchard (1991). The following two search terms were used: (i) “life cycle cost”
AND case, and (ii) “life cycle costing” AND case. These words were searched from the
abstract, title and keywords sections of the articles during July 2006. We felt that, if life
cycle costs and case study were not mentioned in these sections of the article then they
didn’t play a significant role in the article and should not be included in the review. In
Google Scholar it was not possible to define article sections to narrow down the search,
so we decided to limit the search only to article title.
A total of 205 articles were found under these criterions. Some of these articles were
dismissed because of the following reasons: (i) we didn’t have access to the full text
version of the article (18 rejections), (ii) the article was not meeting our criteria for
suitable case studies: life cycle costing played only a very minor role in the article or
there was no case study in the article (132 rejections). Thus, we were left with 55 case
studies that were suitable for the review. All the suitable articles were relatively new: A
total of 38 cases were from this century. The included case studies are listed in Appendix
1.
There were only seven journals with more than one suitable case study: Renewable
Energy, Building and Environment, Energy, Structural Safety, Construction Management
and Economics, Energy and Buildings and Applied Energy. Articles from a total of 43
journals were used in the study.
Case analyses
Nine different features were analyzed from all of the case studies. Four of the features
described operating environment and another four described the methods used in the
analysis. The purpose of LCC analysis in the cases was assessed with a single category.
The different categories and our classification on these features are presented in table 1.
Each of the classifications is described in more detail in the results section.
7
Table 1. Dimensions of case analysis
Operating environment
Item
Classification
Industry
Public sector influence
Perspective of the analysis
Nature of the product
Purpose of the analysis
Item
Purpose of the analysis
LCC methods
Item
Life cycle phases included in
the analysis
Information sources
Cost estimation methods
Nature of the analysis
Based on
Construction
Transportation
Manufacturing
Energy
Research
Real estate
Public
Private
Manufacturer
Client
Other
Continuous production
Recurring investments
Unique investments
SIC divisions (U.S.
DoL, 2006), with
two alterations
Classification
Based on
Affordability studies
Source selection studies – vendor
Source selection studies – product
Design trade offs – optimization
Design trade offs – comparison
Repair level analysis
Warranty and support costs
Supplier’s sales strategies
Barringer and Weber
(1996), with two
alterations
Classification
Based on
Research & development (R&D)
Production & construction (production)
Operations & maintenance (O&M)
Retirement & disposal costs (disposal)
Public statistics
Internal sources
Other firms
Other articles
Other sources
Information sources not reported
Estimating by engineering procedures
Estimating by analogy
Parametric estimating
Stochastic
Deterministic
Fabrycky and
Blanchard (1991)
Woodward (1997)
Fabrycky and
Blanchard (1991) vs.
Dunk (2004)
Our own
classification,
inspired by Asiedu
and Gu (1998)
Descriptions in
analyzed cases
Fabrycky and
Blanchard (1991)
e.g. Fabrycky and
Blanchard (1991),
Emblemsvåg (2001)
8
Research results
Operating Environment
Industry and public sector influence
We used SIC divisions (U.S. Department of Labor, 2006) to classify the industries in
which the case studies were done. We had to make two minor alterations into the SIC
divisions in order to better describe the case studies. We added energy category into our
classification, because a notable part of the cases were concerned with energy use and/or
production. One of the cases didn’t fit to any of the existing SIC divisions, thus we
denoted it with the research category in Table 2.
In addition, the cases were analyzed to identify the possible influence of public sector, i.e.
whether the case analyses were performed for the needs of public or private sector. This
analysis was done as public sector has been stated to be a relevant promoter for life cycle
cost calculations (Woodward, 1997).
Table 2. Industry and public sector influence of the analyzed cases (industry nonexclusive)
Public Private
Industry
In total
Construction
34
14
19
Energy
10
5
5
Transportation
9
3
6
Manufacturing
6
0
6
Research
1
1
0
Real estate
1
1
0
Our findings [Table 2] in this category support the literature in the field only partially.
Almost two thirds of the articles were from the construction industry, so the construction
cases dominated even more than one could have expected on the basis of the literature.
On the other hand only one of the cases was from the military sector (In Table 2, it is
included in the transportation category). One might have expected more military cases to
be found because of the fundamental role of the U.S. Department of Defense in the
development of life cycle costing. Other industries widely represented in the review were
energy, transportation and manufacturing. Six cases had features of both energy and
construction divisions and therefore these cases are shown in both of these categories.
Research and real estate divisions are discarded in further analysis because of their low
count.
Although there was only one military case, a large portion of the cases (40 %) were
written to fulfill the needs of the public sector [Table 2]. One article was written by a
standard committee and it isn’t included neither in the public nor in the private sector
cases.
Perspective of the analysis
If the analysis was done from the perspective of the party responsible for the costs
accumulated during the operations and maintenance phase, the case was added to client
9
category. If the analysis was done by the manufacturer of the product in question, the
case was naturally added to manufacturer category. If neither of these points applied to
the party who did the calculations, the case was added to category other. In almost two
thirds of the cases there was a client (owner/user) perspective [Figure 2]. A quarter of the
cases had been written from the point of view of the manufacturer. Five cases considered
life cycle costs from the point of view of the society or economy. Three of the cases in
this category have been allocated to client, one case to manufacturer category and one
had neither perspective so it is included in the category other1. The portion of cases
reported from manufacturer’s perspective was in fact quite large considering the
dominant position of client view in the LCC method literature.
Perpective by industries
100 %
90 %
80 %
70 %
60 %
manufacturer
50 %
client
40 %
other
30 %
20 %
10 %
M
an
uf
ac
t
ur
in
g
n
Tr
an
sp
or
ta
tio
En
er
gy
ct
io
n
Co
ns
tru
AV
ER
AG
E
0%
Figure 2. Case perspective and association with industry
The perspective wasn’t very clear in all of these case studies, because most of the cases
had been written by academics with rather unclear contacts to the actual companies. In
fact 37 articles had a quite strong academic focus, which made it somewhat difficult to
interpret the perspective.
The industry had clearly an effect on the perspective used [Figure 2]. Manufacturer was
much more likely to do the analysis in the transportation industry than in the other
industries. Cases with energy industry focus were done mostly from client perspective.
1
From the category other two cases were done from a perspective of a party that purchases a component,
but installs it as a part of a system produced for an external client and thus is not responsible for the costs
incurred in the O&M phase. One case was from a point of view of a LCC software provider, another from a
point of view of a standard committee and the last case in that category was an academic article with
neither a client nor a manufacturer perspective.
10
When analyzing the private/public sector influence on the perspective of the analysis,
manufacturer perspective was found to be more common in the cases done for the needs
of the private sector. 71 % of the manufacturer cases were from the private sector,
whereas almost half (46 %) of the client cases were done for the needs of the public
sector.
Nature of the product
We grouped the products of the case studies into three categories: (1) Products that are
produced continuously, (2) recurring investments and (3) unique investments. First we
made the classification from both manufacturer and client perspectives and then we
classified the products from the perspective of the party who had done the calculations
(analyzer). We made this classification in two steps for two different reasons. First of all
it wasn’t possible to classify the products universally because the different parties
experienced the products in a different way. For example, a hot water boiler can be
regarded as continuous production from the supplier’s perspective and as a recurring
investment from client’s point of view. We were also interested to see what kind of
differences there were between the different parties.
How do the different parties see the products?
40
35
30
25
Continuous production
Recurring investments
20
Unique investments
Unclear
15
10
5
0
Manufacturer
Client
Analyzer
Figure 3. Product classification in terms of decision making recurrence from
different perspectives
Figure 3 shows that manufacturers considered most of the products as recurring
investments or continuous production whereas clients considered the same products as
unique or recurring investments. This difference in the way how the different parties
considered the products is quite natural. Manufacturers after all do produce more units of
the same products than what the clients are likely to buy. An interesting observation was
that the analyses of continuous products were almost exclusively done in the
transportation and manufacturing divisions, making the construction and energy cases
11
focus mainly on investments. However, most of the investment analyses in construction
cases considered rather subassemblies than entire project deliverables.
The most typical product was one that manufacturers considered as recurring production
and the clients as unique investments. 42 % of the products had this combination. Most of
the parties that did the calculations thought that the product was an investment (recurring
or unique, 80 %). Making the calculations in an investment situation enables taking the
special characteristics of the operating environment into consideration. On the other hand
doing these calculations for continuous production would enable a wider application of
the calculations. The fact that most of the analyses were indeed done in investment
situations suggests that it is important to take the actual operating environment of the
product into account.
Purpose of the analysis
We used Barringer and Weber’s (1996) list of possible functions for LCC use with small
modifications in order to classify the purposes in which the analyses were made. We
divided two of the categories into two subcategories each. Source selection studies were
divided into vendor and product categories and design trade-offs were divided into
optimization and comparison categories. The first modification into Barringer and
Weber’s model was done in order to illustrate that most of the source selection studies
compared different products or systems with each other, instead of different suppliers.
The reason for the second alteration was to illustrate the existence of two quite different
types of design trade-off calculations. In some of the cases an optimal design is searched
and in the others a few different design options are only compared with each other.
Categories in the table 3 are not exclusive: One case study can have multiple purposes.
Table 3. Purpose of LCC in the case studies
Purpose of LCC use
Affordability studies
6
Source selection studies -- vendor
1
Source selection studies -- product
20
Design trade-offs – optimization
9
Design trade-offs – comparison
16
Repair level analysis
7
Warranty and repair costs
3
Suppliers sales strategies
1
11 %
2%
36 %
16 %
29 %
13 %
5%
2%
All of the categories in the Barringer and Weber’s model were represented in at least one
case study. Most common uses of life cycle costing were source selection studies for
different products and design trade-offs, both comparison and optimization.
In a few articles also two other notable benefits of LCC analyses were mentioned: (i)
They were able to systematically take into account the cost aspect in design decision
making, and (ii) they were able to find out the factors that had the largest effect on the
total life cycle cost.
Industry seemed to have some effect on the purpose for which life cycle costing analyses
were used. Five of the six affordability studies were done in the construction division and
12
four of them were done for the needs of public sector. 29 % of the public sector
construction cases were in fact affordability studies. Energy cases focused on the source
selection studies for different products. 80 % of all energy cases belonged to this
category. There were a lot of design trade-offs done for the needs of the private sector (59
% of the private sector cases). Source selection studies dominated the public sector cases
(50 % of the public sector cases).
The nature of product had some surprising effects on the purpose of the LCC study. Two
thirds of the affordability studies were done for recurring investments although one might
have expected these studies to be done almost exclusively for large, unique investments.
Another surprising thing was that three quarters of the source selection studies for
different products were done for unique investments and the rest of the cases for
recurring investments. One might have expected that there were more recurring and
continuous production products in this category. The lack of continuous production cases
among source selection studies might be explained by the search terms used in case
selection: Based on our literature review this sort of products might be mostly considered
in the total cost of ownership literature.
Methods and coverage
Life cycle phases included in the analysis
We investigated which life cycle phases were included in the case study analyses. The
results can be found in table 4. In one case study there was no distinction between life
cycle phases. In all the other cases operations and maintenance support (O&M) costs
were dealt with at least partially. In some of the case studies for example only energy
costs were included from the O&M phase. Production and construction costs were also
very commonly included in the case studies. On the other hand research and development
(R&D) costs as well as retirement and disposal costs were included only in about a
quarter of the cases. Our interpretation of the term initial costs might be a partial reason
for the low percentage of the R&D category. If the costs were not specified in detail, we
interpreted that initial costs include only production and construction costs, not R&D
costs. Also in some situations there aren’t any research and development costs, for
instance if you compare one existing solution with another one. It was interesting and
quite depressing to notice that only three case studies had included costs from all of the
four phases of the life cycle in the analysis. In a few case studies where LCC was used
for comparative purposes the authors had explained the exclusion of some cost categories
by stating that the costs are roughly the same in different alternatives.
Table 4. Life cycle phases included in the case studies
Life cycle phase
Use / %
Research and development
20
Production and construction
87
Operation and maintenance support
98
Retirement and disposal
26
There were only minor differences between the industries. Transportation industry
emphasized design costs (44 % of the transportation cases included design costs) and deemphasized retirement and disposal costs (none of the cases included these costs).
13
The perspective from which the cases had been done had some logical effect on the life
cycle phases covered. Manufacturers focused more on the earlier parts of the life cycle
and the clients on the other hand focused more on later parts of the life cycle [Table 5].
Table 5. Life cycle phases associated with case perspective
Perspective
R&D Production O&M Disposal
Manufacturer 29 %
93 %
100 %
7%
Client
14 %
83 %
97 %
31 %
The function of the LCC analysis had some effect on the life cycle phases considered in
the analysis. Disposal costs were covered in 67 % of affordability studies in contrast to 20
% of the other cases. In repair level analyses other than O&M costs were not much
covered: R&D costs were covered in 14 % of these cases and disposal costs were covered
in the same fraction of cases. Production costs were also covered in only 43 % of the
repair level analyses.
Within the above cost categories the division into smaller categories has been very
limited in most of the articles. By far the most often recurring subcategory is energy costs
(in 22 cases), which in the cost breakdown structure of Fabrycky and Blanchard (1991) is
included in the O&M costs.
Information sources
In method literature of life cycle costing mainly internal sources of information are dealt
with (Fabrycky and Blanchard, 1991; Woodward, 1997). Unfortunately the internal
sources of cost information were not described so deeply in the case studies. As a matter
of fact the use of internal sources of cost information was reported only in one third of
the articles. Based on the descriptions in the case studies, we decided to use a division of
information sources shown in table 6.
Table 6. Information sources used in the case studies
Information
Public
Internal
Other
Other
sources
statistics
sources
firms
articles
Construction
50 %
21 %
26 %
24 %
Energy
70 %
10 %
40 %
60 %
Transportation
33 %
33 %
0%
0%
Manufacturing
17 %
83 %
0%
17 %
44 %
33 %
22 %
20 %
Average
Other
sources
21 %
20 %
0%
0%
15 %
Not
reported
15 %
0%
33 %
0%
15 %
Public statistics was the most common reported source of information, especially in the
energy and construction divisions [Table 6]. Internal sources were the second most
common source and it was used extensively in the manufacturing division (83 %). In 15
% of the cases the sources of cost information were not reported at all. Reporting of
information sources was especially inadequate in the transportation division: In one third
of the cases cost information sources were not reported at all and in all the other cases
there was only one reported source of information. Collaboration and information sharing
were quite rare in the case studies. There was reported information sharing whatsoever
between the different parties in the supply chain in only 12 cases. Out of these twelve
cases in six cases only purchase price information was shared, and in only three cases
detailed information from for example O&M costs was distributed to the other party.
14
Manufacturers’ reporting of information sources was deficient. In 36 % of the cases done
from the point of view of the manufacturer, information sources were not reported at all.
Manufacturers didn’t receive any cost information from their customers to support life
cycle cost analyses in any of the case studies. There would be a clear opportunity to
acquire data from the customers and thus be able to estimate the O&M costs more
reliably and accurately.
Cost estimation methods
Figuring out the cost estimation method wasn’t very straightforward because the authors
of these articles did not explain the method that had been used. In fact a lot of judgment
and interpretation was needed. There were two good indicators of the method used. The
first indicator was the calculations. In some cases the method was evident from the
numbers and formulae used, and another good indicator was the source of information
and the level of detail of this information. For example, external information (public
statistics or other publications) often had to be adapted to the purpose by using analogy or
expert opinion. In many cases a combination of two or three estimation methods had been
used.
Table 7. Cost estimation methods used in the case studies
Cost estimation methods
count Per cent
Parametric
25
45 %
Analogy
7
13 %
Engineering
2
4%
A mix of parametric and analogy
14
25 %
A mix of parametric and engineering
1
2%
A mix of analogy and engineering
1
2%
A combination of all three methods
1
2%
unclear
4
7%
According to Fabrycky and Blanchard (1991), parametric estimation should be preferred
in most of the situations. From these case studies only less than half used purely
parametric cost estimation methods [Table 7]. Activity-based costing had been used in
only one analysis.
15
Use of cost estimation methods in different industries
100%
90%
80%
70%
60%
Parametric
Analogy
50%
Engineering
40%
30%
20%
10%
0%
Construction
Energy
Transportation
Manufacturing
Figure 4. Cost estimation methods used in case studies of different industries. Full
color indicates the amount of cases using only the respective method, striped color
indicates method use mixed with other methods.
Industry had a clear effect on the cost estimation method used [Figure 4]. Construction
and energy divisions used a lot of analogy with the estimates. In construction and energy
divisions lots of data from secondary sources [Table 6] is used and this increases the need
for expert judgment and the proportion of cases applying analogical methods.
Transportation and especially manufacturing divisions use more parametric cost
estimation methods.
The function of the analysis had an exceptionally strong effect on the cost estimation
methods used. Repair level analysis and warranty and support cost estimation cases were
all purely parametric. This implies that these analyses relied more on data. The
optimization cases were also very data intensive. None of the optimization cases were
purely analogical and 67 % of the cases were either purely parametric or purely
engineering. Source selection studies were on the other hand the least data intensive.
Only a quarter of these cases were done with purely parametric methods compared to 57
% of the other cases. The proportion of purely analogical cases was instead really high
with the source selection studies: 25 % of the studies were purely analogical compared
with 6 % of the other cases.
Cost estimation methods had also an effect on the life cycle phases considered in the
analyses. Especially R&D and production costs were not taken into account in many of
the parametric cases. R&D costs were covered in 12 % of the parametric studies
compared to the 27 % of the other studies. Production costs were considered in 76 % of
16
the parametric studies compared to the 97 % of the other studies. This lower percentage
of production and construction costs can be at least partially explained by the purpose of
the analysis. All the repair level analyses and warranty and support cost estimations are
parametric and on the other hand these analyses don’t take the production and
construction costs into account in many cases. The differences in R&D costs couldn’t be
explained with the purpose of the analysis. One possible reason for this difference might
be lack of suitable data: It is probably hard to find quantitative data on R&D costs.
Nature of the analysis
Considering the methods suggested in the LCC literature the amount of deterministic life
cycle cost analyses was a surprise. Almost half (49 %) of the analyses were deterministic.
This means that almost half of the studies ended up with a single number without taking
into account the uncertain nature of the cost estimations. A few determining factors for
this worrying result were also found when comparing this category with other ones.
The industry seemed to have a strong effect on this issue [Table 8]. Construction cases
were relatively stochastic but transportation and manufacturing cases were extremely
deterministic by nature.
Table 8. The nature of life cycle cost analyses in the case studies
Deterministic Stochastic
N
Construction
41 %
59 %
34
Energy
50 %
50 %
10
Transportation
67 %
33 %
9
Manufacturing
83 %
17 %
6
Information sources used in the analysis also had an effect on the fact, whether the
analysis was deterministic or stochastic. Most interesting finding of this analysis was that
use of public statistics in the construction industry had a clear effect on this: 47 % of the
cases where public statistics had been used were stochastic, while the share of stochastic
studies was 71 % for the studies where statistics hadn’t been used. A possible explanation
for this finding is that the public statistics are mostly in a form of single numbers, not
distributions, making the statistics seem as universal truths and hiding the variability of
the costs. In fact, sensitivity analyses should be emphasized more when relying on public
statistics because fitting the information from public statistics into the particular situation
always requires expert judgment and thus induces more uncertainty to the calculations.
One factor that increases the significance of sensitivity analysis is the discount rate that
needs to be used when addressing future life cycle costs. Choosing the right discount rate
isn’t easy, because it depends for example on the risk-level of the project, market
situation, credit rating of the company and on many other factors (Brealey and Myers,
2003). The authors of the case study articles had acknowledged the importance of
discounting: In only one article the future costs hadn’t been discounted at all and discount
rate was also the most common factor for sensitivity analysis.
The number of studies lacking proper sensitivity analysis was disappointing, when you
consider that energy-related costs constituted a large proportion of total life cycle costs in
many case studies and the price of energy has been highly volatile and very hard to
forecast (see e.g. Huisman and Mahieu, 2001).
17
Limitations of the study
One limitation of this study is related to terminology used in the research design. We
didn’t attempt to find out and classify all the case studies about cost management
practices with a life cycle view. Instead we concentrated on what has been reported under
the term of life cycle costing. For example one of the findings of our study might be
explained with our search term: There was only one source selection study for continuous
products among the case studies. According to our literature review, this type of cases
might be covered more in total cost of ownership case studies. Focusing explicitly on life
cycle cost cases in this study was however justified, as, by definition, other identified life
cycle cost management traditions excluded some of the life cycle phases we were
interested in. There seems nevertheless to be overlap in the uses of the different costing
traditions.
Maybe the most notable limitation of our study is that it is limited only to the reported
case studies and the reported studies do not necessarily represent all the practices used in
the field. In some situations the deficiencies in reporting might have lead to
interpretations underestimating the actual methods. For example, the calculations may
have been reported at a lower level of detail than at which they have actually been
performed. Another reporting related limitation arises from the fact that a notable
proportion of the case studies were written from an academic perspective and this may
have had an effect for example on the information sources used and reported. In fact,
articles with a strong academic focus were typically using analogous cost estimation
methods as the access to internal information sources was limited (22 % of articles with
academic focus, vs. 56 % of others used internal sources of cost information).
A third limitation related to reporting practices is that the aspects we wanted to find out
from the case studies were not always clearly presented. Judgment and interpretation was
needed in these categories. Especially problematic was “cost estimation method”category. Other categories where considerable amount of judgment was needed were
“nature of the product” and “perspective of the analysis”.
Conclusions
The purpose of this study was to explore through the analysis of published LCC case
studies: (i) What kinds of characteristics of the operating environment encourage the
adoption of life cycle costing, (ii) What are the main purposes for conducting LCC, (iii)
How do LCC implementations conform with the methods suggested in literature, (iv)
How do the characteristics of the operating environment affect the methods used in LCC
analysis. We address the research questions in the subsequent sections.
As a general observation, LCC case studies don’t have a strong tradition in any scientific
journal. Thus, the case studies are unconnected and are not founded on previous
discourse. The focus of the case studies themselves wasn’t in developing LCC further,
but in displaying its use in a specific context and especially in justifying the superiority of
one product/design aspect over another, despite the higher initial cost of the former.
18
The lack of a general discourse was obvious from some of the case studies: The shortage
of standards and formal procedures was complained in several case studies, although
there are at least two commercial standards (ASTM international, 2002; International
Electrotechnical Commission, 2004). On the basis of our research the reason for the low
adoption rate of the standards seems to be the strong context-specific nature of LCC
methods. The methods used depend strongly at least from the purpose of the analysis and
the availability of information. Thus, while agreeing with the statement that the slow
adoption rate of life cycle costing results from lack of standard or formal guidelines and
the lack of reliable past data (Ardit and Messiha, 1999), we amend it by noting that the
variety and context-specific nature of LCC methods makes the establishment and
application of formal guidelines fairly complicated.
Characteristics of operating environment
The statements of Woodward (1997) that the main LCC users come from construction
and military, as well as public sector having a notable role in encouraging the use of LCC
received partial support. The proportion of case studies done for the needs of public
sector was indeed notable (40 % of cases). Construction division dominated the reported
cases very strongly (62 %), but military cases were almost absent. However, this is likely
to be due to the reporting bias discussed above.
The majority of the analyses were done from the client perspective, but the share of cases
reported from manufacturer’s perspective was in fact quite large (25 %) considering the
dominant position of client view in the LCC method literature. This is surprising also in
the light that the manufacturers were not reported to receive any information from their
products’ users regarding the O&M and disposal phase costs, although all of the
manufacturer cases were reported to include the operations and maintenance costs.
Most of the analyses were done to support investment decisions rather than continuous
procurement or production decisions. This indicates that life cycle costing is mostly
performed in situations where the specific end use of the product needs to be taken into
account.
Purposes for LCC analyses
Life cycle costing had been used for wide range of different purposes. All of the six
categories in the classification by Barringer and Weber (1996) were represented in at
least one case study. In general, most common uses of life cycle costing were source
selection studies for different products and design trade-offs, both comparison and
optimization. There were some differences in the LCC purposes by industry:
Construction industry is the main user of affordability studies, and cases from energy
division focused mostly on the source selection studies for different products. Quite
understandably, the public sector uses life cycle costing mostly in sourcing decisions,
while the private sector uses LCC as a design support tool.
19
Life cycle costing methods
The reported LCC methods were overall fairly unsatisfactory, in terms of all of the
analyzed aspects of the cases (life cycle phases considered, information sources used,
cost estimation methods used, and the deterministic nature of analyses).
All the life cycle phases (Fabrycky and Blanchard, 1991) were taken into account in only
three case studies. Additionally the level of detail of the calculations was very low. Only
a few articles had presented the costs at a similar, high level of detail, what the LCC
method publications suggest (Fabrycky and Blanchard, 1991; Woodward, 1997). The
design phase was neglected in the LCC analyses (presented only in 20 % of cases), which
is much in line with remarks from Ellram and Siferd (1998). It must, however, be noted
that this negligence is not as such a feature of LCC methods (cf. Fabrycky and Blanchard,
1991), but rather a feature of the reported LCC implementations.
According to Fabrycky and Blanchard (1991) parametric estimation should be preferred
in most of the situations. From these case studies only less than half used purely
parametric cost estimation methods. Construction and energy divisions performed
especially poor in this category mainly because these industries did not report having
internal cost databases and therefore had to rely heavily on external sources of data
(public statistics and other articles). As a whole, the reporting of the use of internal
sources of information has been quite rare. It is however possible that this is partially due
to shortcomings of the reporting or the academic nature of the cases.
The purpose of the analysis had an extremely strong effect on the cost estimation
methods used. Repair level analyses and warranty and support cost estimations were all
purely parametric. Design optimizations were also very data intensive. On the other hand
source selection studies involved lots of expert judgment and analogy. While the strong
relationship between purpose and method selection is not surprising, it indicates a need
for further development of context-specific LCC methods or standards.
The deterministic calculation methods of almost half of the case studies were quite
alarming. These analyses didn’t pay any attention to the fact that future costs are always
uncertain. In cases where uncertainty was addressed, the most common factor for
sensitivity analyses was discount rate. Considering the fundamental role of highly volatile
energy costs in many analyses, including the deterministic ones, the need for a sensitivity
analysis is ever greater.
Further research
As the reviewed case studies focused heavily on the characteristics of products or
designs, there seems to be room for case studies focusing on the implementations of
different LCC applications. The current case studies are by no means encouraging for
readers looking for insights on how to conduct life-cycle costing in practice.
To address the limitations in this study, we suggest two lines of further research: (i) A
similar literature-based multiple case analysis for other cost management terms with a life
cycle focus to generate an overview of life cycle costing traditions, and (ii) A multiple
case study of actual applications of LCC methods used in the industry. The framework
20
we have developed for this review could serve as a good starting point for both of these
analyses, especially for the study of actual applications of LCC methods in the industry.
With a multiple case study of actual applications in the industry, one could circumvent
the inherent limitations of our research design, namely the bias caused by reporting and
the extent to which judgment is needed in interpreting the reporting. Such a field study of
actual LCC methods could reveal context-specific dimensions of LCC analysis and
enable the development of a more detailed formal guideline for performing LCC
analyses. Field studies are fairly resource intensive, and to minimize the costs of
recording an individual case, a tested framework of analysis is very valuable. We hope
the framework we have used here in analyzing reported cases can serve also with field
studies of LCC applications.
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22
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23
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24
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