Life Cycle Costing
Though many procurers are using life cycle costing as a decision-making tool, its use is still far from being systematic and the calculation methodologies are sometimes far from robust. Moreover, procurers are not using life cycle costing to inform strategically advantageous decisions. It is therefore clear that the current sustainable public procurement model is not delivering the best value for taxpayers’ money We believe this needs to change.
Introduction: Why decisions on life cycle costing (LCC) are needed now
Life cycle costing (LCC) is defined in the International Organization for Standardization standard, Buildings and Constructed Assets, Service-life Planning, Part 5: Life-cycle Costing (ISO 15686-5) as an “economic assessment considering all agreed projected significant and relevant cost flows over a period of analysis expressed in monetary value. The projected costs are those needed to achieve defined levels of performance, including reliability, safety and availability.”
In the context of sustainable public procurement (SPP), the use of LCC is essential to demonstrate that procurement processes and decisions have to move beyond considering the purchase price of a good or service, for the purchase price does not reflect the financial and non-financial gains that are offered by environmentally and socially preferable assets as they accrue during the operations and use phases of the asset life cycle.
Typical LCC analyses are therefore are based on:
● purchasing costs and all associated costs such as delivery, installation, commissioning, and insurance;
● operating costs, including utility costs such as energy and water use and maintenance costs;
● end-of-life costs such as removal, recycling or refurbishment and decommissioning;
● longevity and warranty time frames of the asset.
Governments are waking up to the business case for sustainable public procurement. In tandem, they are also finding it is important to integrate LCC into these policies, as “green” and socially-preferable assets may carry considerably higher purchasing price tags than their less sustainable substitutes. This is particularly the case in the middle- and lower-income countries where the markets for green and social goods and services are in their infancy.
It is true that the price premiums paid for sustainable assets may be largely offset through efficiency gains, cost savings, and lower risks during the product/project lifetime. But procurers still face difficult decisions. Whilst they are being required to make purchasing decisions that are better for their environment and their societies, they are also bound by the principle to award the tender to the most economically advantageous bid to ensure the best value for their money.
Incorporating LCC into procurement policies will provide procurers with the opportunity to demonstrate that the best value for money across the asset life cycle can only be assured by purchasing green and socially preferable alternatives. But to what extent is LCC integrated into procurement policies? And do procurers and sustainable procurement policy-makers have the expertise to interpret LCC analyses to demonstrate the value for the public purse? These questions are particularly timely as governments roll out economic stimulus packages that have a strong focus on sustainable development. Large sums of public funds are being allocated to upgrade infrastructure, buildings, and utilities in a manner that reduces energy and material inputs lower waste, and improves livelihoods. Governments need to ensure that these funds are put to optimum use and sustainable public procurement, with an inbuilt LCC requirement, can serve as a cost-effective tool to achieve these ends.
This white paper is based on:
● The review of national green and sustainable public procurement policies of over 30 countries;
● A review of five voluntary public sector initiatives to promote sustainable purchasing;
● Formal consultations with public procurers, sustainable public procurement policy-makers, enterprises that do business with the public sector and experts in LCC.
IISD developed this white paper to begin a global debate on the role of life cycle costing in sustainable public procurement and indeed, the effectiveness of sustainable public procurement as a cost-effective strategy for sustainable development. We look forward to your perspectives on this debate, which can be addressed to Oshani Perera at IISD at [email protected].
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