Life Cycle Cost (LCC) has become an important element in the source selection decision for a system or equipment. In itself is not often if ever a determinant of the selection, but it can be an important differentiator between alternatives.
In many instances, only a single point estimate of LCC (nominal value) is determined for the decision maker. However, the decision maker needs to know more about the risk associated with each LCC estimate, as represented by the probable range of values that the LCC may take, ie between a lowest value and a highest value, and how LCC means may differ from their respective point estimates (modes). Determination of the most probable range for any cost (within confidence limits), be it for a cost component or for the aggregated LCC itself, is the only way that the risk in a cost estimate can be expressed quantitatively. It behoves the LCC analyst to determine the risk distribution for LCCs, in an accurate and defensible manner.
This paper illustrates the need for knowledge of the spread of LCC values about the nominal value, as an expression of estimating risk and the importance of correct statistical summation of cost component distributions to obtain a valid estimate of that LCC spread. A document such as this could well accompany the results of LCC risk analysis, as support for the validity of the spreadsheet algorithm and, hence, the LCC figures being recommended to an evaluation team.
For the sake of simplicity, discussion herein is in the context of evaluation of tenders for a system or equipment.