What it means
Many purchasing decisions are made on the price tag alone, but for long-lived assets this can mislead. A machine, a vehicle or a building may cost far more to run and maintain than to buy.
Whole life costing brings all of these costs into one comparison. The main cost categories are the initial purchase and installation, the running costs such as energy and staff time, maintenance and repairs, and the end-of-life costs of removal or disposal.
Any resale or scrap value is deducted. Some analysts also include financing costs and the cost of downtime when the asset is unavailable.
For a fair comparison over many years, the costs can be discounted to present value. A dollar spent in ten years is worth less than a dollar spent today, so later costs are reduced using a discount rate.
This approach is common in public sector projects and in infrastructure, where assets last for decades. Finance teams use the results in capital budgeting and procurement.
A higher up-front price may be justified if it brings lower running costs, for instance an energy-efficient machine. The calculation also exposes projects whose business case depends on ignoring maintenance.
The weak point is uncertainty. Energy prices, maintenance needs and asset lifespans are estimates, and small changes can alter the ranking of options.
Good practice is to test the result with higher and lower assumptions, and to document the sources of the estimates. Whole life cost should not be confused with the accounting cost of an asset on the balance sheet.
That figure is usually the purchase price less depreciation, and it ignores future running costs. Whole life cost is a decision tool rather than an accounting figure.
In practice
Real-world examples.
Example
A logistics company compares two delivery vans. The electric van costs $15,000 more to buy but saves $4,000 a year in fuel and servicing, so over eight years the whole life cost is lower. The company also expects fewer breakdowns, which improves delivery reliability.
Example
A hospital evaluates a new scanner and includes training, service contracts and replacement parts in the calculation. The cheapest bid turns out to be the most expensive over ten years once service contracts are included.
Example
A city council chooses between two road surfaces. One costs less to lay, but needs resurfacing twice as often, so the council selects the more durable option on whole life cost. The decision also reduces road closures, which are a hidden cost to local businesses.
Formula
Calculation
Whole life cost = purchase cost + running costs + maintenance costs + disposal costs - resale value
Suppose Machine A costs $100,000 to buy, $15,000 a year to run for 10 years, $40,000 in total maintenance and $5,000 to dismantle, and can be sold for $25,000 at the end. Running costs = 15,000 x 10 = $150,000. Whole life cost = 100,000 + 150,000 + 40,000 + 5,000 - 25,000 = $270,000. Machine B costs only $70,000 to buy but $24,000 a year to run, $60,000 in maintenance, $5,000 to dismantle and has a resale value of $5,000, so its whole life cost = 70,000 + 240,000 + 60,000 + 5,000 - 5,000 = $370,000. Machine A is $100,000 cheaper over its life despite costing $30,000 more to buy.Case study
Seen in the real world.
Ridgeway Printing is an illustrative, fictional business choosing between two presses. Press X cost $400,000 and Press Y cost $520,000, and the owner was leaning towards the cheaper one.
The finance manager estimated running and maintenance costs over 12 years at $90,000 a year for Press X and $60,000 a year for Press Y. Over 12 years, Press X cost 400,000 + 90,000 x 12 = $1,480,000, while Press Y cost 520,000 + 60,000 x 12 = $1,240,000.
Press Y was cheaper by $240,000 before discounting, and it also had less downtime. The illustrative lesson is that the lowest purchase price is not always the lowest cost, and a simple whole life comparison can reverse the decision. Ridgeway also noted that the result would hold even if running costs for Press Y were 20% higher than estimated.
Watch out
Common mistakes.
- Choosing the lowest purchase price without estimating running and maintenance costs.
- Adding costs across many years without discounting, which overstates the weight of later costs when comparing long projects.
- Leaving out disposal and decommissioning costs, which can be large for plant, buildings and vehicles.
Questions
People also ask.
Is whole life cost the same as total cost of ownership?
They are very close, and the terms are often used interchangeably, although total cost of ownership is more common in technology purchasing, where software licences, support and upgrades are added.
Should I discount the costs?
For long-lived assets, yes, because it reflects the time value of money and lets you compare costs that fall in different years.
Does whole life cost include revenue?
Usually not, since it focuses on costs, so you should compare it with the benefits the asset produces.
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