Page 105 - Global Project Management Handbook

TOTAL LIFE-CYCLE SYSTEM MANAGEMENT 4-13

C = C + C + C + C D
R
O
I
T
where C = Total cost of ownership
T
C = Research and development costs
R
C = Investment costs
I
C = Operation and support costs
O
C = Disposal costs
D
FIGURE 4.15 Total cost-of-ownership stages.
These costs are divided into four distinct stages of the product life (Fig. 4.15):
research and development (R&D), investment, operation and support (O&S), and
disposal. These four stages do cross over several of the product life-cycle phases
discussed earlier. The R&D stage consist of all the initial studies conducted at the
beginning of a project prior to any procurement decision. The investment stage is
where the organization purchases everything necessary to meet the mission require-
ment. The investment stage ends with delivery of the system and all necessary support
resources. The O&S stage is the operational life of the system, when it is being used
to perform assigned tasks and is being maintained using the support resource package.
The disposal stage is when the system and all support resources are removed from ser-
vice and either disposed of or sold to another organization. Calculation of the estimat-
ed C O using LCC requires identification of an extensive number of statistics that are
then combined in a computer model based on the cost-estimation model architecture
shown at Fig. 4.16.
As seen in this figure, LCC is an all-encompassing estimate of all direct and indi-
rect costs associated with owning a system. Each of the subelements of this cost-
model architecture represents between three and seven submodels needed to calculate
each identifiable cost. Normally, the project team must gather the required model
input data from many sources, including internal project data, design data from the
system manufacturer, and information from the possible future users of the system
being purchased. Producing the estimated LCC for a system is not an exact science
because the project team can never obtain all the input data that it would like to have

before using the computer model. Thus some degree of expertise is needed to make
the appropriate assumptions to fill in the knowledge gaps where required input data
cannot be found. The resulting LCC estimate should be the total cost of owning a system
for its entire life cycle.
The resulting LCC figure may be many millions of dollars, especially if the system
being purchased itself costs millions. The investment costs are combined with the opera-
tion and support costs and disposal costs to determine the total costs of ownership. This
may be such a large figure that it is difficult to use it as a significant factor in deciding
which option is more attractive in terms of cost of ownership, so it may be desirable to
reduce the total to a more understandable and usable number. Typically, the project team
will calculate the total number of operational hours for the system over its life and then
divide the estimated LCC by this number to produce an average cost per operating hour.
In the case of the example of the helicopter purchase, the total number of operating hours
calculated in Fig. 4.17 is 576,000 hours. If the total estimated LCC for one of the heli-
copters that could be purchased for the fleet were $365 million, then the estimate of oper-
ating costs would be approximately $634 per flying hour. A similar estimate for all other
helicopters under consideration also would be made so that each could be compared on
equal terms.