Cost Analysis

Cost Analysis

Introduction

In situations of developing a project, there is a need to come up with economic evaluation at the infancy stage of the process. This gesture helps in the determination of the most cost effective avenues to carry out the implementation of the project. Life Cycle Cost Analysis (LCCA) is used in the assessment of the expenses needed to undertake the project in question. It is considered a necessary process, especially in the case of looking for an alternative measure to achieve similar performance needs (Plebankiewicz et al., 2020). The method helps in the comparison of the operating and initial costs in selecting the right alternative that would aid in optimizing the savings used in the overall project.

Factors considered in the LCCA Process

Several factors are available in the avenue of recognizing the right parameters while conducting the LCCA and include alternative comparison, period, and cost. The cost linked factors that need evaluation include the replacement, maintenance, and operation costs. Original prices in the project include purchases, construction, and acquisition costs. Others in the same category include non-monetary fees, residual values, and finance charges; it is significant to consider the decision linked prices alongside the amount required to make the decisions on investments. The accurate and relevant prices are determined when the available values are compared with the initial cost of starting the project (Le & Caracoglia, 2020). Significant differences in the costs can make an enormous difference in the value of the initial project. Before starting the project, initial prices like the capital include the cost of acquiring land in the purchasing, renovating, and constructing the equipment used in the operation of the project. In the case of land acquisition, LCCA requires to include the review of the cost available in the alternatives and the initial cost of the project.

The evaluation is also essential when comparing renovation costs and the costs used in constructing new projects. The construction cost is often estimated through referral to the earlier data from similar facilities and the available value that has been generated from other sectors such as government archives and the private sector. Operational costs, such as utilities, are frequently considered in cases of water and energy bills. These bills are often calculated using the currently available rates. Due to the difference in service consumption, an assessment must be done using the specific components (Plebankiewicz et al., 2020). Energy usage could be cumbersome to predict, especially in the initial process of starting the project. Similar consumptions are determined based on specific factors such as occupancy schedules and rates. Other factors like the amount of energy consumed can be determined from the analysis based on the perspectives of the engineer.

Maintenance and operation refer to the non-fuel operating expenses that are often harder to estimate then the reasonable costs of the project. These costs often vary with the premises where the building is based on the organization. It is significant to utilize engineering judgments in the estimation of the costs.  Energy costs include the values used in the operation of the project, such as water, electricity, and other utilities that are deemed necessary for the development of the project.  Square footage costs refer to the values used in the space occupied by several separate pieces of equipment with varying sizes (Le & Caracoglia, 2020). The prices vary based on the size of the material. A project must have some return on the investments made. The acceptable return on investments refers to the rate at which the return is profitable to the firm. It covers all the costs required for the operation of the project to benefits and the success of the organization. It forms the basis of decision making as to whether or not to invest in the project.

The expected lifespan of the project refers to the period in which the equipment will be useful. Replacement costs apply to those that are utilized in an event where the material would require some form of replacement to make them efficient and effective in the overall process. It may also cover the costs incurred when the equipment reaches the economic end. Life cycle analysis also takes into account the financial justification of the decision-makers. Such charges include the replacement costs, lifespan of the equipment, return on investments, square footage costs, energy costs, maintenance and operation costs, and the initial costs (Li et al., 2020). LCCA would then consider all the factors linked to these costs to make it viable and feasible in the market sphere. Therefore, all the phases of the LCCA are deemed necessary for the success and functional operation of the project.

Importance of LCCA

LCCA is essential when an organization needs to ascertain the lowest life cycle cost in undertaking a new project. The analysis aids the project coordinator to ensure that the choice of the product is not only based on the lowest initial prices, but it also takes into account the expenses needed in the future to ascertain the critical life of the project. In some cases, a project may have some form of the initial outlay, but the future costs linked to the project are incredibly high (Asadi & Hajirasouliha, 2020). With LCCA, the organization does not suffer from the surprises emanating from values that are unexpected soon. This gesture is based on the fact that they will already be considered in the lifetime of the project.

In some cases, an organization can be faced with alternatives in the design structure with the same level of benefits in the program. In such cases, the LCCA is vital in the selection of a project from the design alternatives with similar interests. It also gives increased performance among the users of the project along the lifetime of operations. There is a need to accommodate more traffic levels in situations where the benefits vary based on different designs (Li et al., 2020). With such developments, the organization cannot compare such design alternatives based on the initial costs. In such a case, the analyst needs to make use of the benefit-costs analysis, which would help in determining the monetary values for the benefits and costs of the project.

Conclusion

In summary, the paper has discussed the LCCA concerning managing the costs incurred during the development of a project. LCCA is a straight process used in the interpretation of the specific measure of economic evaluation. The LCCA is often performed earlier in ensuring and refining the effect that the life cycle has a reduced cost. It encompasses operation costs, use, and maintenance. Other factors deemed important include purchase price, and this issue is a practical method of evaluating the value rather than focusing on the prices of purchases only.