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Procurement Perspectives: Measuring cost over the full-life of each item purchased

Stephen Bauld
Procurement Perspectives: Measuring cost over the full-life of each item purchased

The relatively short terms of municipal council offices could lead to an undue focus on the short-term picture.

However, such an approach is unrealistic.

The cost of procurement must be paid over at least the life of the good or service that is to be procured and, in some cases, may have aggregate cost implications over the longer term still.

For instance, in the case of a building, the full-life cost is the total of all expenditures made to acquire, construct or modify, and operate and maintain it over the course of its service lifetime.

It also includes its decommissioning cost. Specific cost concerns include planning, design, construction, financing, operational cost, maintenance, renewal and mid-life modification, and ultimately disposal.

Generally speaking, the majority of those costs are incurred after construction.

For instance, one school has determined the initial cost of a school, including financing, represents only 30 per cent of the life-cycle cost of ownership.

A proper process of comparing the price of alternative suppliers reflects the total cost of each item over its expected useful life. Costs are estimated for each year of service, from the time of the original planning stage to the eventual disposal of the item in question.

Actual experience in costing is continually compared against estimates, so as to obtain a more accurate model for future cost calculation.

A full-life approach to costing (sometimes called life-cycle-costing) will reflect at least the following:

  • Capital Cost: include all aspects of the initial outlay incurred to acquire a capital asset. These include design, development and construction cost, and the acquisition of any property right necessary to the use or enjoyment of the asset.
  • Operating Costs: include all costs associated with the day-to-day running or operation of the asset, including maintenance and salaries.
  • Life-cycle Costs: maintaining the operation’s assets in good condition (e.g., equipment upgrades, leasehold improvements). These are long-term capital financing costs.
  • Factor Costs: include overhead and financing costs.
  • Risk Cost: related to the potential financial impacts of the major risks identified in the project, discounted to reflect their respective probability of occurrence.
  • Environmental Costs: the impact of use on the environment.
  • Decommissioning Costs: the costs associated with removing an item from use. Even though incurred at the end of the life of a product, the risks here can be substantial. For instance, with respect to the decommissioning of nuclear reactors.

Factors militating in favour of a longer-term focus in working out full-life cost include:

  • Maintenance requirements: One must always remember any equipment purchased will have to be maintained and serviced. The fact the initial purchase of one type of equipment is lower than another does not lead automatically to a conclusion the aggregate cost of that equipment will be lower over the long-term once maintenance and service costs are factored in.
  • The effect of downtime on municipal performance: Every time a given item must be taken out of use for repair or replacement, there is likely to be at least some adverse impact on municipal operations.
  • Life expectancy: All goods will eventually wear out, but some last longer than others. A low priced good that has a short life expectancy may be more expensive over the long term than a more expensive good that is expected to last for a much longer period.
  • Ongoing consumption costs: Energy efficient equipment may have a lower cost over the long-term than less efficient equipment having a lower initial price.
  • Training costs: Includes the cost of manuals, training in-house trainers or buying-in such expertise, shut-down time during training sessions and the risk of sub-optimal performance prior to receipt of training.
  • What is initially cheaper is not always the lowest cost item over the full-life of the purchase.

Stephen Bauld is a government procurement expert and can be reached at Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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