In April 2024, Larry Dysert will be presenting on the topic of Cost Estimating Best Practices to Enhance Decision-Making.

Economic evaluation forms the cornerstone of most project authorization decisions, a fundamental principle that holds true even for projects driven by necessity rather than profitability.  In such cases, the role of economics remains pivotal in evaluating and distinguishing between competing options.

​At the core of this evaluative process lies the meticulous preparation of an all-encompassing and dependable cost estimate.

A well-constructed cost estimate serves as the foundation for assessing a project's financial feasibility, offering multi-faceted support for a wide range of project-related decisions.  Its value transcends mere numbers, extending to diverse functions such as supporting comparative analyses of alternative courses of action, facilitating fiscal budgeting, aiding in resource allocation, promoting transparent stakeholder communication, proactively managing risk, and ensuring alignment with overarching strategic objectives.

The preparation of thorough and reliable cost estimates is not just best practice but an imperative to maximize investment performance.  It provides the necessary foundation for making well-informed decisions.  In this presentation, Mr. Dysert will illuminate exemplary practices in cost estimation, ultimately equipping decision-makers with the insights required for informed, strategic judgments.

Life cycle cost analysis provides an economic evaluation methodology for assessing the total cost of lifetime ownership of an asset; taking into account all the costs of acquiring, operating, maintaining, and eventual disposal of an asset. In order to provide an effective evaluation of costs over multiple years, LCCA relies on the concept of discounting that provides a method to convert future lump sum values, a uniform series of future values, or an incremental series of future values to a present value. The comparison of present values between potential alternatives provides a consistent methodology to evaluate the life cycle costs for alternatives that may have differing life cycles of asset acquisition and operation. Note that the concept of discounting can also be used to support a future cost evaluation (or an annual cost evaluation) between alternatives; although present value comparison is most common. The discounting conversions can also incorporate the impact of escalation when required.

Discounting conversions are supported by mathematical formulas and tables, as indicated in the following table:

The discount formula notation uses the (X/Y, i, n) scheme, which means find equivalent amount “X”, given amount “Y”, discount rate “i”, and the number of compounding periods “n”. When escalation is also factored into the discounting formula, it is represented by “e”.

The following shows a simple investment alternative comparison evaluation:

The typical steps involved in a life cycle cost analysis are:

1. Identify and define the problem requiring LCCA:
This step involves identifying the potential opportunity (e.g. creation of a new asset, modification of an existing asset, retirement of an asset). Identify the potential time periods to be considered in the analysis. Identify the appropriate financial or other criteria upon which to base an eventual decision (e.g. present value versus future value, discount rate to be used in the analysis).

2. Develop potential alternatives/solutions to consider in the analysis:
This step determines viable alternatives that will have economic impacts to be considered in the analysis. It may involve the consideration of capital and non-capital solutions. Often, making no change to the status quo is a potential option to be considered.

3. Develop the cost breakdown to support the analysis:
The cost breakdown structure for the analysis will vary based on the particular problem under consideration and the alternatives, but at the highest level will typically include identification of acquisition costs (e.g. planning, procurement, construction) and sustaining costs (e.g. operating costs, utility costs, maintenance costs, repair costs, etc.).

4. Collect data and information to support the required cost and benefit values for each alternative:
Effective analyses typically require a large amount of information to determine reasonable estimates for all elements of the cost breakdown structure. The analysis must address all elements for both acquisition and sustaining costs for each alternative; with the goal to provided sufficiently reliable unbiased estimates of both costs and benefits for each alternative.

5. Prepare the cost profiles and LCCA model for each alternative:
Develop the cost profile (cost/benefit flow) over time for each alternative. Use the cost profiles to develop the LCCA model with appropriate discount formulas to support the financial analysis. The LCCA models should address all significant cost and benefit impacts (sufficiently complex but not overly complex).

6. Analyze results:
Analyze the results for reasonableness. Prepare supporting analyses such as Pareto charts of key cost drivers or breakeven analyses. Test significant cost drivers with different assumptions or incorporate uncertainty analysis into the model to evaluate sensitivity for key cost/benefit drivers. Recycle to previous steps to adjust the model if warranted.

7. Communicate results and determine the course of action:
Prepare reports to communicate the LCCA results to support decision making.

Life cycle cost analysis is intended to measure cradle to grave costs for the asset or activity under consideration. It can be useful to identify key cost drivers to overall profitability and tradeoffs between competing alternatives. It’s a valuable technique to improve decision making be focusing on Total Cost Management, and improving long term cost effectiveness.

The most effective impact from life cycle cost analysis is obtained when it is employed as a value improving practice during the early stages of project planning. It requires identification of alternatives, and good alternatives often require creation ideas. Focus on sufficient complexity to support the decision to be made. LCCA models should be flexible, traceable, and scalable; and the supporting data should be quantifiable and defensible.

The techniques to perform life cycle cost analysis are not difficult; however they do require attention to detail to meet the objectives of the analysis. When performed well, they support better decision making by focusing on long-term costs and benefits to maximize capital investment performance.

For 2022, AACE International return to holding an in-person Conference and Expo. The event will be held in San Antonio, TX on June 26-28, 2022; which will be combined with virtual sessions as well. Larry Dysert is preparing two presentations: Alignment of Cost Estimating and the Project Development Process and Equipment Factored and Engineering-Model Estimates.

The Conference & Expo convenes the world's leading cost and project controls experts. All  presentations undergo a rigorous peer review process to ensure attendees receive the highest quality education.  The event will include many networking opportunities and the opportunity to share experience, thoughts, and ideas with your peers. Consider attending in June 2022!

Conquest Consulting Group will once again be attending and presenting at AACE International's 2020 Virtual Conference & Expo.  This conference will provide a combination of live sessions from June 28-July 3 2020, and approximately 70 recorded sessions. In addition, networking events and continuing education seminars will be provided. Larry Dysert and Bruce Elliott of Conquest Consulting Group present a live session on Conceptual Estimating Methods on July 1. Larry Dysert and Todd Pickett recorded a session on Supporting Estimates with Effective Scope of Work Definition.

Cost engineering leaders from around the world will be providing exciting technical presentations that provide practical knowledge for you to apply immediately to your projects! Join the networking event on July 1 at 6pm (EDT) to listen to the amazing music of Giri and Uma Peters, two young award-winning instrumentalists setting the Bluegrass and Old-Time Music world on fire.