Life Cycle Costing (LCC) and Whole-Life Costing (WLC) are related disciplines which seek to forecast the future costs of assets. This generally requires a series of modelling exercises which forecast the future deployment, operation and reliability of an asset, and then produce financial projections taking into account external variables such as escalation. LCC/WLC models are crucial for exploring potential cost reduction pathways or value engineering opportunities and are successively refined over the course of an asset’s life, as experience is gained.
Components of LCC/WLC models
Models that usefully predict costs to a far horizon will typically be supported by a deep understanding of the asset, its likely operation, its reliability and the consequences of failure. Ideally, this understanding has been gathered over the course of a number of years and reflects many documented experiences in a variety of environments. High quality data gathering and asset monitoring are therefore extremely helpful.
This experience is then translated into an operational regime which meets the customer or user’s needs from the asset. This regime includes the operation of the asset to meet demand, downtime for planned periodic maintenance, and some assessment of unplanned, reactive maintenance. The operational regime may be explored through further scenario modelling to decide on what levels of reliability or uptime may be achieved, or what costs can be expected.
Integrated team working
Like many modelling and analytics tasks, LCC and WLC demand close and co-ordinated working between different teams and disciplines. A modeller must be able to synthesize inputs from reliability engineers, designers, O&M specialists, finance teams and many other Subject Matter Experts (SMEs), and produce outputs that are useful to managers and decision-makers.
While the modeller necessarily cannot be an expert in all the fields that provide inputs, they can helpfully keep track of which inputs to which their model is sensitive, and facilitate discussion with SME’s to explore the inputs they are compiling. A modeller must have faith in the validity of the inputs they are receiving, and take ownership of the overall outputs of the model. Developing strong, respectful relationships with inputting SME’s, as well as the end client, is therefore an important part of a modellers’ skillset.
LCC/WLC of complex assets
Complex assets are made up of many components, some of which carry out the primary aim of the system (for example, the pump of a pumping station) but many others of which are concerned with the second or third order actuation or support of the primary components. It is therefore important to understand the relationships between components within the system, not only to appreciate how failures may propagate but also to determine what interventions are feasible in the event of failure. For example, design features such as redundancy and modularity allow components or sub-systems to be quickly removed and replaced, so long as the operational systems and supply chain are in place to achieve this.
Understanding and forecasting the costs associated with the operation and management of natural or semi-natural assets, such as rivers, coasts, reservoirs and embankments, brings additional challenges to the forecaster. Natural systems can introduce uncertainty at many levels, whether in the number of times that a flood gate is operated over its life, or in the magnitude of abrasion and degradation experienced by a hydropower turbine blade by suspended sediment.
For example, reservoir managers will integrate sediment accounting into their long-term strategy to allow better decisions to be made. Academic research can provide additional insights here – for example, Palmeiri et al (2001) found that certain reservoirs could be operated indefinitely, and profitably, if maintenance practices such as silt flushing, routing or dredging are followed. For other basins and reservoirs, the usual strategy is to accept a finite life to the reservoir due to sedimentation, and plan for substantial end-of-life costs when the dam is retired. Some unusual exceptions exist, such as reservoirs on the Loess Plateau in China that are predicted to have a significant end-of-life salvage value due to sedimentation producing valuable agricultural land (Voegele, 1997).
Life Cycle Costing and Whole Life Costing are important but complex areas for organisations to explore. At Naiad Infrastructure, we have extensive expertise building these models collaboratively with clients, as well as strengthening clients’ own internal capabilities to support longer-term smart asset management aspirations.