Calculating Life Cycle Costs

Jan. 1, 2008

Life cycle cost analysis (LCA) is the systematic, analytical review of all factors that influence the total “cradle-to-grave” cost for an asset or activity. LCA can be a valuable tool in evaluating competing machines for purchase and in analyzing choices previously made, says John Brewington of Brewington & Co., a fleet management consultant in Mt. Airy, NC.

An LCA can be conducted as part of the bid evaluation prior to acquiring an asset or anytime during the life of an asset, or at the end of the asset’s life. Prior to acquisition, you predict the costs using known costs or estimates where necessary. You can then select the machine that has the lowest projected life cycle cost.

For doing an LCA further into the life of a machine, you have more accurate information. This process is helpful in confirming results projected by the initial cost analysis. A final LCA has the advantage of knowing all actual costs and values for all components of the analysis.

Brewington’s formula for doing an LCA follows:

LC = (C + U) + F + I + L + M + MS + T
– (S – R – E)
C = Initial cost of the machine
E = Expenses incurred to sell the
F = Fuel cost
I = Insurance
L = Loss of use from downtime
LC = Life cycle cost
M = Maintenance and repair cost
MS = Miscellaneous expenses
R = Refurbishment cost
S = Salvage value
T = Taxes and title fees
U = Cost of upfitting, accessories, etc.

Keeping a balanced fleet is key.

When comparing competitive bids for equipment within the same classification, the formula may be as simple as LC = C + F – S, where fuel costs (F) and salvage value have been adjusted to net present values.

Going forward, contractors may be forced to keep equipment longer, because the major manufacturers have stretched out lead times for new machines in the past couple of years. Worldwide demand for equipment has been strong, and major manufacturers have focused on building larger, more profitable machines. “It puts a pinch on the supply for smaller equipment,” says Mike Monnot of Zachry Construction Corp. “Lead times will become longer.”