Introduction To Life Cycle Costing

Introduction

This section provides background information including an explanation of life cycle costing, definitions of the key terms used in the life cycle costing module, an explanation of how the costing module in music works, and a caveat associated with model estimates.

Definitions

Life cycle costing: A "process to determine the sum of all expenses associated with a product or project, including acquisition, installation, operation, maintenance, refurbishment, discarding and disposal costs" (Standards Australia, 1999, p. 4). As shown in Figure 1, the life-cycle cost often provides one important input into a process where stormwater management options are being evaluated. Such an evaluation process may involve the selection of the best stormwater treatment device (or combination of measures) for a particular site. For more information on modern evaluation processes that incorporate a financial, social and ecological dimension, see Taylor (2005a).

Use of life cycle costing in an evaluation process such as the design of a stormwater treatment device (modified from Standards Australia, 1999 by Taylor, 2003).

Life cycle cost: For individual stormwater treatment devices / measures - The life cycle cost is the sum of all discounted costs over the life cycle of the asset / measure (expressed in dollars relevant to a base date). All costs are discounted back to the base date using an appropriate discount rate. In MUSIC’s life cycle costing module a real discount rate is used for discounting future costs that are expressed in real terms relative to the base date (i.e. costs that have not been adjusted for inflation).

For stormwater treatment trains - The life cycle cost is the sum of all discounted costs over the span of analysis for the stormwater treatment train.

Equivalent annual payment: The life cycle cost of the stormwater treatment device / measure ($) divided by the specified life cycle of the device / measure (years).

Life cycle: The functional life of the treatment device / measure (in years). For asset types that are maintained so that they can operate indefinitely when well-maintained (e.g. constructed wetlands) the life cycle is usually set at 50 years when calculating a life cycle cost (as the effect of discounting ensures that costs incurred beyond this date do not significantly affect the life cycle cost).

Total acquisition cost: The cost of defining the need for the treatment device / measure (e.g. preliminary feasibility studies), all design costs and construction costs including overheads but not GST (goods and services tax) or costs associated with using the land (where relevant). Any additional costs associated with using the land can be added manually to the total acquisition cost in music if the user desires. However, the final life cycle cost should clearly indicate these site-specific cost elements have been included.

Annual establishment cost: The cost required to ensure that the treatment device / measure is properly established where that establishment cost is not included in the total acquisition cost. For some systems, such as GPTs, sediment basins and other non-vegetated treatment systems, the establishment cost may be included in the acquisition cost, however for vegetated systems it may be necessary to separate out the establishment cost from the total acquisition cost, especially where the establishment period is expected to extend beyond the first year of the life cycle of the treatment device / measure.

Typical annual maintenance cost: The annual cost of typical, frequent maintenance activities (sometimes called ‘routine maintenance’), including all costs associated with inspections, training, administration and waste disposal (but not GST). The typical annual maintenance cost is assumed to be incurred in the final year of the treatment measure’s life span.

Renewal / Adaptation cost: The cost of unusual and/or infrequent restoration activities (sometimes called ‘corrective maintenance’), including all overheads but not GST (e.g. additional landscaping, improving the access track for maintenance, replacing filtration media on a bioretention system, re-contouring and replanting a wetland’s macrophyte zone, replacing a GPT’s screen, etc.).

Renewal period: The period between infrequent renewal / adaptation costs (e.g. on average, bioretention systems may need their filtration media replaced every 25 years).

Decommissioning cost: For structural stormwater treatment devices - The cost of removing the asset and fully restoring the site at the end of the asset’s useful life. For non-structural measures - The cost of shutting down the stormwater management measure and where relevant, re-instating the site to its original condition.

GPT volume: For estimates of total acquisition cost involving gross pollutant traps, music users have the option of using an algorithm that relates this cost element to the maximum volume of the unit (m3). This volume has the most relevance to in-ground, proprietary gross pollutant traps, where it is the total volume of stormwater and trapped pollutants in the device when it is operating at full capacity (i.e. at its peak design flow).

Cost element: One component of a treatment measure’s life cycle cost (e.g. its total acquisition cost, typical annual maintenance cost, renewal / adaptation cost, or decommissioning cost).

Discount rate: The rate (%) used to discount all future costs back to a base date. The current default value for the ‘real discount rate’ in MUSIC’s life cycle costing module is 5.5% p.a. ± 2% (at April 2005). Ideally, users should check to determine a rate that is current. For up-to-date figures, contact experienced local stormwater asset managers, or agencies that specify discount rates for the urban water industry (e.g. the Essential Services Commission in Victoria and the Independent Pricing and Regulatory Tribunal of New South Wales). Sensitivity analysis should also be done to check how the choice of this rate affects the estimated life cycle cost, as this can be a significant issue when evaluating options with substantially different temporal distributions of costs. Note that the rate must be a ‘real discount rate’ when discounting real costs (i.e. costs that have not been adjusted for inflation) and a ‘nominal discount rate’ when discounting nominal costs (i.e. costs that have been adjusted for inflation).

Annual inflation rate: A rate used in the life cycle costing module to convert real costs to a new base date (e.g. $100 in 2004 dollars equates to approximately $102 in 2005 dollars). The current default value in music (at April 2005) is 2% p.a. (± 0.5%). Ideally, users should check to determine a rate that is current. For an up-to-date figure, contact experienced local stormwater asset managers or agencies that specify rates for the water industry (e.g. the Essential Services Commission in Victoria and the Independent Pricing and Regulatory Tribunal of New South Wales).

Base year for costing (base date): The calendar year that the life cycle costing results will be reported in (e.g. "The life cycle cost of the stormwater treatment device / measure is approximately $150,000 in 2005 Australian dollars").

Span of analysis: The length of time over which the life cycle costing analysis is being done. For stormwater treatment trains, the span of analysis is typically set at the longest life cycle of any of the measures in the treatment train, or 50 years if the measures effectively have an infinite life cycle when maintained.

Real cost: The cost expressed in values of the base date (e.g. 2005 Australian dollars), including estimated changes in prices due to forecast changes in efficiency and technology, but excluding general price inflation or deflation.

Nominal cost: The expected price that will be paid when the cost is due to be paid, including estimated changes in prices due to the forecast changes in efficiency, inflation/deflation, technology and the like.

Non-structural measures: In the context of this manual, stormwater treatment measures that do not involve constructing an asset (e.g. educational programs, regulatory instruments and complimentary enforcement programs, illicit discharge elimination programs, street sweeping, etc.). music can model these measures using the generic treatment node, were pollutant removal efficiency estimates are available. For more information, see Taylor and Wong (2002).

p value of a regression (p): The regression's statistical significance. If p = 0.01 it means that there is a 99% probability that the observed relationship (regression equation) is a function of the inherent structure of the data (i.e. the relationship is real), rather than a product of random variation (i.e. chance).

R2 value of a regression: The regression's coefficient of determination. The R2 value tells you the proportion of variability in the regression’s y variable that is explained by the variation in the x variable. So if R2 = 0.95 for a particular regression equation, we could say 95% of the variation in y is explained by the variation in x using this equation. In simple terms, R2 tells you how closely x and y are related (i.e. how much "x controls y"), and p tells you how confident you are in the relationship.

The following key can also be used to describe the strength of the relationship between the x and y variable in the regression where the explanation of variance has been calculated: R2 > 0.79 = ‘very strong’; 0.48 < R2 ≤ 0.79 = ‘strong’; 0.15 < R2 ≤ 0.48 = ‘modest’; 0.04 < R2 ≤ 0.15 = ‘weak’; and R2 ≤ 0.04 = ‘very weak ‘.