How to perform an LCC

This strategy describes how one can identity the costs factors and suggests different approaches to estimate them. Furthermore, the possible development of LCC tools is described.

Identifying the cost elements 
For someone with experience of the product and knowledge of the driving cost elements setting up and calculating the LCC is not a major problem.

With less experience of LCC, a more structured approach is necessary identify the required cost elements by breaking down the cost structure of the product in three different dimensions.

1. Break down the product in subsystems (e.g. power source, control system, etc.) and work packages (e.g. erection, decommission, etc.). 
2. Break down the product in life cycle phases (e.g. development, acquisition, operation, service, etc.) 
3. Break down the product in cost category of applicable resources (e.g. labor, materials, fuel/energy, overhead, transportation/travel, etc.)

The three different cost dimensions can be illustrated by a three dimensional matrix (see figure below). The blue element in the matrix can, for example, be the cost of the energy to run the power source (dimension 1; power source, dimension 2; operation, dimension 3; energy). This kind of systematic approach ensures that all relevant cost elements will be included.

Estimating costs 
When all possible cost elements have been identified (i.e. all elements of the matrix) one has to find or estimate the cost for each element. Many elements will be zero or almost zero (e.g. energy cost of the development of the power source) and require no cost estimation. Some costs are well known (e.g. by quotations from suppliers) others have to be estimated and there are three basic methods that are commonly used: 

• engineering cost method - involves the direct estimation of a particular cost element by examining the product component-by-component or part-by-part. It uses standard established cost factors, for example firm engineering and manufacturing estimates 
• analogous cost method -cost estimation based on experience with a similar product and technology in the past. 
• parametric cost method - uses significant parameters and variables to develop estimates which are usually in the form of equations. A parameter reflects a conversion factor from one system of units to another. A price like cost per manhour, for example, converts person hours into costs. An example of an empirical ratio is the number of maintenance person-hours per failure of a given component, which may be known by experience.

Once the costs have been estimated the present value of all future costs and incomes have to be calculated by "net present value". Once all the present values of all costs have been calculated the LCC calculations are trivial (i.e. summation of the costs).

Making a cost estimation/sales support tool 
Instead of making a LCC analysis of one specific solution, one could develop a LCC tool. Instead of estimating the costs one has to estimate costs based on a parameter, for example; 

• Cost of pump = factor * (throughput [kg/s]) 
• Cost of pump operation = factor * (throughput [kg/s]) 
• Cost of tank = factor * size of tank (= throughput [kg/s]*residence time* density) 

Now all costs (of pump, tank and operation) are parameterized (this does not have to be linear) on the throughput and this could be modeled in, for example, excel.

As an additional feature, one could allow the user discreet choices e.g. tank of steel or stainless steel. The cost of the tank is then dependent on the throughput and the user choice. 

• Cost of tank = factor(steel or stainless steel) * (size of tank)

LCA-like evaluation 
Yet one additional feature would be to include a LCA-like evaluation of the data from the cost model. Using the parameterized example of pumps and tank above, the throughput also can be used to estimate the material use (size of tank and pump, as well as tank material) and energy use (electricity to operate the motor driving the pump)

Using the parameterized model, the user gets a cost estimate as well as an LCA-like environmental evaluation based on a few simple inputs.

Soft values 
In a sales situation when one want compare two products there are a number of additional parameters that one needs to consider. These can not easily be included in the LCC or LCA-like evaluations described above. A tool could assist a more systematic evaluation of these "soft values" between two products by simply compare values for the two products and give a qualitative estimate of the difference. Examples of "soft values" are; Noise, Fulfillment of standards, Selection of color, Ease of scrapping/recycling, Distance to service, etc.

Experiences