One of the most important tasks of facility managers is to identify the best and most cost-effective solutions to specific problems. Here’s how to use life-cycle cost analysis to identify the best solution covering all of your pain points.
For quite some time you and your team might have been looking to find a new, more energy-efficient and cost-effective office lighting solution. Finally, the best offer came your way, 15% cheaper than their most affordable competitor. Based on the price alone, you know that you’re going to make your manager a happy man – or do you?
Due to the global economic crisis in recent years, businesses worldwide have partly been focusing on buying products and solutions with the lowest initial costs to better control the overall spending in favor of tight budgets. This make sense, but in many cases only in the short run. Facility Management decisions made solely on initial costs are never good decisions and are more likely wrong than right.
Incorporating the long-term perspective
Facility Managers ready to escape this shortsighted strategy should instead embrace the concept of Life-Cycle Cost Analysis (LCCA). Life-Cycle Cost Analysis allows a comparison of two different options of different expected life-cycles and the total cost of one option over its expected life-cycle. Applied within the context of Facility Management, this concept acknowledges that the business buys into a chain of costs when buying a specific solution or product. This is in other words also called the cost of ownership. Similar, the life-cycle costs can be used to evaluate two options meeting the same requirement. All in all, the method takes at least these three factors into account:
By calculating these three factors, Life-Cycle Cost Analysis will help you minimize your overall costs by benchmarking them to alternative choices that are similar, yet different in cost structures.
What you need in order to conduct Life-Cycle Cost Analysis
Facility Managers can apply Life-Cycle Cost Analysis to all sorts of decisions and project sizes, when the main focus is simply to determine the lowest cost alternative for a given level of performance.
To conduct Life-Cycle Cost Analysis, the following information is the minimum requirement:
While all of this might make sense – other parts can be quite confusing. So how can you as a Facility Manager work around this?
To make sure your calculations are correct, always keep in mind the total and sometimes hidden costs. As an example consider that the total cost of acquisition does not only include the price, but also includes transportation costs, technical setup and other initial installation expenses. To get the whole picture, calculating Life-Cycle costs also includes accounting for future energy prices or yearly maintenance costs.
Finally, make sure to tap into other resources such as the business’ finance and equipment manufactures and contractors can help determine the estimates and clarify future costs.
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