2.9 Life-cycle costing

The true cost of ownership can only be established if the full life-cycle costs are known.

Life-cycle costing is a key asset management tool that takes into account the whole-of-life implications of planning, acquiring, operating, maintaining and disposing (including makegood provisions if necessary) of an asset. It is a process that analyses the known costs over an asset's life, or that of a non-asset solution, to reflect the true overall cost of acquiring an asset. Life-cycle costing is best performed prior to acquisition to allow a comparison of costs to be made. Additional guidance can be obtained on life-cycle costs from the Australian National Audit Office's Better Practice Guide, Life-Cycle Costing, issued in 2001.

When entities undertake strategic asset management it is important that they capture the life-cycle costs associated with the ownership of key assets, and that these costs are included in decisions relating to assets, including capital investment decisions and in determining the optimal mix for the asset portfolio. In certain circumstances it may be beneficial for an entity to develop a chart of accounts in its financial management information system that is used to track life-cycle costs, and project management modules can also be configured to capture this data.

To assist in making life-cycle costing more efficient, assets that have similar characteristics can be grouped together and profiled. The use of profiling across the whole of an entity's asset base can dramatically improve the life-cycle costing process. This can enable the entity to:

  • identify the true costs of asset ownership more accurately and reliably; and
  • enhance its ability to track life-cycle costs at the asset and program level.

Case Study 2.5 provides an example of how asset profiling may be developed.

Case Study 2.5: Asset profiling

Asset profiling is a useful tool in developing generic profiles aligned with individual assets that share similar characteristics to determine the life-cycle costs, including the capital and operational components.

Estimations of life-cycle cost incorporating maintenance regimes, are, depending upon the nature of the assets, based upon assessment of the design specifications by engineers, quantity surveyors or other relevant experts.

Asset profiling provides a robust and defensible methodology for developing budget estimates and is built into capital management planning. This methodology provides assurance to an entity’s executive as to the likely resource demands for both its existing asset base and for proposed acquisitions. The New Policy Proposal capital bid process is strengthened by having life-cycle costs supported by a sound methodology and expert, independently sourced calculations.

Asset profiling can be illustrated through a fictitious example of an asset profile for a freehold building, although the methodology and examples are equally relevant to other assets which comprise a number of interrelated components. A building is made up of many components and associated life-cycle costs. For the purposes of the example inflationary movements and revaluations are ignored, the building will be replaced at the end of its useful life, and depreciation is maintained at a constant level based upon the original acquisition cost.

Table 2.9: Asset profile for a freehold building

Acquisition Cost     $25,000,000 Usefule life: 50 years
Component Time period (years) Last performed Next task date Capital Operational
        ($) ($)
Building condition assessment 5 15/03/2007 15/03/2012   10,000
Window cleaning 1 31/01/2009 31/01/2010   5,000
Heating and air condition maintenance 5 31/10/2008 31/10/2013   10,000
Painting 10 30/06/2005 30/06/2015   15,000
Upgrade stairs, railings, handrails and guardrails 30 31/03/1985 31/03/2015 150,000  
Replace roofing, guttering and flashing 40 30/04/1980 30/04/2020 100,000  
Lift inspection and maintenance 3 30/04/1980 31/07/2010   10,000
Upgrade building automation systems 2 31/03/2008 31/03/2010 5,000  
  09/10 10/11 11/12 12/13 13/14 14/15 15/16 Sub Total
Capital 5    5   5 150 5 170
Operational 5 15 5 15 25 20 5 90
Deprecational 500 500 500 500 500 500 500 3,500
Total 510 515 510 515 520 670 510 3,760
  16/17 17/18 18/19 19/20 20/21 21/22 22/23 24/25 Grand Total
Capital
5  
105 
5
5 290
Operational 15 15 5 15 5 5 20 15 190
Deprecational 500 500 500 500 500 500 500 500 7,500
Total 515 520 505 620 505 510 520 520 7,980

Aggregated with asset profiles developed for other asset types, a composite financial impact of an entity's asset base can be integrated into an Asset Management Strategy and a Capital Management Plan.

Actual costs incurred against an asset profile are tracked to assess whether the original estimates that were made based on design specifications were reasonable. Adjustments to estimates and methodologies can then be made through this feedback loop.