Difference between revisions of "Life-cycle costing"

Revision as of 05:44, 27 May 2015

Financial frameworks account for all life-cycle costs, especially for major capital maintenance, support to service authorities and service providers, and monitoring and regulation.

Moving beyond the time-limited project approach to indefinite sustainability means taking into account the full life-cycle costs of water delivery systems. Life-cycle costs (LCC) are the costs of ensuring adequate water, sanitation and hygiene services to a specific population in a determined geographical area - not just for a few years but indefinitely. LCC include the costs of constructing new systems, maintaining them in the short- and long-term, and at higher institutional levels. Costs for both district and national level administration and planning are taken into account, as well as the costs of replacing and extending infrastructure.

A versatile tool

LCC tools can be used by governments, investors, donors and users to develop and maintain their own life-cycle costs databases and incorporate them into management information systems and decision-support tools. By monitoring how each cost component affects overall costs, governments, investors, donors and users can plan for sustainable and appropriate levels of service delivery.

Life-cycle costs are cyclical

In a sustainable system, the costs follow a cycle from capital costs, to operation and minor maintenance, to capital maintenance and finally to the replacement of infrastructure that has come to the end of its useful life. This may then be extended with more capital maintenance or renewed with additional capital expenditure. The life-cycle can refer to the individual system components or to the overall costs required within a context of maintaining sustainable services which are, ideally, indefinite.

Lessons from the field

WASHCost did a rapid assessment in Burkina Faso, Ghana and Mozambique in 2008. They found that the awareness of unit costs by sector actors is typically limited to capital expenditure. Blind spots include how much is spent on the operations and maintenance and how much it costs to provide support services or expenses for rehabilitation and replacement.Calculating life-cycle costs can have surprising results. An LCC cost analysis in Ghana showed that the average annual cost for delivering water services from small town piped water systems ranges from US$10 to $14 per capita (per year), while that for water point sources is about US$4 per capita, per year.

Life-cycle costs

• Capital expenditure (CapEx): The capital invested in constructing fixed assets such as concrete structures, pumps and pipes.
• Capital maintenance expenditure (CapManEx): Expenditure on asset renewal, replacement and rehabilitation costs, based upon serviceability and risk criteria.
• Cost of capital (CoC): The cost of financing a programme or project, taking into account loan repayments and the cost of tying up capital.
• Operating and minor maintenance expenditure (OpEx): Expenditure on labour, fuel, chemicals, materials and regular purchases of any bulk water.
• Expenditure on direct support (ExpDS): Includes expenditure on post-construction support activities direct to local level stakeholders, users or user groups.
• Expenditure on indirect support (ExpIDS): Macro-level support, planning and policy making that contributes to the service environment but is not particular to any programme or project. Indirect support costs include government macro-level planning and policy-making, developing and maintaining frameworks and institutional arrangements and capacity building for professionals and technicians.

Further reading

• More information on the life-cycle cost approach and other publications on the topic are available at WASHCost and Akvopedia.

• Life-cycle costs building block summary sheet. Water Services That Last. IRC.

Acknowledgements

• Financing to cover all life-cycle costs. Water Services That Last. IRC.