Lifecycle Project Costs

I see a lot of new engineering technologies that have been developed in an attempt to better solve old problems. And I see a lot of people buying into these technologies because of the sticker price.

PlastikI’m ashamed to say that even engineers are suckers for a “bargain” sometimes – without taking into consideration the lifecycle cost of the project or purchase being made. Often the engineer on a project is given almost autonomous power of decision in the form of an options report or a promising proposal that appears to save the client a heap of cash.

Without getting into engineering economics 101, I’d like to suggest that if you are reviewing the budget or a report for a project with obvious variables, particularly involving treatment systems, novel technologies or methodologies, ask to see the lifecycle cost analysis, sometimes called a cost-benefit analysis. This will give a comparative view of the proposed options over a given timeframe, usually the lifespan of the longest surviving element, accounting for all of the operating, maintenance and replacement costs and is usually converted using discount rates to net present values so that costs that occur in differing timeframes can be compared. For further accuracy, often two timeframes and several discount rates are provided as part of the analysis to show the sensitivity to these factors. There are many ways of presenting the data relating to cost, if  relying on manufacturer’s data, note that they usually only provide the most favourable analysis methodology. (For example, if you knew the option would cost 20% more over a 20 year lifecycle cost analysis, would you still be writing the cheque?).

On a separate, but related note, and something I’m sure I have covered before, research has shown that in rail transportation projects, costs were on average over 44% higher than estimated, and ridership was on average 51% lower than estimated. Other studies have confirmed similar results for other infrastructure project types. (via Wikipedia – all the links to research are on the page).

So, what’s the lesson? Today you get two for the price of one:

  1. Consider the whole cost of ownership against any perceived benefits, just like a new car will cost a lot more than the sticker price in the sales yard once you include insurance, fuel, repairs, interest payments and depreciation, and
  2. Check how conservative the project costs and perceived benefits really are. Do they sound realistic?