The Business Case for Life Cycle Costing

Cut costs & fight climate change

Library                     Articles                  News              Case studies

The Business Case for Life Cycle Costing in Construction

 

The implementation of a LCC perspective … can also enable economic and environmental dimensions to be combined in sourcing, and as mentioned, can effectively help determine the lowest cost by evaluating offers comprehensively and thoroughly.

— Maria Rosa De Giacomo, Francesco Testa, Fabio Iraldo, Marco Formentini. “Does Green Public Procurement lead to Life Cycle Costing (LCC) adoption?” (2018)

If you already know the basics of Life Cycle Costing in construction and real estate business, you are now ready to move on to the real-life application of this methodology and its practical benefits.

But first, let’s recap what are the essential elements of Life Cycle Costing.

Life Cycle Costing analysis is a variation of financial analysis that is embedded in all stages of a construction project, comparing different design solutions in order to find the most ergonomic option with the highest return on investment. It is based on Life Cycle methodology, which goes hand in hand with environmental Life Cycle Assessment in construction, so the two analyses are often conducted together.

The main condition for a successful LCC analysis is to start conducting it early in the project planning stage. Furthermore, it should be an ongoing process, which is repeated several times as the project changes and evolves. Finally, the best way to conduct LCC analysis is to use professional software with an extensive LCC database tailored to your region, like One Click LCA.

So how can you get maximum profit from LCC?

First of all, if you are looking for the minimal initial project investment, LCC is not the methodology you should apply. In order to get real value from Life Cycle Costing analysis, you have to adopt strategic thinking, shifting from aiming for short-term payback towards striving for long-term value and savings.

When you perform a LCC analysis, your initial costs might increase. However, due to the mechanics of LCC, it is a trade off for less financial obligations in the future, for example, for reduced maintenance and renovation costs. Will your project value increase rapidly if you conduct a LCC study? Will your end profit grow? – these are the questions you should be focusing on instead of focusing only on reducing the initial investment.

Life Cycle Costing methodology is the tool you can use to increase your returns exponentially, as it is an advanced financial forecasting technique that allows you and your investors to make an accurate prognosis on the development and the pay-off of your initial investments in smarter design or higher quality materials.

While other financial analysis methods subtly push you towards compromising on utility and efficiency, they also bring down your ROI percentage significantly. To give a specific example, you can be asked to choose between two options:

Project Initial costs ROI
1 100,000 20%
2 25,000 18%
3 75,000 15%

In this practical exercise if you were asked how to invest – in option 1 or in options 2 and 3 together – what would you choose?

Lacking the LCC analysis, it would seem like investing in projects 2 and 3 is the smarter choice: the ROI percentage looks good and close to that of project 1, so you get more for the same investment price, right?

It looks compelling while, in fact, they provide less pay-off. Projects 2 and 3 combined would pay back only 15,750 when project 1 alone would grant you 20,000 of revenue.

To further clarify this, let us review the key benefits of LCC identified in the previous article and add the business case benefits.

Why should you switch to Life Cycle Costing analysis in your project planning?

1. Best long-term value

Regardless of the change in project costs, with LCC you get higher value proportionally to the invested funds. Life Cycle Costing analysis is an opportunity to improve your original design and at the same time rationalize your spendings and get a positive impact on your bottom line.

2. Earning easy Green Building credits

LCC is one of the easiest optional credits to get in a lot of Green Building schemes: DGNB and BREEAM to name a few. Considering that it is recommended to conduct LCC and LCA together (by the way, learn about the business case for Life Cycle Assessment now!), it takes less effort to get higher value.

3. Reliable planning

LCC gives you full control over your project at all stages. Avoid surprise costs and have the full power over financial side of your business.

4. Get a larger financial benefit and compel investors to contribute more funds

Use Life Cycle Costing method to the full potential and achieve the highest return on investment among all other options. Your investors will see the practical benefits of your LCC-inducing planning and the financial gain it entails for them. Request your free LCC trial with One Click LCA now!

 

Download our Business Case for Life Cycle Costing cheatsheet:

Test One Click LCA now

You might also like