A guide to life cycle costing
Life cycle costing is very much similar to the life cycle assessment. In this article, you will find out what are the similarities, types and whether it can be done in SimaPro.
What is life cycle costing (LCC)?
Life cycle costing (LCC) belongs to the group of sustainability tools that focus on flows in connection with the production and consumption of goods and services. They focus on evaluating different flows in relation to various products or services instead of for example regions or nations. LCC is an economic approach that sums up ”total costs of a product, process or activity discounted over its lifetime”. It is associated with cost in general rather than just environmental costs.
A robust LCC framework will be able to link life cycle assessment (LCA) studies to the monetary cost systems used by business decision-makers. Unless these “dollar-driven” decisions can be assessed in terms of the physical limits of natural systems, it will be difficult to assess progress toward sustainability. Therefore, LCC is seen alongside LCA as two of the three pillars in an evaluation of sustainability, with the third, social assessment, still in development.
What are the types of life cycle costing?
According to the SETAC Working group on LCC, there are three different types of LCC: conventional, environmental and societal.
The conventional LCC is, to a large extent, the historic and current practice in many governments and firms, and is based on purely economic evaluation, considering various costs associated with a product that is born directly by a given actor. External costs are often neglected.
Environmental LCC summarizes all costs associated within the life cycle of a product that are directly covered by one, or more, of the actors involved in the product’s life cycle, including externalities that are anticipated to be internalized in the decision-relevant future. These costs must relate to real money flows. The environmental LCC is not a stand-alone technique but is seen as a complementary analysis to the environmental life cycle assessment.
The environmental LCC as compared to the conventional LCC can be seen as a tool for both external communication and certification as well as labeling, while conventional LCC is more likely to be used as an internal tool. In environmental LCC it is obligatory to include all life cycle stages, while the conventional LCC often does not take into consideration the end-of-life costs (Ciroth et al. 2008).
Are there similarities between LCC and LCA?
Life cycle costing (LCC) is very similar to a life cycle assessment (LCA). Also for life cycle costing, goal and scope (system boundaries, the object of study, allocation, “impact assessment”), and other aspects need to be defined and aligned with the decisions taken for the life cycle assessment in order to obtain an overall consistent analysis.
Basically, an environmental LCC analysis has a similar structure as a life cycle assessment that is conducted in parallel and has the same functional unit. The life cycle and system boundaries need to be equivalent, but not necessarily the same as different processes may have different relevance for the environment and for the cost part. For example, research and development will rarely be considered in an LCA, while it is commonly taken into account in LCC. Further, environmental LCC can be performed from the viewpoint of different “life cycle actors” (as producers, product buyers, or end-of-life actors).
Since both environmental LCC and LCA are of a similar structure and can even be interpreted together, it makes sense to conduct both in one software tool such as SimaPro.
How to do life cycle costing in SimaPro?
Since each organization defines costs differently, and costs are fluctuating almost by definition, no default costs and costing methods are defined in SimaPro. You can define your own “customized” costs and create a related life cycle costing method in SimaPro. It isn’t difficult and is explained in this guideline by our partner.