Importance of Life Cycle Cost Analysis (LCCA)

Importance of Life Cycle Cost Analysis (LCCA)

Let us make it simple – If we have to plan and implement an HVAC upgrade – we generally miss out on 2 key issues :

  • HVAC upgrades, which will likely remain in place for 20 to 25 years (or more), are capital investments made within an organization’s fixed asset management program.
  • Also when a facility that is comfortable in terms of temperature, humidity, air quality, noise level, and energy consumption plays a mission-critical role in occupants’ satisfaction and their ability to concentrate and function productively.

Thus – Facility Managers need to be more strategic in having asset management focus on capital investments.

TIME TO SHIFT / CHANGE THE PARADIGM

Normally, bids are taken on a FIRST COST BASIS – asking vendors vide RFP’s to provide the lowest cost solutions while keeping the specifications and the design requirement intact, for the initial acquisition and installation of their recommended equipment.

This strategy of “Price based procurement” is alright, but a major HVAC upgrade is a capital asset; with the procured and installed equipment that will see several decades of service, representing a substantial investment and the upfront cost often represents only 5% of the overall funding in terms of the total cost of ownership over 20 or more years.

In spite of this knowledge, Facilities continue to purchase HVAC upgrades on a first-cost basis. But this paradigm needs to shift, which we are already seeing in many markets, with commercial building managers maximizing efficiency and saving money by evaluating their HVAC projects in view of their life cycle cost.

The Life Cycle Cost (LCC) of an asset is defined as the total discounted dollar cost of owning, operating, maintaining, and disposing of a building or a building system over a period of time.

Ref: The National Institute of Standards and Technology (NIST) Handbook.

Whereas, an LCC analysis (LCCA) examines a capital project’s total cost of ownership by comparing initial, maintenance, repair, and operating costs over the life of the system.

It is generally thought that a low prices initial investment is bound to appear attractive, but might have its own cons like – might use energy inefficiently, have excessive lifetime operational costs, or have a shorter usable life and effectively a shorter replacement cycle.

Facility Managers, thus, should consider all of these factors in order to make the most effective, efficient choices for their facilities – and this what a well-executed LCCA will result in one of the three following outcomes:

  • Procuring & Installing Equipment and systems that are outstandingly durable And compensate their higher initial costs with lower operational and maintenance expenses.
  • Procuring & Installing Equipment and systems with lower initial costs and satisfactory, if not optimal, performance.
  • Procuring & Installing Equipment and systems with the high cost of construction and operations but increase the facility’s performance ✓ (which can result in higher profitability that can offset the high cost of construction)

Any good LCCA needs to take into consideration this wide variety of factors- the Payback method/ ROI – how quickly the initial investment can be recovered without any measure of long-term performance or consideration of the system’s lifetime. And takes into account the system’s lifetime as well as a number of unpredictable factors, Behavioural psychology of the equipment, usage pattern forecast , Environment Condition forecast and energy costs, all of which can affect a system’s overall costs.

As a complex analysis, the LCC evaluation method requires an in-depth understanding of the process in order to ensure the best results. The rewards of a proper LCCA are well worth the time and effort.

Author: Arshad Ahmed, Head of Building and Facilities Consultancy

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