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Life-cycle costing

Under the EU procurement rules a contract can be awarded based on lowest price or most economically advantageous tender (MEAT).  Where the second option is chosen, costs may be calculated on the basis of the whole life-cycle of the supplies, services or works, and not solely on the purchase price. This allows costs associated with the use, maintenance and end-of-life of the supplies, services or works to be taken into account – sometimes also referred to as total cost of ownership.

Life-cycle costing or LCC is a tool which evaluates the costs of an asset throughout its life-cycle.

The conventional LCC techniques most widely used by companies and/or governments is based on a purely financial valuation. Four main cost categories are assessed: investment, operation, maintenance and end-of-life disposal expenses.

An environmental LCC methodology takes into account the above four main cost categories plus external environmental costs. The latter may come from LCA analyses on environmental impacts, which measure for example the external costs of global warming contribution associated with emissions of different greenhouse gases. Environmental costs can be calculated also in respect of acidification (grams of SO2, NOX and NH3), eutrophication (grams of NOX and NH3), land use (m2*year) or other measurable impacts.

LCC structure

To be introduced into an 'accounting' LCC process, environmental costs must be expressed in monetary terms. In other words, environmental costs should be quantified and monetised so they can be considered as an additional cost input in a LCC analysis.

An environmental LCC is not a stand-alone technique but draws upon the results from appropriate environmental Life-cycle Assessment (LCA) analyses. For further information on LCA please see the Glossary.

An example of how environmental externalities may be included in LCC is given 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)

CO2

NOx

NMHC

Particulate matter

0,03-0,04 EUR/kg

0,0044 EUR/g

0,001 EUR/g

0,087 EUR/g

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.

For further information on the Clean Vehicles Directive please consult the website of DG Mobility and Transport and the dedicated Clean Vehicle Portal.

LCC is being applied by many public authorities across the EU and in a range of sectors. Further information is available from the sources below:

Background information on LCC in procurement

The Buying Green! Handbook (Second edition) contains a section on LCC

The following publication also gives a useful background on environmental LCC:

Hunkeler, D., Lichtenvort, K. and Rebitzer, G. (eds) Environmental Life-cycle Costing CRC Press, 2008

Further information on LCC in procurement is available from the Procura+ manual

LCC Tools

The Swedish Environmental Management Council (SEMCO) has developed several excel tools for calculating life-cycle costs in public procurement. In addition to a general tool, specialised ones are available for professional kitchens (fridges and freezers), indoor and outdoor lighting and vending machines: http://www.msr.se/en/green_procurement/LCC/

The SMART-SPP project developed and tested a tool for public authorities to assess LCC and CO2 emissions and to compare bids. It is available to download in four languages: http://www.smart-spp.eu/guidance

LCC in Construction

A 2007 study looked at the role of LCC in sustainable construction and proposed a common methodology. The report and methodology are available to download from the website of DG Enterprise & Industry.

The UK-based Whole Life Cost Forum has a focus on the construction sector and contains many useful links: www.wlcf.org.uk

(1) Source: Directive 2009/33/EC on the promotion of clean and energy-efficient road transport vehicles