Life cycle cost analysis: From planning to profitability

Conducting a life cycle cost analysis helps you see beyond the surface-level considerations of a cost. It considers the total cost of owning and operating an asset over its entire lifespan. You can use these insights to shape your decision-making process and create more consistent success with your commercial real estate (CRE) investments.

What is life cycle cost analysis?

Life cycle cost analysis (LCCA) is a method that helps you understand the total expenses associated with owning and operating a building over its entire lifespan. It goes beyond the initial investment and looks at various costs that occur over time, like construction, maintenance, energy usage, and potential replacements. By considering all these costs, LCCA gives you a complete picture of the financial implications of a CRE project.

How do you calculate life cycle costs? A step-by-step guide

To calculate life cycle costs, follow these steps:

1. Define the scope: Decide what to include in your analysis based on the type of asset, from installation to ongoing maintenance.
2. Gather cost information: Collect accurate data on initial costs, maintenance, and operating expenses.
3. Calculate costs in present value: Adjust future costs to their current value, considering inflation and money’s worth over time.
4. Summarize costs: Calculate the total life cycle cost by adding up all relevant expenses.
5. Analyze the results: Compare scenarios, identify cost drivers, and explore cost-saving opportunities.
6. Assess all risks: Account for changes in variables like inflation rates or energy prices that can impact cost projections.
7. Make informed decisions: Evaluate financial implications, long-term benefits, and sustainability factors to choose the best options.

Differences between LCCA, LCA, and CBA explained

In evaluating CRE projects, using life cycle cost analysis, life cycle assessment (LCA), and cost-benefit analysis (CBA) to assess an asset can help provide a comprehensive understanding of risks, costs, and benefits. Here is an overview of the insights you can find from each methodology:

• LCCA: Life cycle cost analysis details the lifetime cost of an asset or facility by taking into account all costs of owning and maintaining the asset.
• LCA: Life cycle assessments focus on the environmental impact of an asset, facility, or product. It considers factors like raw materials, manufacturing, transportation, use, and disposal. LCAs identify opportunities to enhance resource efficiency, reduce waste, and improve sustainability.
• CBA: Cost-benefit analysis helps us assess the financial and non-financial benefits and costs of a project. It helps us determine if the benefits of an investment outweigh the costs. CBA looks at variables such as projected revenue increases, efficiency improvements, environmental impact, and social benefits. It informs project prioritization and resource allocation.

Integrating life cycle cost analysis with a cost-benefit analysis for HVAC projects

For HVAC (heating, ventilation, and air conditioning) projects, LCCA gives us a detailed analysis of upfront expenses, as well as long-term costs like operation, maintenance, and replacements. CBA takes a broader perspective, considering both financial and non-financial factors. In HVAC projects, it evaluates the benefits and costs of energy efficiency, occupant comfort, environmental impact, and incentives.

Combining these approaches gives a holistic view of the costs and benefits of HVAC initiatives. It predicts the opportunity for increasing your revenue by improving occupant comfort as well as the lifetime cost and savings from HVAC improvements. ProptechOS partners such as ClimaCheck can help you combine these two analysis methods to fully understand the costs and benefits of your HVAC projects.

Components of a life cycle cost analysis in facility management

Understanding the three key components of conducting an LCCA in facility management can enable data-based decision-making for resource allocation and unlock new insights to improve efficiency.

Cost estimation and evaluation

Accurately estimating and evaluating costs at each stage of an asset’s life is crucial. It includes initial construction or acquisition costs, ongoing maintenance expenses, energy consumption, repairs, and eventual replacements. Thorough cost evaluation allows you to understand the financial impact of facility management activities and identify opportunities for cost optimization. These opportunities for optimization can also help improve real estate energy efficiency and make the CRE industry more sustainable.

Assessing maintenance and operational expenses

Evaluating the ongoing expenses required for maintenance and operation is vital. This includes routine maintenance, repairs, upgrades, and adjustments to meet regulations or standards. By carefully assessing these expenses, you can effectively plan and budget to avoid unexpected financial burdens.

Balancing upfront costs with long-term benefits

Striking the right balance between upfront costs and long-term benefits is essential. While lower initial costs may seem appealing, it’s crucial to consider potential savings, energy efficiency gains, and the durability of materials and equipment. Finding the optimal balance ensures cost-effectiveness and sustainability throughout the building’s life.

Simplified LCCA process with Proptech

Some Proptech solutions offer LCCA tools to simplify the process and improve accuracy. Here are a few ways Proptech solutions can help you conduct an LCCA:

• Easy data collection and integration: Automate data collection from various sources, including construction records, equipment details, maintenance logs, and energy consumption data.
• Advanced cost analysis and modeling: Sophisticated algorithms and modeling techniques are employed to analyze life cycle cost with a high degree of accuracy.
• Clear visualization and reporting: Building management systems can create clear visuals of expected costs and easy-to-read reports based on LCCA results.
• Scenario planning and optimization: Some Proptech solutions can conduct a scenario analysis to evaluate the lifecycle cost of an asset when placed under different circumstances.

ProptechOS can further streamline these efforts by acting as an operating system for all of your Proptech solutions. This creates a cohesive ecosystem that allows for a more comprehensive LCCA on investments. You can try ProptechOS for free to see how integrating your Proptech solutions allows you to evaluate assets more accurately.