Life cycle costing-Explain with a simple example
Whole life cycle costing (in construction) is the process of evaluating and estimating the total costs involved for building a project from the design stage to disposable stage. The building life cycle can divide into four key steps.
- Planing & Design stage
- Construction stage
- Operation stage (maintenance & renovations)
- Disposal stage
Therefor calculate project life cycle cost; It is essential to evaluate and estimate every cost involving in above each step. The expected life span of the project is an important factor when calculating the life cycle cost of the project.
A simple example of calculating the life cycle cost is below.
AAA contracting has decided to purchase new chairs for their office. So purchasing team requested quotes and samples from a few suppliers. Two suppliers have come up with two options. The first supplier has proposed complete plastic made chair and the chair second manufacturer suggested contains a metal mechanism and cushioned fabric. Technically the chair offered by the second manufacturer is more durable than the chair provided by the first supplier. But the cost of the first chair is lesser than the second chair. And the Company is planning to use these chairs for the next five years.
- Cost of the first chair(A) is 20$, and the price of the second chair(B) is 50$.
- First supplier (A) is giving a three-year warranty and after that buyer can extend the warranty for another two years by paying 10$ each. Complete warranty provided the first supplier is (3+ two years extended= five years) five years.
- The second supplier(B) is offering five years warranty, and the buyer can extend the warranty for another two years by paying 10$ each.
So the calculations are as follows.
|First supplier(A)||Second supplier(B)||Comments|
|Maintenance cost||20$||20$||For extended warranty|
|Disposal cost||15$||0$||Disposal cost of the First plastic chair(A) is assumed as 15$, Metal parts of the second chair(B) can be sell for scraps.|
|Expected life span(years)||5||7|
So as per the above calculations, even the purchase cost of the second chair(B) is expensive, it is beneficial for the AAA contracting to purchase the second chair. Because the life span of the second chair is high and the disposal cost is less.