Whole-life costing

What is whole-life costing?

Whole-life costing (WLC) is an estimate used to help buyers determine the end-to-end cost of providing a service, manufacturing, or procuring a product. Also commonly referred to as total cost of ownership (TCO), or total life cycle costs (LCC). The use of the terms vary dependent on industry and sector. Whole-life costing is typically applied to products which are strategic or of critical importance to the future success of the organisation.

What is included in the life cycle cost?

Life-cycle costs (LCC) are used to analyse the total costs incurred over the lifetime of a product, work, or service. Life cycle costing techniques include whole-life costing or total cost of ownership analysis. It relates to all costs of acquisition, owning and running the asset but does not include disposal. Public sector often talks about LCC while private sector tends to talk about total cost of ownership (TCO) or whole-life costing (WLC).

Life cycle costs can be split into the total cost involved in inventory items, including purchasing price, inward delivery, receipt and handling, storage, packing and preparation, dispatch costs, insurance and overheads.

How is the life cycle cost calculated?

The information required to undertake WLC may not be readily available and research may be required. This can involve, for example, engaging with the supplier and other customers of the supplier, particularly for information about their experience of using the requirement in question. However, once such information is obtained it can be used in other WLC exercises for similar procurements.

The time and effort involved in data collection to make WLC effective and useful can be considerable, so it could be argued that WLC is most appropriate for high-value and high-risk products. However, where such data is readily available, and WLC is consequently not highly resource-consuming, there is no reason why it cannot be applied to lower-value purchases as a means of determining the best value-for-money option.

Cost information required should include a breakdown of:

• overheads
• margins
• production costs
• operating costs
• energy consumption
• maintenance costs

What is total cost of ownership in procurement and supply?

Total cost of ownership is defined as:

An estimate used to help buyers determine the end-to-end cost of providing a service or manufacturing a product. It includes all non-value-adding processes and scrap, rework, or other disposal costs, as well as purchase price, acquisition cost, usage cost, and end-of-life cost.

Total cost of ownership can typically be categorised into four categories: procurement costs, acquisition costs, usage costs, and end-of-life costs. Read more about total cost of ownership here.

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