Whole Life Cycle Costing

Whole life cycle costing

Whole life cycle cost is the total costs of the asset throughout its life cycle from its acquisition until disposal, amongst others includes:

1. Capital costs
2. Operating costs
3. Maintenance costs
4. Risk exposure costs
5. Rehabilitation costs
6. Administrative costs
7. Depreciation and disposal costs
8. Insurance and tax costs (if relevant)

Whole life cycle cost is important in order to determine the actual cost that will be incurred in the future, the benefits that will be derived, the cost of operation and maintenance, the capital expenditure needed and so forth. Previously, we would be satisfied if we only know the capital cost as it is the easiest to do, but it is not the true cost of the asset.

Cost of the assets relates to the design and shape of the asset, the equipment employed, the type of material used, type of operation and maintenance deployed and so forth. Before making justifiable and the right decison, an organization needs to know all costs, which become future liabilities. These liabilities would cut into the profit margin and the organization will be non-profitable for the asset it holds. This scenario is not a good business case if the organization needs to venture and explore new business areas.

Nevertheless, if an organization acquires the predicted costs of actually having the asset, then a predicted cast flow is known throughout the asset life span, which can span more than 25 years. A good business decision is ensured and the decision to acquire the asset is well justified.

Capital cost

Capital costs, amongst others, include:

1. Design and supervision cost
2. Cost of acquiring or purchasing land
3. Interest and funding cost
4. Construction or installation cost inclusive of all electrical
   and mechanical facilities, incidental equipments and others
5. Cost of permits, levies and approval from local authorities
6. Project management costs
7. Consultation cost

Operating cost

Operating costs are cost incurred when operating or using the building, amongst others, include:

1. Telecommunication bills or usage
2. Electricity bills or usage
3. Gas, Water and sewerage bills or charges
4. Chilled water bills or usage
5. Tenancy fees or charges
6. Local authority or central government taxes or duties relating to the
   property
7. Insurance and tax costs (if relevant)

Maintenance cost

Maintenance costs are costs incurred to ensure that the building functions as designed and costs to upkeep the building, such as:

1. Custodial and up keeping
2. Routine maintenance
3. Unplanned or breakdown maintenance
4. Planned or scheduled maintenance
5. Security services
6. Unplanned or planned inspection and assessment costs
7. Special arrangements

Risk exposure cost

1. Increase in insurance, mortgage or interest rates
2. Mitigation costs

Rehabilitation costs

1. Installing new technologies within its functional life
2. Major maintenance works to meet new customers’ demands

Administrative costs

1. Management cost
2. Direct and indirect costs relating to the management of the
   asset and et cetera

Depreciation and disposal costs

1. Renewal cost inclusive any design, demolishing, and et cetera
2. Disposal costs
3. Replacement cost
4. Depreciation cost

Typically, a whole life cycle cost curve will look lik this:

Fundamentals of asset management

To understand asset management, we must understand the fundamentals in asset management. The fundamentals are as follows:
(Please follow the links to read the topics)

1. Asset registry
2. Roles and responsibility
3. Asset objectives
4. Service criteria
5. Asset condition and performance
6. Asset life cycle
7. User expectations
8. Asset stakeholders
9. Asset management objectives
10. Asset planning

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13.0 Asset planning

13.1 An objective is not meant to be just a visionary or an eye-catching phrase, but it must be realized in order to indicate the approach and the path undertaken is the right undertaking and the right strategy. Therefore, an asset management plan must be formulated containing the policies, strategies, objectives, performance measurements (such as service levels) and all activities in the asset life cycle.

13.2 Over-planning is a mystic phrase where an organization plans towards an objective, which is impossible to achieve. Thus, planning must be flexible enough to meet changes, to be able to detect risks and changes over the asset life cycle. A comprehensive plan will achieve the desired outcome, but planning without having an inbuilt performance measurement and reporting system will always fail as the organization would not know whether it has achieved what is set for. Nevertheless, organization must not over plan.

13.3 In asset management, these plans are called Asset Management Plans, which contains the minimum items such as:

a. Purpose of the plan
b. Asset management policies, strategies and policies
c. Asset life cycle management plan
d. Future demands
e. Service levels
f. Monitoring and improvement plan
g. Operating and maintenance plan
h. Renewal, replacement and disposal plan
i. Financial Management Plan
j. Asset Management Practices

With these plans, the organization shall be able to ensure that the service delivery is optimized and efficient to meet community and stakeholders demands.

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12.0 Asset management objectives

12.1 The need of asset management objective is clearly stated in PAS 55-1 from the Institute of Asset Management, United Kingdom and the statement is shown below:

“The organization shall establish and maintain documented asset management objectives at relevant function and level within the organization. The objectives shall derived from and consistent with the asset management strategy.”

12.2 It is very clear that emphasis is on a single asset management objective throughout the organization and the organization shall disseminate or establish asset management objectives to all staff at various levels in the organization. No single unit/sections in an organization shall have an objective deviating from the main objectives. This is necessary if any asset management policies, strategies or operational tasks need effective executions.

12.3 In realizing the asset management objectives, the organization shall consider:

a. Legal, regulatory and statutory requirements
b. Technological advancements
c. Financial, operational and business requirements
d. Related risk in asset management
e. Views for appropriate stakeholders

12.4 The above requirements are important so that the objectives developed are always relevant and in the context of the organizational business environment. In this respect, every activity and data gathering will be streamlined throughout the organization resulting in a shared vision, improved and effective information and decision-making. As such, the organization shall be able to meet service delivery objectives efficiently and effectively.

12.5 As a result, the organization would be able to plan, formulate and implement strategies and, lastly measure its performance. It is also important that a communication plan be established so that the objectives can be communicated effectively to its stakeholder, customers, users, key suppliers and so forth ensuring formulating of a set of reasonable objectives and successful delivery of service.

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11.0 Asset stakeholders

11.1 Stakeholders are person, group, or organization that has direct or indirect interest in the asset. In infrastructure assets, the person, group, or organization who used the asset are basically the stakeholders of the asset and their quality of life will be determined and influenced by the asset. On the other hand, the government or the person that funds and owns the asset is the key stakeholder of the asset.

11.2 It is good practice to involve in the planning for new asset, those who are concerned directly or will be affected by the asset. Their inputs are important to successful delivery and the benefits realization of the asset. This is what we call good governance of the asset.

11.3 In this respect, the organization who manage the asset, service providers and the construction community have roles to play and hence, be responsible to achieve the asset’s objective(s). They have the responsibility to create and manage the asset. Each of the organization, service providers and the construction community has different roles and responsibility in the asset life cycle. Their actions are inter-related and have considerable effect on each other when realizing the asset. They must instill good governance in order to have an asset that fulfills its objectives.

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1o.0 User expectations

1o.1 When assets are constructed or installed, these assets are meant to be used or utilized. As such, the asset must be able to continuously provide services to the community. Subsequently, asset owners will derive benefits from the assets whilst the public or the users of the assets will enjoy a better environment and quality of life.

10.2 On the other hand, a user of the asset does not expect much from the asset used but when they relate it to quality, quantity, availability, safety and responsiveness, questions will be raised by the user when there is a drop in the level of service of the asset. Hence, the organization must act accordingly to the questions raised as it has an impact on its organization’s service delivery. Though it is impossible to have zero gripe from users, efforts must be made to minimize any discomfort to the users thus minimizing complaints from users.

10.3 To do this, organizations must take a proactive stand and constantly thrive to understand user expectations through regular interaction with users. By having regular interactions, the level of satisfaction can be determined. There are various methods to implement the assessment or survey and the most common method is by street, online or a general survey. Nevertheless, focus groups may be employed at an earlier stage before implementation to gauge the fulfillment of the asset objective.

10.4 Examples of user expectations are:

1o.5 From the above table, user’s expectations relates to the amount of money the user have contributed through statutory taxation to the government or the local authority. As such, user will expect value for money. Likewise, the organization also expects the asset to function as specified in order to realize the organization service delivery within whatever constraints or limitations the organization has. To match the two (2) expectations, the logical thing to do is by giving the asset a service level, hence satisfying both the organization and the user.

10.6 By assessing the condition and performance of the asset in conjunction with periodic and customary customer satisfaction surveys, CSS in short, the organization will be able to gauge the achieved service level of the asset and appropriate the amount of funds to asset if the achieved asset’s service level is lower than the stated service level. If gaps arise between the actual and and the intended service of the asset, measures must be taken such as renewal to ensure that the asset will continue to deliver its sevice during it functional life.

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9.0 Asset life cycle

9.1 We do sometimes just fix the asset after it breaks down because it is the easiest way to maintain assets. It might be the right strategy but it is the best option and relative easy to undertake. In doing so, the cost of maintenance might not be justified and there is no value for money. There is also high probability that the cost is more than expected and the maintenance is sometime “overdone” and repeatable. Nevertheless, without proper planning, design and construction or acquisition, the asset may cease to have value to the organization. By doing this, the asset has become a liability and a burden to the organization. With asset management, these practices are things of the past as asset management starts from the inception of the asset until the end of the asset life, which is the life cycle of an asset and giving prominence to the operation and maintenance of the asset. Asset life cycle does not start from the day it is operating or maintained, but it starts from its inception and asset life cycle is an important element in asset management. Control starts from the inception stage, making its way up to end that is the disposal. Some would say that we must design to maintain rather than design to build which is easier.

9.2 Any asset would have a typical and simplistic life cycle, that is:

a. Initiation

Initiation involves such activities as planning and designing. This is the most crucial activity for it involves monetary decision such as is the type of funding, the benefits that can be derived, cost of the asset, the operational and maintenance cost, and most of all, the value of the asset at disposal. This stage is actually a major business decision for an organization.

b. Procure or acquire

This stage will usually involve activities such as constructing the asset, installation, or even buying an asset. Construction or installation activities will also involve sub-activities such as supervision of the works including formulating and implementing procurement strategies.

c. Operate and maintain

Once we acquire or complete the construction/installation of an asset, we need to maintain and operate the asset. The life span of an asset is the longest at this stage, which is usually at the range of 90% of the life cycle period and 80% of the whole life cost of the asset. At this stage, the asset is vulnerable to the lack of maintenance resulting in a low disposal value.

d. Dispose or renew

As the asset reaches its lifespan, an organization must make a decision whether to dispose or making a complete renewal of the asset. If the asset is disposed, the organization will have to start to plan for a new asset, if the need arises.

9.3 For infrastructure assets, a more comprehensive and detailed life cycle must be developed to reflect the actual activities an stages of the asset such as buildings or roads. The figures below llustrate typical examples:

9.4 Briefly, every activity that is pre-requisite to materialize an asset (no matter what asset it is) is detail out in sequence in order to manage and control the output of each activity including measuring the outcome of each activity. In this context, the output of each activity must reflect back the asset intended objective. If the asset does not meet its objective, the asset’s specification needs reviewing, amendment or even a total revamp, to ensure the asset’s objective is met in all the activities. This is the importance of an asset life cycle. The life cycle ensures reviews and allows immediate amendments or modifications to its specification before any preceding activities to proceed.

9.5 The above statement is in line with the previously stated asset definition, that is:

a. An item/physical component/facility that have a distinct value to the organization; and/or

b. An item/physical component/facility that enable services to be provided

In order for the asset to give service well within the designated objective, we must manage and control the activities at its infancy that is during the inception phase and up to its disposal or renewal or even upgrade.

9.6 At the end of the day, whatever asset that is constructed or installed, the asset is what the organization wants in order for the organization to realize its service delivery.

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8.0 Asset condition and performance

8.1 Asset condition is the physical state of the asset at the material time of assessment whilst asset performance is the ability of the asset to provide the required level of service. We understand that every physical asset will deteriorate due to normal wear and tear or through other factors such environmental degradation and so forth. In this respect, some assets will deteriorate faster from other assets and vice versa. As such, we must assess the asset periodically in order to have a quantifiable physical condition of the asset. Furthermore, the condition of the asset relates to the degree of performance of the asset and performance of asset relate to achieving its service level. At the end of day, we will have a database of asset condition, which will allow the organization to make a strategic decision on the asset. The figure below illustrates a typical performance cycle of an asset.

8.2 There are numerous ways to assess the condition of asset and the most common method is by visual inspection. However, visual inspection will only give the apparent deterioration but not the physical attributes of the assets such as material strength and so forth. Therefore, a far better and comprehensive method of assessment need to be formulated. As such, a good assessment will give the organization an overall and accurate picture on the physical condition of its assets.

8.3 For a typical condition assessment, the methods used are:

a. Documentation and desktop review
b. Visual inspection
c. Sampling for laboratory testing
d. Analysis on the present and future rate of deterioration

8.4 It is important that the necessary documentation depicting the details of the asset and record of maintenance works must be available for a conclusive assessment. If no documentation is available, the organization must start from zero base, build up the documents especially as-built plans, and so forth. Hence, by accepting asset management, the organization will be building an excellent documentation system.

8.5 It is also equally important to have a rating or a grading condition system to identify the physical state of the assessed asset. With this rating or grading system, the organization will at anytime know the physical condition of the asset and the funds needed to maintain the assets. The combination of the physical condition and performance will be the basis to determine the actual service level of the asset at that particular time. With further analysis, the economic life span can be determined at different scenarios and the expected performance of the asset in the future.

8.6 In general, asset performance is the ability of the asset to provide the required level of service and can be measured in terms of reliability, availability, capacity and meeting customer needs.

8.7 The assessment of asset condition and performance must be a cyclic programme either yearly or frequency determined by the organization, based on condition of the asset or maintenance cost. If the resources to implement the assessment are readily available, the assessment must be on a regular interval. Without this assessment programme, a number of outputs, which are important inputs to the organization’s decision making process, will not be known amongst others such as:

a. The residual life,
b. The maintenance or renewal cost ,
c. Prediction of asset failure,
d. The rate of consumption,
e. Failure pattern and so forth

Nevertheless, due consideration must be given to short and long-term benefits to the organization when implementing an assessment programme.

8.8 Without these assessments, the organization will be back to the normal maintenance programme and doing things without having a justifiable and value for money programme that is fixing asset when it breaks down. By doing so, the asset will continue to fail and dysfunction prematurely resulting in the deterioration of asset performance and customer’s expectations as shown in the figure below.

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7.0 Service criteria

7.1 Service criteria are a set of guiding principles defining the standard of quality of service provided by an asset or assets. Amongst the generic service criteria are:

a. Quality
b. Quantity
c. Availability
d. Safety
e. Responsiveness

7.2 Even though the above generic criteria encompass all that the organization need to formulate service criteria, the other important factors to include are legislative, user, availability of funds and the organizational strategic requirements. With all these criteria and linking it to the asset’s objective, the asset’s service criteria can be developed and implemented by the organization. The figure below shows the formulation of asset criteria, asset service level and asset performance.

7.3 It is simpler to define the service criteria for a single asset compared to a network of assets such as road, buildings and so forth. This is because a road will have a multiple service in terms of the items in a road such as road signage, pavement, drainage, street lighting, road markings and so forth. It is the same for a building, which consists of air conditioning system, elevators (or lifts in some part of the world), lightings, signage, water supply system, sanitary and so forth. The building is, basically, a system of assets working in tandem to provide a service.

7.4 Each of the assets mentioned have its own service criteria and maybe, multiple level of service for each of the assets. For example, a road pavement has multiple service level, but it can be consolidated into a single service level for the road pavement. Furthermore, a level of service is the defined quality of a particular service area in which measurements of performance or compliance can be made. In this case, the road pavement provides a smooth riding quality but signage and drainage will have a different service criteria and service level.

7.5 It is important for the organization to determine the current service level of the asset in order to see whether the asset is within the service criteria set forth and to enable the gap closed between current service level and the newly defined service level. If the asset is below the service criteria and the defined service level, the asset need to be renewed, upgrade or disposed of. This method also allows the gap determination between customer expectations and the service provided.

7.6 The above figure illustrate two (2) gaps to closed and once, the two (2) gaps are closed the actual service delivery will be the same as the customer’s expectations. The closing of gaps will sometimes involve capital expenditure or it could just inform the customer the value for money for having that level of service. Nevertheless, it most cases, the organization has to disburse funds for modifications or renewal of the assets in order to elevate the current level of service towards customer’s expectation. This exercise could take years depending on the availability of funds. For a local council, the funds are limited and usage of the limited funds must be prioritized on assets which in a poor condition. This is the most important aspect of using service criteria, which can help an organization to manage its financial needs and spending.

7.7 The diagram below shows the relationship between the individual service level and ultimate service level of a network of assets:

7.8 Lastly, every asset must have a service level and sometimes, an asset consist of numerous assets acting in a system to provide a service. The determination of service level is important, as the organization will be able to demonstrate to its customer the performance of the assets to their expectations.

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5.0 Roles and responsibility

5.1 In any management system, role and responsibility is important and given due recognition as one of the leading factor of a successful management system. Hence, the key success factor is always the clarity of role and responsibility in an organization. Without this clarification, everyone in an organization will assume a role but will not assume the responsibility. In such case, we have organization full of people but none is doing tasks or activities towards the organization’s objectives.

5.2 In asset management, the organization must know:

a. What is the role and responsibility of each person or unit sections;
b. Why the role and responsibility is formulated in such a way;
c. When to execute the role and responsibility;
d. Who is the custodian of the assets;
e. Who is responsible for the operation and maintenance of the asset;
f. How to execute the role and responsibility;

5.3 Once the organization has established the roles and responsibilities in the organization, the role and responsibility must be properly documented and maintained. As mentioned earlier, the role and responsibility in an asset management system is utmost important, as it will determine the successful implementation of an asset management system.

5.4 Even though it is not a necessity to create a new unit, but an asset management team must be in place either using an existing manpower or outsourcing the expertise. The asset management team will necessitate qnd implement an asset management system in the organization with emphasis on review, coordinating and monitoring asset management activities.

5.5 At the end of the day, the organization will be accountable if the asset fails to deliver the desired or the expected service delivery.


6.0 Asset objectives

6.1 It is a norm that an asset acquisition’s proposal must be accompanied with reasons and objectives of acquisition or creation. One does not build, acquire or construct an asset without any justifiable reasons or objectives unless the organization has surplus funds, which the organization does not know what to do with it. An asset will become a liability if it ceases to function and perform its primary objective. Therefore, it is necessary that an objective(s) be attached to an asset.

6.2 Clearly, all assets must have a defined objective(s). By having an objective, the asset is created with a purpose. With this objective, service criteria for the asset can be created and the asset performance can be measured and monitored. Typical assets’ objectives are:

Fig. 6.2: Typical asset objectives

6.3 At the initiation and acquisition stage, the asset’s objectives are in general adequate and justifiable. If the users’ expectations on the service provided change during the asset operational life, then the objectives of the asset must be renewed or modified to reflect the change. Cases such as this would entail a modification, a renewal or even an upgrade of the existing asset(s). There are other factors that affect the current asset’s objective such as obsolescence, technology changes, environmental changes and lastly, legislative changes. If these factors do affect the existing asset, modifications to the existing assets must be made to ensure that the asset continue to provide the necessary service and not becoming a liability.

6.4 By having assets’ objectives, the service criteria and the service levels can be determined. With these service levels, the organization can informed the public, determine the assessment rates need to be paid by the taxpayers, the budget needed to maintain the service levels and so forth. This action creates transparency and justifiable measures to the customers and the organization as a whole.