New RP 138R-25: Introduction to Life Cycle Cost Analysis
Life cycle cost analysis (LCCA) is a comprehensive economic assessment method used to evaluate the total cost of owning, operating, maintaining, refurbishing, and disposing of an asset over its expected life span. LCCA extends beyond initial acquisition or construction costs to include all subsequent expenses, such as operation, maintenance, upgrades, and eventual disposal costs, as well as the potential savings or benefits over the asset’s life. The primary purpose of LCCA is to assist decision-makers in choosing the most cost-effective option among different competing alternatives. By evaluating the total cost of ownership of a project, asset, or system over its entire lifespan, LCCA enables informed decision-making that balances initial investment costs with long-term operational, maintenance, and disposal costs.
The AACE International Total Cost Management Framework states that “the most important business requirement for most enterprises, and the basis for their asset investment decisions, where applicable, is a measure of economic return on investment; a single measure that expresses in monetary terms the value of investment over its life cycle to the enterprise.” A goal of cost engineering is to support decision-making, ensuring that the best option among competing alternatives is selected, followed by effectively managing project execution to realize all project goals and objectives. Support for early investment decisions should place a focus on determining the optimal life cycle cost option. The result of an effective LCCA provides that single monetary measure of value, which should underpin the selection of a preferred alternative or the decision to approve (or disapprove) a final capital investment decision. There are times when other constraints, such as limited capital funds, may not support the lowest life cycle cost option; however, due diligence should always encourage life cycle cost analysis as a part of the decision-making process.
Life cycle cost analysis is important in supporting overall investment decisions that underpin effective strategic asset management, “the macro process of managing the total life cycle cost investment of resources in an enterprise’s portfolio of strategic assets.” However, LCCA can be just as important in selecting an optimal technology during the project development process for an asset (value engineering) as it may be in choosing the preferred replacement pump during the operation and maintenance of an asset. LCCA enables value-driven decision-making by identifying the most cost-effective option among competing alternatives, focusing on total cost of ownership rather than just initial capital expeditures. This approach is especially critical in infrastructure, industrial, and public sector projects where long-term costs can significantly exceed initial capital costs.
This recommended practice (RP) of AACE International introduces life cycle cost analysis as a crucial tool for assessing the total cost of ownership of assets over their lifecycle. It will address the concept, purpose, methodologies, and application of life cycle cost analysis. It will also address life cycle cost estimating, which is a key step in the overall LCCA process.
Contributors:
Larry R. Dysert, CCP CEP DRMP FAACE Hon. Life (Primary Contributor)
Sam Kitchin, PSP (Primary Contributor)
Shoshanna C. Fraizinger, CCP FAACE
John K. Hollmann, CCE CEP DRMP FAACE Hon. Life
Dan Melamed, CCP EVP FAACE
Tom Orr
Amanjeet Singh
About Larry:
Larry R. Dysert, CCP CEP DRMP FAACE Hon. Life, is the Managing Partner of Conquest Consulting Group (CCG) and a Senior Principal at Long International. He has extensive experience in various areas of cost engineering, including independent estimate review and validation, estimate preparation, project controls, risk management, training, and supporting claims and dispute resolution. With over 45 years of experience, he has worked in industries such as chemical, petroleum, oil sands, high technology, utility generation, manufacturing, and construction. Larry has been responsible for creating both conceptual and detailed estimates for capital projects, both domestic and international, with project sizes exceeding $50 billion.
Larry is a frequent presenter and author on estimating and cost engineering topics and an active member of AACE International. He is a Certified Cost Professional, Certified Estimating Professional, and Decision and Risk Management Professional. Larry served as the Chair of the AACE task force that developed AACE’s Certified Estimating Professional program. He is also an AACE Award of Merit recipient, Honorary Lifetime Member, and Fellow of AACE International. Larry previously held the roles of Vice President and Chair of the Technical Board at AACE International, overseeing the development of all AACE technical products, including recommended practices. He is the primary author of 17 AACE recommended practices and has contributed to over 35 others. Additionally, he authored chapters in the AACE Total Cost Management Framework and in Skills and Knowledge of Cost Engineering. You may reach Larry at ldysert@ccg-estimating.com.
About Sam:
Sam Kitchin, PSP is the Technical Director at Augur Consulting with more than 13 years of experience in government acquisition. He has performed cost, schedule, and earned value management analysis for a broad range of projects within the Department of Energy and the Department of Defense. He began his career developing lifecycle cost estimates (LCCEs) for long-duration acquisition projects, building complex cost models used to support budget planning and specialized cost analyses. He has experience performing independent cost reviews, conducting integrated baseline reviews (IBRs), and performing schedule analyses for capital infrastructure projects. In his current role, he oversees training and implementation of cost estimating, schedule analysis, and performance management best practices within Augur. Sam graduated from Wake Forest University with a BS in Mathematical Business. He holds a PSP certification from AACE and is a certified cost estimator/analyst (CCEA) through ICEAA. Sam may be reached at skitchin@augurconsulting.com.
You can find this new RP here: 138R-25: Introduction to Life Cycle Cost Analysis