Posted by Cindy Cheng on March 29, 2016
Life-cycle costing is a concept that has come to prominence in public procurement over the past few years but there seems to be a lack of understanding over exactly what it means and what areas it covers.
Regulation 68 of The Public Contracts Regulations 2015 specifically outlines that life cycle costing can now be used by buyers when cost is the award criterion.
Life-cycle costing is similar to MEAT (Most economically advantageous tender) in that it takes into account a combination of price and quality. The difference is that all aspects of the production process can be considered in the evaluation of the bid.
Research and development, production costs, maintenance costs and end of life disposal costs are all considered to be part of life-cycle cost. Environmental factors like costs of greenhouse gas emissions and climate change mitigation can also be included in the assessment if a monetary value can be assigned to them.
To break this down further, buyers may want to consider the following elements in greater detail before making the decision to purchase:
- Various transaction costs, such as taxes, foreign exchange and contracting costs.
- Finance costs (if capital has to be borrowed to pay for the purchase).
- Acquisition costs: costs of delivery, installation and commissioning.
- Operating costs, such as energy, spares, consumables, maintenance and repair over the useful life of the purchase (e.g. for equipment and machinery), operating training, supplier support.
- Costs of storage and other handling, assembly or finishing required.
- Costs of quality (inspection, re-work or rejection, lost sales, compensation of customers etc).
- End of life costs, such as decommissioning, removal and disposal (minus some negative cost if the asset has sufficient residual value for re-sale).
Some or all of these costs may be included in the price quoted by a supplier but they may not be. Buyers should assess this fully – does a lower price reflect competitive pricing or a lesser total package of benefits?
When procuring in the construction industry for example, it is recommended by The Office of Government Commerce that higher costs at the design and construction stages should be considered in the interests of achieving significant savings over a building’s lifetime. For construction projects in particular, life-cycle costs are those associated directly with the building; costs such as land, income from the building and support costs associated with the activity in the building.
Of course, suppliers will need to consider the lifecycle cost factor as a priority too. This is to ensure that best value can be gained from cost of production whilst staying competitive in the marketplace.
Regulation 68 also sets the parameters to ensure that it is fair and to make sure that it doesn’t disadvantage certain suppliers. If an authority is to use life cycle costing, the criteria that they are using must be included in the procurement documents and they must also outline what data they are expecting the supplier to provide. It also states that if a common method for calculation has been made mandatory by EU legislation that it should be used for the assessment. (The only example so far is the Clean and Efficient Vehicles Directive (2009/33/EU).
It may be common once the procurement process is in progress for lifecycle costing to slip down the list of priorities. Calculations therefore need to be incorporated at the start of the process, and not be seen as a last minute fix.
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