LCC is being applied by an increasing number of public authorities across the EU and in a range of sectors.
Under the 2014 EU procurement rules a contract must be awarded based on the most economically advantageous tender (MEAT). A number of different approaches are available under this general heading, some of which may be considered appropriate for GPP. Cost or price will form part of the assessment of any procedure, and is usually one of the most influential factors. Costs may be calculated on the basis of a product’s life-cycle. But how do you define the cost?
When you purchase a product, service or work, you always pay a price. Purchase price, however, is just one of the cost elements in the whole process of purchasing, owning and disposing. Life-cycle costing (LCC) means considering all the costs that will be incurred during the lifetime of the product, work or service:
LCC may also include the cost of externalities (such as greenhouse gas emissions) under specific conditions laid out in the directives. The current (2014) directives require that where LCC is used, the calculation method and the data to be provided by tenderers are set out in the procurement documents. Specific rules also apply regarding methods for assigning costs to environmental externalities, which aim to ensure that these methods are fair and transparent.
LCC makes good sense regardless of a public authority’s environmental objectives. By applying LCC public purchasers take into account the costs of resource use, maintenance and disposal which are not reflected in the purchase price. Often this will lead to ‘win-win’ situations whereby a greener product, work or service is also cheaper overall. The main potential for savings over the life-cycle of a good, work or service are:
For further details on how LCC approaches can be used as part of public procurement procedures see Article 68(2) of Directive 2014/24/EU and Article 83(2) of Directive 2014/25/EU.
An example of how environmental externalities may be included in LCC is provided by the Clean Vehicles Directive (2009/33/EC).
Under this Directive, contracting authorities and entities are obliged to take energy consumption and emissions into account in their purchases of road transport vehicles.
One of the ways of doing this is by assigning a cost to these factors in the evaluation of bids. The Annex to the Directive provides a set of common costs to be applied in this case.
Data for the calculation of operational lifetime costs of road transport vehicles (1)
Table 2: Cost for emissions in road transport (in 2007 prices)
Note: higher costs may be applied, up to a maximum of two times the stated values
This allows emissions to be priced for inclusion in the evaluation and comparison of bids. Values are also provided in the Directive for the energy content of different fuel types and the lifetime mileage of different vehicle categories.
Note: in November 2017, the European Commission proposed a reform to the current Clean Vehicles Directive. The proposed new directive would broaden the scope of purchases included while also simplifying the definitions. At present however, the directive as outlined above still remains in force.
The EU-funded Clean Fleets project also created an LCC tool for vehicle purchases, available here.