2.2.5 How is Value for Money Achieved?

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Essentially, whole life costing, (WLC), incorporating the acquisition, operation, maintenance and disposal of the asset,  is aimed at answering the question “What is the minimum WLC  of achieving these  business or policy objectives ?” rather than the more limited question “What is the cost of buying this item?”  In deciding on which option to select for meeting a need or providing a service, it is essential to consider all the costs involved in each option.

Some of these costs will be incurred at the outset, when equipment is bought or initial payments are made for service contracts. However, many of the costs will only arise over the life of the option, for example, as a result of operating the equipment, such as, energy costs, equipment maintenance costs, staff training, and disposal costs, along with the environmental impact of both the old equipment and the new equipment at the end of its working life.

The cost of achieving an objective differs from the cost of buying an item in two ways. Firstly a purchase may not be necessary for the achievement of the objectives identified. For example; there may be a number of different options available such as hire, lease, and partnership along with outright purchase. Second, the purchase price is unlikely to be the only cost incurred as a result of the procurement. For example, there may be operating costs including: fuel costs, maintenance and labour costs along with disposal costs including recycling. Determining the full cost of meeting a given requirement involves an understanding of how the eventual solution will be operated over the whole life. It is always necessary to consider what the procurement is supposed to provide, the cost options of each of the solutions along with risks and the relative WLC of meeting the business or policy requirements.

The WLC of using an item can be broadly divided into three categories: acquisition, operating and disposal costs.

Acquisition costs are incurred before the solution is ready for implementation.
Operating costs are incurred as a result of actually using it or keeping it available (maintenance costs).
Disposal costs are incurred on disposal or when dealing with site contamination or other harmful effects.

There may also be some income that will be realised on disposal if there are assets with a resale or residual value. This and any rental income when assets are not in use can be offset against the costs in determining the whole life cost.

The following analysis of costs needs to be considered by contracting authorities when considering the options of buy, lease, hire or find an alternative.

Table 2-2: Analysis of Costs

Type of Cost

Detail of Costs

Acquisition

Purchasers Legal costs
Cost for Writing Specification
Purchase Price/Rent/Hire Purchase Price
Software Licences
Fees to copyright holders
One-Off Licence Fees
Cost of Transportation to Site
Installation Costs
Preliminary Inspection Costs
Sustainable Development Costs

Operating

Insurance
Accommodation of operators
Annual Licence Fees
Operatives Wages and Salaries
Fuel and Electricity
Cleaning Costs
Periodic Inspection Costs
Spare Parts and Other Maintenance Costs
Sustainable Development Costs

Disposal

Sellers Legal Costs
Costs of Removing Installations
Cost of Transportation from Site
Refuse Disposal Charges
Site Clean-up Costs
Environmental Sustainable Development Costs

Although whole life costing deals with the total cost of an asset over its total life, it should be remembered that different solutions may have different life spans. The cost of the chosen solution should therefore be annualised to enable the costs of different solutions to be properly compared (such issues can arise either at the initial business case or at the evaluation stage provided that it has been stated in the tender documents and broken down in the bidders proposals).

The following simple example gives an illustration of how to annualise costs for comparative purposes.

Example 2-1: How to annualise costs for comparing different solutions

Electro Mechanical Services requiring the supply and maintenance of 5 buses. A bus with automatic transmission, which has a whole life cost of 270, 000 Euro and a life span of 15 years, has an annual cost of 18, 000 Euro. A bus with manual transmission, which has a whole life cost of 200, 000 Euro but a life span of only 10 years, has an annual cost of 20, 000 Euro. The bus with the higher whole life cost has the lower annual cost. The life span of a solution will, of course, depend on the length of time the solution is needed as well as its durability. In the above example, if the bus was only needed for 10 years and the total cost of using the bus with automatic transmission for the first 10 years would be 180, 000 Euro, the bus with automatic transmission would deliver better value for money.


© 2007 Republic of Cyprus, Treasury of the Republic, Public Procurement Directorate
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