By S. R. Rajashekar
The concept of ‘Life Cycle Costing’ or ‘Whole Life Costing’ takes into account all the costs associated with a product or a service from cradle to grave. When the cost of a product includes the purchase price plus the running and maintenance costs throughout the life of the product and further costs of disposal or end-of-life, the true cost of usage of a product or a service is revealed. This, in fact, shows the real cost according to the concept of ‘Life Cycle Thinking.’ When the costs of externalities such as the damages caused to the environment etc., are also taken into account, the true cost that the society as a whole pays for that product comes to light.
Governments worldwide spend anywhere between 20-70% of their GDP on procurement of various goods and services in discharge of multifarious responsibilities towards citizens. The best value for money can be achieved only when all facets of the cost of a product or service is kept in view while opting for the best alternative. Some of the products, which might have a higher initial or upfront cost, might prove to be more beneficial in the end when the life cycle cost is examined. One of the most sighted examples is the usage of LED bulbs.
Government spending can be a soft policy instrument to boost the market for more viable products and foster investment into innovative technologies. In this way, the governments can lead by example and demonstrate the efficacy of more sustainable products. The achievement of the concept of the triple bottom line of Profit, People and Planet should replace the concept of Economy, Efficiency and Effectiveness, which currently is the hallmark of government procurements.
The implementation of ‘Life Cycle Costs’ in public procurement is quite challenging as it is extremely difficult to actually assess all the costs associated with a product or a service: especially those of externalities (or the damages caused to the environment etc.,). Even if one ignores the same for a moment, it will not be easy to estimate all the costs associated with the operation and maintenance of the product over its lifetime and end of life cost of a product.
In government procurement, the procuring authorities either have to accept all the figures submitted by the suppliers without any means to verify the same or depend upon third-party certifying agencies. This presupposes the existence of such dependable and capable agencies.
There are no commonly accepted rates for discounting the estimated costs over the lifetime of the product to the current prices while deciding upon the most viable option. Last but not the least, it is very difficult to hold any vendor accountable if the facts given at the time of bidding doesn’t hold good over the next decade or more when the product is actually put to use. If one seeks guarantees over the lifetime of a product, it is likely that the upfront costs become unaffordable. Elected governments may not be willing to look at the long-term impacts when forced with budget constraints and compulsion to show immediate results.
In spite of innumerable challenges, the concept of life cycle costing has been slowly gaining ground in public procurements in developed countries like the members of EU and OECD, Japan and USA etc. Of late, the LCC is being considered as the first step towards more sustainable public procurement. Specialised tools and techniques are being developed to account for various aspects of the cost incurred over the entire life cycle of a product or a service. Various agencies are striving to work out different solutions to make the assessment of life cycle costs an easier task for the generalist administrators.
Considering the long-term benefits of looking into the whole cost, there is a need to promote the same in public procurement through legislation and provision of incentives wherever necessary. To begin with, the government procurers can look for low hanging fruits such as considering the life cycle costs of electrical and electronic products and buildings etc., where it is easier to assess and gradually move on to all the other capital acquisitions. The best value for money spent could be obtained by looking at the life cycle cost; as this forms the basis for choosing the ‘Most Economically Advantageous Tender.’ It is high time that the practice of acceptance of the lowest-priced bid is replaced with the lowest cost over a lifetime in the larger interest of all the stakeholders.
About The Author
S. R. Rajashekar is from the Indian Defence Accounts Service (IDAS) cadre, and is presently appointed as the Integrated Financial Advisor, Research and Development (Aero), Bengaluru
