Whole life costing takes account of the total cost of a product or service over its life from determining the need for it through to its eventual disposal and replacement. For equipment, for example, it includes the costs of maintaining and operating the product, as well as the outright purchase, hire or lease price; the cost of consumables, utilities, training; and the cost of disposal or potential sale value at the end of its life. In some cases the elements, which are difficult to calculate (life expectancy, accuracy, ease of use, speed etc), are of paramount importance in making the final choice. For services, costs such as full budget costs, overtime, staff training, perhaps redundancy or re-location (should the unit close at some future time) need to be considered when evaluating a service contract and comparing in-house costs against those of buying in the service from an external provider.
Research has shown that the purchase cost of equipment is often only a small proportion of the costs of operating it. Likewise, the costs of running and maintaining an office building are about 200 times the cost of building it. It is important therefore to take all these elements into consideration when making procurement decisions. As with other aspects of procurement, there will be a need to balance the work undertaken with the value and risk of the proposed procurement.
Whole life costing should be applied at a strategic level to assess different options (for example, do nothing, new build or refurbishment) as part of an options appraisal exercise in, for example, major works projects. It should also be used, for example, to compare the costs of buying, renting or leasing an item of equipment.
It is important that non-financial factors are considered when making a procurement decision, for example, do the goods/services meet the users' technical specification, do they have the qualitative standards that are expected and required, and is the proposed decision sustainable.
Most people make decisions that incorporate aspects of a whole life costing approach. For example, you might choose a car based on the selling price, your personal taste and its fuel economy. Whole life costing provides a framework for comparing these different aspects objectively. It requires the people involved in the procurement decision to specify from the outset the technical specification, what will be required to support it and for how long.