Methodology

Life cycle cost analysis - methodology

Definition of the goal and scope (Step 1)

Goal and scope definition specifies the motivation for the study as well as its intended application and audience. The scope of the study should be clearly explained. In particular, a basis for the evaluation, or functional unit, must be defined and product system boundaries clearly delineated by specifying which downstream and upstream stages are to be considered.

The goal of the LCC must state:

• the intended application;
• the reason for carrying out the study;
• the intended audience, that is, to whom the results of the study are intended to be communicated; and
• whether the results are to be used in comparative assertions intended to be disclosed to the public.

In defining the scope of the LCC study, the following items must be considered and clearly described:

• the product or service system to be studied;
• the functions of the product or service system;
• the functional unit that is consistent between the LCC and an associated LCA;
• the system boundary that satisfies the objectives of both the LCC and an associated LCA component;
• allocation procedures;
• the way the interpretation will be conducted;
• data sources to be considered;
• assumptions;
• value choices;
• limitations of the LCC;
• data quality requirements;
• type of critical review, if any; and
• type and format of the report required for the study.

Functional unit: The functional unit of the LCC, as with conventional LCA terminology, is often seen from the view of the consumer or end-user, with the manufacturer providing the reference flow and the other actors treating the reference flow. However, depending on the perspective of the study, a consumer-based functional unit may not be adequate. The full test of a valid definition for the functional unit and reference flow is consistency with the goal and scope of the study and support for the needs of the decision-maker conducting the study.

System boundaries: In terms of system boundaries, the life cycle in LCC may start even earlier compared to that of LCA because it may also include the knowledge phase, such as research and development and acquisition via the supply chain. When considering system boundaries, practitioners must take into account the relevance of all subprocesses in terms of their resulting effects on the LCC evaluation.

Stakeholder Input: Engaging key stakeholders, such as facility managers, healthcare administrators, and clinical staff, in defining the scope ensures the analysis reflects real-world needs and operational concerns.

Creating the Life Cycle Inventory (Step 2)

The LCC inventory should be built on a well-defined cost classification system that is valid and commonly understood across all actors and organizations within the defined system boundaries. The usual data issues of availability, quality, and uncertainty apply equally to LCA and LCC.

The LCC inventory comprises only a single unit of measure, currency, eliminating the need for a characterization step or weighting of different cost categories. In this step, data collection, classification, and processing take place. For healthcare, this can be quite complex because costs are multifaceted and spread across various domains such as construction, equipment procurement, staffing, operations, and maintenance.

The following needs to be defined:

• definition of the product or services to be analyzed, including structure and components;
• cost classification, or cost breakdown structure;
• cost data sources, including time and geographical background, currency units, and uncertainty;
• cost categories.

Examples of data sources include:

• historical data;
• vendor data;
• regulatory and standards data.

Illustrative cost categories include:

• initial investment, acquisition and capital costs;
• installation and transport costs;
• operational costs;
• maintenance and repair costs;
• end-of-life costs;
• waste disposal, energy and related costs;
• risk management;
• other general information to be considered.

The assessment with inventory analysis (Step 3)

By comparing scenarios, LCC analyses provide information to inform choices and optimize costs over the period defined in the analysis. Cost information is presented in a range of categories to help managers determine which assets to buy, what maintenance strategies are most cost effective, and when replacement is necessary.

Informed decisions can be based on a range of financial criteria for all scenarios in the analysis. In healthcare, it is often beneficial to compare multiple alternative options or scenarios to determine the most cost-effective solution over the long term.

Sensitivity analysis is essential because of the uncertainty of long-term cost projections, especially in healthcare. This step involves testing how changes in key assumptions, such as labor costs, energy prices, equipment life expectancy, and inflation, can affect the LCC of the project.

Interpretation of the results (Step 4)

The interpretation and communication of the results and assessment methodology is paramount for any study. In LCC, where significant assumptions and methodological procedures might give rise to differing conclusions, it is imperative that close attention be paid to this step and the reader be made aware of the underpinning logic. For this reason, similar stringent procedures for methodological and data quality review as for the LCA standard should also be applied.

The interpretation phase should systematically identify, qualify, check, and evaluate information from the results of the cost accounting and present them in order to meet the requirements of the application as described in the goal and scope of the study.