Introduction to LCC

8/2/2019 Introduction to LCC

1/32

3UR0#LQ Introduction to LCC p1 of 31

ProM@in Technical Note

Subject: Introduction to Life Cycle Cost analysis

Author: Per Hokstad and Jrn Vatn, SINTEFDate: 2001-09-30

Rev: 1

1. INTRODUCTION1.1 Objectives of the noteThe main objectives of the Technical note are to:

Provide an LCC model to be used in the overall economic evaluation of railwayequipment (the "product"), with focus on the possibility of making cost comparisons

of different options.

This note is based on work performed under the REMAIN project sponsored by EU.

1.2 DefinitionsDefinitions of a few basic concepts are given below. These are based on IEC 300-3-3-Part 3, Section 3: Life cycle costing (IEC), and the NORSOK Standard: Common

requirements Life Cycle Cost.

Life Cycle (IEC): Time interval between product conception and its disposal

Life Cycle Cost: The total cost to the user of the purchase and installation, and the use

and the maintenance during the life cycle (IEC gives the shorter version: "Cumulative

cost of a product over its life cycle".)

Dependability (IEC): A collective term is used to describe the products availability

performance and its influencing factors, i.e. reliability performance, maintainability

performance and maintenance support performance.

1.3 List of abbreviationsThe followingabbreviations are used in this report.

General:

CM Corrective Maintenance

CON CONdition Monitoring

CONSYS System (turnout) with the inclusion of CON equipment/product

DEL Delay Cost (over life cycle)

HAZ Hazard Cost (over life cycle)

IEC

INV

International Electrotechnical Committee

Investment cost of the system or equipment/product (primary

investment)

LCC Life Cycle Cost


2/32


MAIN

NORSOK

Maintenance and Operating Cost (over life cycle)

NORSOK Standard, LCC

PM Preventive Maintenance

RCM Reliability Centered MaintenanceREFSYS

TC

Reference system (turnout) withoutcondition monitoring

Technical Committee (within IEC)

Investment:

AIC

EPC

Annual Investment Cost (i.e. split on total life cycle)

Equipment and Material Purchase Cost

ENC Engineering Cost

INC

ISPC

ITCDIC

Installation Cost

Initial Spare Parts Cost

Initial Training CostDisposal and reinvestment Cost

Maintenance/operation:

ADC

AMC

Annual Administrative Cost

Annual Maintenance and Operating Cost

CONC Annual CONdition based monitoring Cost

CMC

ECC

MHR

PMC

Annual Corrective Maintenance Cost

Annual Energy Consumption Cost

The Man-Hour Rate for maintenance

Annual calendar based PM Cost

Delay:ADC

LDC

NLD

NSD

SDC

Annual Delay Cost

Long term Delay Costs

Number of Long term Delays per year

Number of Short term Delays per year

Short term Delay Costs

Hazard:

AHC

HEC

NHE

Annual Hazard Cost

Hazardous/accidental Event Cost

Number of Hazardous/Accidental Events per year

t0t1n

m

k

Discounting:

Base year. All costs are discounted back to this year

The year for start of operation ( t0)

Lifetime. The number of years from t0 until disposal of the

product/equipmentThe number of years in operation (from t1 until year of disposal),

= n - (t1-t0).

Annual rate of return (interest rate minus rate of inflation)

Some further abbreviations are used "locally" in the LCC model, e.g. see themaintenance models, Sections 2.4.2-2.4.4.


3/32


2. LCC MODEL

The objective of this chapter is to present and discuss a model for cost evaluation to be

used in the overall economical evaluation of railway equipment.

The chapter is divided into nine sections, which comprise the following:

Standards for LCC modelling. Section 2.1 presents and discusses the status withrespect to international standards on LCC. The standards form the basis for the

modelling of acquisition cost.

LCC modelling aspects. Section 2.2 presents the suggested overall breakdown of thetotal LCC into various categories.

Investment cost model. The suggested capital cost model is presented in Section 2.3.

Maintenance and operating cost model. The operating /maintenance cost model ispresented in Section 2.4..

Delay cost model. The suggested unavailability (i.e. delay) cost model is presented inSection 2.5.

Hazard cost model. The cost inferred by accidental events (rebuilding, clean-up,personal injuries, environmental threats) is presented in Section 2.6.

The simple formula for discounting, used in the present report, is summarised inSection 2.7.

Main features and limitation of the REMAIN LCC model is presented in Section 2.8.

The practical use of LCC models in the acquisition of new equipment for railwaycompanies is shortly discussed in Section 2.9, essentially based on reported

experience with the acquisition of the high speed train X2000 to the Swedish StateRailway.

2.1 Standards for LCC ModellingAs a basis for the modelling of acquisition cost, the status with respect to international

standards on LCC has been checked out. Within IEC (the International Electrotechnical

Commission), there is a technical committee working with this topic. The technicalcommittee is no. 56

1(TC56) with the titleDependability. An international standard was

1It should be noted that although the TC56 is within IEC, the International Electrotechnical

Commission, it is recognised also by other standardisation bodies to cover a much wider area than theelectrotechnical within the area ofdependability.


4/32


issued in 1996, entitled IEC-300-3-3: Dependability Management, Part 3: Application

guide, Section 3: Life cycle costing (see the reference, IEC 1996). An earlier version of

the standard is the referenced, IEC 1987.

SINTEF has earlier developed models for life cycle cost, ref. Lydersen and Aar (1989).The modelling was then based on an even earlier version (committee draft) of the IEC

standard (ref. IEC, 1987). The referred SINTEF-work based the LCC-modelling on the

breakdown of the LCC given in the 1987 document. In the newer versions of the IEC

documents, this suggested breakdown structure has been taken out, and the scope of the

standard is to provide guidance on the general application of the LCC concept.

The NORSOK standardisation work group have issued a draft standard with the title

Life Cycle Cost for Production Facility, reference number O-CR-002 (NORSOK,

1995). The standard is based on P-CR-002 Common Requirements - Life Cycle Cost

(NORSOK, 1994), which present general aspects with respect to the calculation of LCC.

Hence, the focus in this report will be on the requirements in O-CR-002, which givemore detailed information regarding the LCC modelling for production facilities. The

scope of O-CR-002 is to standardise LCC calculation methods necessary to establish

the facility design that gives the maximum return on investment. The suggested model

for breakdown in cost elements in the NORSOK standard will be used as the basis for

the economic evaluations in this report.

There are no conflicts between the suggested LCC breakdown structure given in the IEC

documents and in the NORSOK standard. The NORSOK breakdown structure is

however preferred as the basis for the present application.

2.2 LCC Modelling AspectsThis Section presents an overview of the LCC model, adapted to railway applications.

2.2.1Principles of LCC breakdown

In order to obtain the total life cycle cost, it is necessary to break the total cost down into

a series of cost elements that together make up the total (i.e. a cost work package). These

elements should be such that they could be individually assessed. As stated in IEC

(1995), the identification of the elements and their individual scopes will need to be

determined for the specific exercise. In IEC (1996) an approach is given which breaks

down the total cost along three axes:

Cost category (who): The cost category of applicable resources such as labour,materials, fuel/energy, overhead, transportation/travel, etc.

Product/work breakdown structure (what): Breakdown of the product to lowerindenture levels.

Life cycle phase (when): The time in the life cycle when the work/activity is to beperformed.

For the present purpose, we suggest to essentially apply the first two of these axes. Thecosts are first split into cost categories, which provides a general structure applicable for

all products. The product/work breakdown is in the following denoted physical


5/32


breakdown of the equipment, and must of course be carried out individually for each

type of equipment.

The third axis: life cycle phases (Figure 2.1) will also (indirectly) be accounted for as thecost categories will distinguish between

1. investment costs (prior to start of operation) and2. maintenance/operating and "risk" costs occurring regularly during operation

(all costs being discounted to a chosen "base year", see Section 2.2.4). Note that disposal

(removal and recycle) cost and reinvestment cost will not be included in the present

model, assuming that these will not distinguish significantly between various options

(and since also data could be difficult to obtain for these costs).

Figure 2.1 Use of LCC in various project phases (from IEC).

In Sections 2.2.2 and 2.2.3 below, the categorisation of the first two breakdown axes are

discussed. Section 2.2.4 presents formulas for the discounting of costs. Section 2.2.5

concludes with a discussion on how the objective of the cost evaluation affects the LCC

model to be applied.

2.2.2Breakdown into Cost Categories

The classification into cost categories (see Figure 2.2) is based on the breakdown

structure of the total LCC suggested in NORSOK. According to NORSOK (1995) thetotal LCC can be divided into three major areas, capital cost, operating cost and


6/32


deferred production. Here we use the term Investmentcost rather than capital cost, to

separate all costs prior to start of operation. As operating cost is mainly maintenancecost, we here refer to this as the maintenance. Further, the cost of deferred production

could more generally be referred to as (production) unavailability cost, which in thepresent railway application essentially equals the delay cost. Finally, we includeHazard

cost(costs related to accidents). Hence the total LCC equals

LCC = CostInvestment + CostMaintenance + CostDelay + CostHazard

or, (cf. Figure 2.2)

LCC = INV + MAIN + DEL + HAZ

Observe that the sum of the delay cost and the hazard cost could be referred to as the

risk cost, and an alternative could be to split LCC into the three main categories: 1)

investment,2)

maintenance/operation and3)

risk. Actually, IEC also split into just twomain categories:

1)acquisition cost (or investment cost) and

2)cost of ownership (or life

support cost). In the notation of the present report the cost of ownership equals MAIN +

DEL + HAZ, see Figure 2.2. The LCC model, based on the cost breakdown of Figure

2.2, will be presented in Sections 2.3-2.6.

LCC Categories

Equipment and MaterialPurchase CostEngineering CostInstallation CostInitial Spares CostInitial Training CostDisposal andReinvestment Cost

INV

Investment Cost

CorrectiveMaintenance CostCalendar basedPM CostCondition basedPM CostOperating CostEnergyConsumption Cost

MAINMaintenance andOperating Cost

Short TermDelay CostLong TermDelay Cost

DEL

Delay Cost

Human Safety CostEnvironmentalThreat CostCleaning CostRebuilding Cost

HAZ

Hazard Cost

LCC

Life Cycle Cost

Figure 2.2 LCC breakdown into cost categories.


7/32


2.2.3Physical Breakdown Structure

As discussed in Section 2.2.2, also a physical breakdown of the product

(equipment/system) under analysis is required. As an alternative tophysical breakdown,

the work breakdown structure could have been used, but the physical breakdownstructure is regarded more appropriate for the present application.

The level of appropriate physical breakdown could be a matter of concern. Note that the

overall level of detail must be sufficient to cover all four cost categories of Figure 2.2.

However, a different degree of breakdown level could be used for the various cost

categories.

Given an appropriate physical breakdown of the product ("system") into subsystems A,

B, C,... , see Figure 2.3, the overall LCC breakdown will be as indicated in Table 2.1.

Note that special support and test equipment should be included as a specific subsystem.

Figure 2.3. Example of physical breakdown of equipment (i.e. "product")

Table 2.1. LCC breakdown according to cost category and physical breakdown

(with illustrative numbers)

Cost Physical breakdown Sum

Category Subsystem A Subsystem B Subsystem C

INV 10 000 2 000 500 12 500

MAIN 5 000 1 100 400 6 500

DEL 1 000 400 100 1 500

HAZ 500 - - 500

Sum 16 500 3 500 1 000 21 000

Physical breakdown

A1A2

SubsystemA

B1B2B3

SubsystemB

C1

SubsystemC

SYSTEM


8/32


2.2.4The Life Cycle and cost discounting

The Life Cycle of the product, is defined (IEC) as the interval between product

conception and its disposal. The LCC is the predicted total cost over this period.

Some time instants must be defined:

t0 = Base year. All costs are discounted back to this year

t1 = The year for start of operation (>t0)

m = The number of years in operation.

n =Lifetime. This equals the number of years from t0 until disposal of the

product/equipment ( = t1-t0+m)

In a simplified analysis, suggested in the present report, we let t0 = t1-1, discounting all

costs to the year prior to the start of production (i.e. operation of the line).

Discounting formula

Let

St = Net cost during year no. tafter t0. Note that all costs are measured in real terms,

using base-year prices. All payments are made (say) in the middle of the year in

question.

k= The annual rate of return to be used for the assessments. This shall here be given as

the difference between the interest rate and the inflation rate (this interpretation

represents a slight approximation).

Then the discounted cost of year t (=net present value) equals St / (1+k)t. Here t = 0

corresponds to the base year itself.

Any cost, St, made tyears after t0 shall be discounted back to the base year to take into

account the time value of money, giving the following total discounted costover the life

cycle

W

W

Q

W

6 N=

+0

1( )

In a simplified analysis we could ignore disposal and reinvestment cost. In that case weconsider an idealised model where all investment costs are restricted to occur in the

years from t0 to t1-1 prior to operation. In this simplified approach, we also let the base

year, t0 = t1-1, and thus all investments are made in year 0, which is the year prior tostart of operation. This will imply that no discounting is required for the investmentcost,

INV, (which simply equals the cost of "year 0", S0 ).

All other costs (i.e. MAIN, DEL, HAZ) are assumed to have constant contributions

throughout the lifetime, i.e. for year 1, up to and including year m. For these

contributions we multiply the annual costs with a discount factor fto get the total costover the lifetime. Thus,


9/32


I NW

P

W

= +=

( )1

1

and we getf= [1 - (1+k)-m

)] /k. So if the annual cost is denoted S, the total discounted

cost for the m years of operation is S f, that is

6N

N

P1 1 +( )

Observe that this equals Sm when k= 0.

2.2.5How the Task Objective Influences the Model Selection.

Another important factor to take into account when the cost model is established is theobjective of the cost evaluation to be performed. In the present application there are

ideally two objectives of the cost evaluations to be performed:

To provide an evaluation ofthe differences in cost performance between two options(here exemplified by considering turnouts with/without condition monitoring

equipment).These are based on rather rough cost estimates as being available in an

early phase of the development (corresponding to a typical application of LCC in the

acquisition phase).

On a more detailed level to evaluate the cost efficiency of inclusion of (part) of thecondition monitoring equipment for turnouts. Here more detailed results, as obtained

from the RCM analysis (see Vatn 1998) are utilised. Parts of this analysis go beyondwhat is considered a typical LCC analysis.

The presentation of the LCC method given below is based on the first of these two

objectives (the second purpose will be handled separately in Chapter 4). From the above

it is seen that the cost model to apply here should be refined with respect to visualisingcost differences. Consequently, we do not put efforts into finding the ultimate answer

with respect to the total cost of the equipment. Rather, it is sufficient to determine quite

rough estimates of the total cost, applicable for visualising the order of magnitude of therelative cost (differences).

2.3 Investment Cost ModelThe investment cost includes of course the acquisition of the technical system (including

investment in the required maintenance equipment) but also documentation,

engineering/installation, training, spare parts and any other project-related cost (e.g.

travelling). As indicated in Figure 2.1, the Investment cost (INV) is here broken down

into the following cost elements:

Equipment and materials Purchase Cost, (EPC)

ENgineering Cost, (ENC)

INstallation Cost, (INC)

Initial Spares Cost, (ISC)


10/32


Initial Training Cost, (ITC)

DIsposal and reinvestment Cost, (DIC)

Thus,

INV = EPC + ENC + INC + ISC + ITC + DIC

Note that for each category any administrative costs shall be included, when appropriate,

in addition to the capital costs. Using the physical breakdown of the system, the costs

related to the above five categories are obtained for each subsystem, adding up to give

the total investment cost of the product. To summarise, the total investment costs equal

INV = EPC + ENC + INC + ISC + ITC + DIC

2.4 Maintenance and Operating Cost Model2.4.1General.

The cost elements to be included in the annual maintenance and operation/adm-

inistrative cost (after start of operation) are, cf. Figure 2.2:

Corrective Maintenance Cost, (CMC)

Calendar based PM Cost, (PMC)

CONdition based PM Cost, (CONC)

ADministrative Cost, (ADC)

Energy Consumption Cost, (ECC)

These costs adds up toAMC=Annual Maintenance and operation cost:

AMC = CMC + PMC + CONC + ADC + ECC

The annual cost, AMC, should be discounted as shown in Section 2.2.4 to give the total

maintenance and operating cost over the life cycle (MAIN).

The above five cost categories are discussed below (Sections 2.4.2-2.4.6). The various

Maintenance Costs (CMC, PMC and CONC) are further split into

Man-hour cost

Spare parts consumption cost

Logistic support cost

All administrative costs and training costs related to the various maintenance activitiesare included in the fourth category, ADC. (All man-hours not included in the three first

categories are included in ADC.)

2.4.2Corrective maintenance cost

The annual corrective maintenance costs are the sum of man-hour cost (for performingthe corrective jobs), spare parts consumption cost and the logistic support cost. Let


11/32


NCM = Number of failures per year requiring Corrective Maintenance (Total failure

rate)

MHCM= The number of Man-Hours required for repair (CM), total time, including

travel, fault finding, testing etc. This is given as MHC = MTTR NC, where

MTTR = Mean Time To Repair (in hours)

NC= The Number of men required to do the Corrective job (including"safety crew")

MHR = The Man-Hour Rate for maintenance. Note that this rate includes all man-hour

costs for operator; e.g. wages, taxes, life/health insurance, facilities.

SPCM = Spare Parts cost per repair (Corrective Maintenance)

LSCM = Logistic Support cost for Corrective Maintenance per year

The annual corrective maintenance cost are then calculated from the formula

Corrective Maintenance Cost =CMC = NCM x (MHCMxMHR + SPCM) + LSCM

2.4.3Calendar based preventive maintenance cost

The annual calendar based PM costs are the sum of man-hour cost, spare parts

consumption cost and the logistic support cost. LetNPM= Number of calendar based PM actions per year

MHPM= Number of Man-Hours per calendar based PM action

MHR = The Man-Hour Rate for maintenance

SPPM= Spare Parts cost for calendar based PM per year

LSPM= Logistic Support cost for PM per year

The average annual man-hours costs for calendar based PM equals

Calendar based PM Cost =PMC = NPM x (MHPM x MHR + SPPM) + LSPM

If there are various calendar based PM actions (servicing) being performed at different

intervals, the cost related to each type of job/interval must be found individually and

summed to get the total cost. The above formula demonstrates how the cost of PM

increases when the number of PM actions increases.


12/32


2.4.4Condition based preventive maintenance cost

The annual condition based PM cost is the sum of man-hour cost, spare parts

consumption cost and the logistic support cost. Let

MHCON= Number of Man-hours for CONndition based PM per year

MHR = The Man-Hour Rate for maintenance

SPCON= Spare Parts cost for CONdition based PM cost per year

LSCON= Logistic Support cost for CONdition based PM per year

Note that included in the above costs are the costs of operating and maintaining any

condition monitoring equipment (as R2000).

Now the average annual man-hours costs for condition based PM equals

CONdition monitoring Cost =

CONC = MHCONMHR + SPCON + LSCON

2.4.5Administration cost

The annual cost of administration, operation and training is denoted

ADC= ADministration, operation and training Cost per year

= Number of man-hours for administration/operation/training per year

x Man-hour rate for administration/operation/training

This cost includes all man-hours costs not included in the various maintenance activities

(Sections 2.4.2-2.4.4). Thus, all administration/training costs required e.g. for

maintenance are included.

2.4.6Energy consumption cost

The annual cost

ECC= Energy Consumption Cost per year

shall include the cost of fuel required and e.g. associated CO2 tax, when relevant.

2.4.7Disposal cost

Observe that the Disposal and Reinvestment cost (DIC) is not included in the present

model.

2.5 Delay Cost ModelUnavailability of the equipment due to failures requiring unplanned corrective

maintenance, may also infer costs related to the operation of the trains, essentially delaycosts. Note that it is here assumed that PM will notcause delay. Thus, unavailability

costs are here grouped into the following two categories:


13/32


Short Term Delay Cost, i.e. costs of delays of relatively short duration (e.g. up to 30minutes) while corrective actions are carried out. This cost is mainly that of losing

reputation (and thereby future passengers), but could also include economiccompensation to passengers if the railway company provides a guarantee on the

maximum length of a delay.

Long Term Delay Cost, i.e. cost due to any unavailability of rather long duration,requiring certain measures to be taken by the railway company in order to be able to

get through the traffic. These costs are e.g. lost income due the cancellation of

trains, financial compensation to passengers, and the cost of alternative means of

transportation for passengers already on the delayed train.

The first cost category could be quantified by predicting the number of trains per year

that are delayed more than (say) 5 minutes by a failure requiring corrective maintenance.

The second category could be caused by accidents/incidents due to failure of the

equipment in question. The frequency of such events per year must be estimated,

together with the expected long term delay costs related to each event (other costs are tobe included in the hazard cost, see Section 2.6).

Now introducing

NSD = Number of Short term Delays per year caused by failure of "product" in

question

SDC= Short term Delay Cost (cost per delay)NLD = Number of Long term Delays per year caused by failure of "product" in

questionLDC= Long term Delay Cost (cost per delay)

Then it follows thatADC= Annual Delay Cost is given as

ADC = NSD x SDC + NLD x LDC

This annual delay cost is discounted as shown in Section 2.2.4, to give the total delay

cost (DEL) over the lifetime.

2.6 Hazard Cost ModelFailure/unavailability of equipment may also cause hazardous events (possibly giving

incidents/accidents), giving the hazard cost:

cost of hazards to humans (e.g. personal injuries, fatalities)

cost of hazards to environment

cost of possible rebuilding (after accidental event)

cost of clean-up (after accidental events)

In addition to actual accidents (collision/derailing), we here also include hazardousevents like landslide. These costs, related to safety, are often notincluded in the LCC,


14/32


partly because it involves putting a price on human lives, being somewhat

controversial. However, it is important in some way to make visible also these costs for

loss of safety. Of course it is possible to calculate LCC without including cost of risk.

But in that case some loss of safety measure should be calculated inaddition (e.g. thefrequency of accidents), so that the overall decision could be based on two measures:

LCC andaccident frequency.

Here it is suggested to include cost of risk in the LCC model in a rather rough way. The

number of hazardous/accidental events per year (or per 1000 years) is estimated, and

then multiplied with the estimated cost per event (without specifying in detail the

various contributions to this cost). Using this approach it will not be required to specifythe cost per (statistically occurring) fatality.

Introducing

NHE = Number of Hazardous/accidental Events per year caused by failures of the

"product" in question

HEC= Cost of one Hazardous/accidental Event.

Then Annual Hazard Cost is given as

AHC = NHE x HEC.

This annual hazard cost is discounted as shown in Section 2.2.4, to give the total hazard

cost (HAZ).

2.7 Simplified case for discounting of cost contributionsUsing the present breakdown into cost categories, the overall LCC is found from (cf.

Figure 2.2)

LCC = INV + MAIN + DEL + HAZ

As pointed out in Section 2.2.4 costs must be discounted back to the base year, t0. In

the somewhat simplified LCC calculation suggested in the present report, we let the

year for start of operation, t1=t0+1. Further, we let the total investment costs (INV) begiven directly in terms of a cost invoiced in "year 0" (t0), i.e. the year prior to start of

operation, t1. The period of operation is exactly m years (from 1st of January in year 1

until 31st of December in year m). Finally, the annual costs ofmaintenance/operation

(AMC), delay (ADC) and hazards (AHC), respectively, are the same for all m years of

the operation for the product, and these costs are then multiplied with the discounting

factorf= [1 - (1+k)- m

] / kto give total costs. So in this case the total LCC equals (cf.

Section 2.2.4)

LCC = INV + [ AMC + ADC + AHC]x[1 - (1+k)- m ] / k


15/32


This is the simple discounting formula used in the calculations of the REMAIN LCCmodel. Observe that AMC + ADC + AHZ equals the annual cost of ownership (life

support cost).

The comparison of two concepts is more problematic if the concepts have different

lifetimes (i.e. different values ofm). In that case the annuities should be compared (total

cost split over the m years of operation). Thus, the LCC is multiplied with

k/[1 - (1+k)-m

)], and in that case, the annual costs,

LCCANNUAL = INVx k/[1 - (1+k)-m

] + [ AMC + ADC + AHC]

of the two concepts are compared. We remind that disposal and reinvestment costs are

not incorporated in the above formulas. By introducing the discounting factor

d(k, m) = k/[1 - (1+k)-m

)](= 1/m, when k=0)

we get that annual investment costs equals

AIC = d(k, m) x INV

And annualLCCis written as

LCCANNUAL= d(k, m) xINV+ ( AMC + ADC + AHC)

=AIC + AMC + ADC +AHC

2.8 Main features of the REMAIN modelIn this Section we point out some of the features and limitations of the REMAIN model

for LCC analysis

The REMAIN model restricts to infrastructure equipment (i.e., possiblemodifications required for use on rolling stock has not been investigated).

The REMAIN approach suggests a flexible method for data collection, applying aquestionnaire that allows data to be provided at various levels of detail (i.e. adapting

data collection to the resources available and to requested accuracy of the results).

The REMAIN model is rather simple, as e.g.- the discount factor is constant through the lifetime- the yearly costs (maintenance, operation etc) are fixed.- it focuses on comparison between two options. The main objective is rather to

provide reasonable estimates ofcost difference (for use as decision support), and

is not aiming at obtaining very accurate total cost estimates.

- disposal cost of equipment by end of its life cycle is not included


16/32


It is realised that the inclusion ofHazard costs in the REMAIN model is somewhat

untraditional. However, for a fair comparison of two options it is judged essential also to

have safety in mind. Of course safety might be judged separately. However, it is

sensible, at least in a rough way, also to visualise the economical effects of possibledifferences in safety, as these effects might easily be underestimated. Not only can a

somewhat lower safety lead to hazard costs as indicated in the REMAIN model, it might

also lead to reduced lifetime (e.g. by a turnout being destroyed in a derailment).Obviously, the user is free notto include the hazard cost in the LCC analysis, if that is

preferred.

The REMAIN approach allows comparison of LCC for two differentconcepts. In order

to make such a comparison meaningful, also when the number of years in operation (m)

differs for the two options, the REMAIN approach focuses on annual LCC.

The use of LCC analysis is often seen as a burden, due to the large amount of (detailed)information required. The use of the REMAIN method is then an option, when the

resources (and data) to carry out such a detailed analysis is not available. In particular,

such a more simple (and less costly) approach would be advantageous in order to

provide a first prediction of costs, e.g. to decide whether a more detailed analysis is

required or worthwhile (cf. the discussion in Chapter 3).

2.9 Use of LCC in the acquisition of new railway equipmentThere is still not a widespread use of LCC in the acquisition of railway equipment.

However, the Swedish State Railway used the LCC approach in the acquisition of their

high speed train X2000, which is reported to be a success, for both parties (customer and

supplier), see Burstrm et al, 1994, and Akselsson and Burstrm, 1994. These papers

provide the information presented in the present Section.

2.9.1General approach for acquisition

The following steps are recommended in the acquisition process:

1. Establishment of the LCC model2. Determination of the operational profile3. Request for proposals4. Evaluation and amplification of the proposals

5. Negotiations with tenderers6. Contract with LCC guarantee7. Delivery8. Verification

A few of these points are commented below. When establishing the LCC model it is

recommended to carry out a pre-study on an existing, similar system, both for validation

of the model, training of the LCC team, and also for establishing a reference for the

reliability and LCC evaluations of the tenders.

The following factors must be included in the request for proposals, see Burstrm et al

1994,


17/32


Principles of the LCC evaluation. Inform that missing data or the failure of thetenderer to guarantee properties of the product implied by the supplied data may be a

reason for rejection of the tender.

Supplier responsibility for availability performance. An availability performanceprogramme shall be carried out, involving continuous analyses of alternative

technical solutions during the engineering phase.

Expected guarantees from the suppliers should be stated.

Operational profile of the equipment.

The present maintenance organisation should be described. If the tenderer identifiesmissing resources or equipment, necessary of maintaining the offered equipment, this

should be stated in the tender.

The LCC calculation model must be provided with the request for proposal, giving allcustomer parameters.

Data necessary for the evaluation, thus to be included in a tender, must be carefullyspecified.

The customer (railway company) performs the LCC calculations according to the stated

model, also using previous experience with similar equipment to estimate e.g.

maintenance costs.

2.9.2Contractual requirements and verification

The contractwill among other things contain rules for project realisation, for example

the change procedure, and guarantees. It should be guaranteed that a specific LCC value

must not be exceeded. Reliability and maintainability performance guarantees are also

desirable, e.g. maximum no. of failures requiring CM, and average or maximum repairtime. In the X2000 project the contract included guarantees concerning both reliability

performance and LCC:

1. The number of stopping failures should not exceed 12 per million km, the definitionof this being a stop on the line for more than 15 min without possible restart.

(Contractual status had indicated about 11 stopping failures pr million km.)

2. The number of faults causing an unplanned workshop visit directly after arrival at theend station should not exceed 750. (Contractual status had indicated about 450.)

3. The LCC value as calculated according to the agreed LCC model should not beexceeded by more than 10 per cent.

However, a guarantee is not much worth unless its fulfilment can and will be verified.

How this will be done should be outlined already in the request for proposals, and a

procedure agreed on in the contract.

In the X2000 project the contract stated that the contractor had an undertaking to

conduct verification of reliability, maintainability and LCC. The contract also included a

contractor commitment to carry out an availability performance programme. This means

that during the engineering phase continuous analyses concerning reliability and

maintainability performance should be carried out, and their impact on LCC assessed. A

specific maintenance analysis was also carried out, e.g. resulting in a prediction on the

balance between PM and CM.


18/32


As in this case where strict reliability and LCC requirements are stated in the contract,

there is a prerequisite for a successful project that LCC and reliability considerations are

integrated into the normal design process.

LCC, reliability and maintainability verification implies that the equipment is very

carefully followed up during a reasonable period of normal operation. For the purpose of

reliability performance verification, all (failure) events are carefully reported and

logged, and customer and supplier together decide whether or not any event is a relevant

irregularity. The supplier is of course responsible only for failures resulting from the

vehicle itself. Maintainability performance (repair times) may be verified through repairs

of a number of randomly chosen failure modes. Verification of PM actions could be

rather expensive to perform, but the customer should at least reserve the right to demand

verification of any data provided by the supplier. Energy consumption also ought to be

verified, either theoretically or in practice.

In the X2000 project there was a verification period of six months, and in this period

every event involving a maintenance action was registered. Each report was classified

regarding relevance to the verification and regarding consequence. All reports were

considered relevant unless any of the following cases were fulfilled:

The failure was caused by incorrect handling

The failure was secondary failure, caused by another reported failure

The failure was caused by equipment not within the delivery

The failure was due to usage of the train beyond its specification.

"Failure" in this text is given a very wide meaning, since all events resulting in any

maintenance action, no matter how simple and unimportant they might be for the actual

service, are considered.

2.9.3Benefits of using LCC

The referred LCC application (X2000) is reported to be a success, for both parties

(customer and supplier). It was demonstrated that the LCC technique is an efficient tool

to achieve low total cost and high reliability. By continuous and systematic analyses

throughout the whole process, from contract to verification, the result was a very reliable

product. There was no doubt that lower failure rates and shorter repair times were

achieved than would otherwise have been the case, and that has also been the means tocontrol the LCC.

The benefits for the customer are obvious. A much better defined product is achieved

already at the time of contract signing, and the supplier will be committed to do a good

job with emphasis on availability performance. All relevant costs of different technical

alternatives are calculated, enabling the most favourable solution regarding LCC to be

chosen. If a low LCC is predicted and subsequently verified the customer will benefit

from low support costs for the entire life of the system.

The LCC method has also advantages for the supplier. An insight into the customers

intended use of the product and the value placed on different costs is obtained. Thesupplier also gets a tool for evaluation of different technical solutions since availability


19/32


performance can be valued in economic terms. Finally, if evidence of a thoroughly

evaluated product can be obtained, this can be used in marketing.


20/32


3. COST EFFECTIVENESS OF THE CONDITION MONITORING CONCEPT

In order to conclude on the cost effectiveness of introducing condition monitoring

equipment (here R2000), we might perform some sensitivity analyses. The question of

whether some but not all sensors are cost effective requires more detailed analyses, cf.

Vatn (1998), where also an overall optimisation of the maintenance strategy is

considered.

In the present chapter we restrict to discuss the conclusion of case A (Section 3.2) on

the cost effectiveness of introducing R2000. As input data are always uncertain, the

main question is: How sensitive is this conclusion to variation in the input data?

Here we restrict to carry out this discussion by considering the following approximation.

Approximation: Assume that

1. m is notchanged by introducing R2000

2. ADC= AHC 0

(here and in the following we use the notation that -ADC = reduction in annual delay

costs by introducing R2000, and AHCis defined similarly).

Both assumptions of this approximation are considered conservative in the sense thatR2000 might possibly extend the lifetime (increase m) of the turnout, and also reduce

the delay and hazard costs. So if R2000 is found cost effective even under these

assumptions, we can actually conclude that this is the case. Further, as the estimates ofADCandAHCwere so small for case A, assumption 2 will hardly affect the conclusion

(unless the estimates are very wrong). We conclude that (for case A)

The cost effectiveness of R2000 essentially is

determined by

k m INV AMC

Here INV= increasedinvestment costs by introducing R2000, and -AMC= reduction

in annual maintenance cost.Further, assumptions 1 and 2 infer that the difference in the

annual LCC of REFSYS and CONSYS equals

LCCANNUAL = d(k, m) x INV + AMC

whereas before

d(k, m) = k/[1 - (1+k)-m

]

d(k, m) = 1/m, when k= 0

Thus, we conclude that R2000 results in cost reduction (LCCANNUAL< 0) when


21/32


-AMC > d(k, m)xINV

(that is, when the reduction inAMCis larger than the increase in discounted investmentcost)

Example:

For case A, we have the following values (see Section 3.2)

AMC= -2 300

d(k, m) = 0.0614

INV = 19 200

giving-AMC= 2 300 > 0.0614 x 19 200 = 1 180

once more demonstrating the cost effectiveness of introducing R2000.

In general, we claim that:

1. Good estimates are usually available for k, m and INV: Gives (upper limit) for the Right Side of the inequality

above

2. Detailed discussion of-AMCis required to conclude on the

cost effectiveness on introducing CON

Regarding item 1. it is observed that:

Lower limitofm and upper limitofkprovides upper limitofd(k, m)

This is illustrated in Table 4.1. For instance it is seen that ifk 6% and m 20 years,

then it follows that d(k, m) 0.087.

Table 4.1 Values ofd(k, m)k

M 0% 2% 4.5% 6% 8% 10%

20 years 0.050 0.061 0.077 0.087 0.102 0.117

30 years 0.033 0.045 0.061 0.073 0.089 0.106

40 years 0.025 0.037 0.054 0.067 0.084 0.102

50 years 0.020 0.032 0.051 0.063 0.082 0.101


22/32


Example on how to arrive at a firm conclusion with respect to cost effectiveness:

1. Provide estimates (limits) ofk, m and upper limit ofINV, e.g.:

k 6% and m 20 years: It follows that d(k, m) 0.087

INV 20 000giving an upper limit of the right side of the inequality above.

2. It follows that R2000 is cost effective if

-AMC > 0.087 x 20 000 = 1 740

Generally it should not be too hard to obtain good estimates for the right side of the

above inequality. Thus, often it is the case that:

Essentially a discussion on reduction in annual maintenance

cost, -AMC, is required to conclude with respect to the cost

effectiveness of R2000

Here we have used the possible acquisition of R2000 for a turnout as an example.

However, the outlined approach for cost comparison is of course quite general.


23/32


4. REFERENCESIEC, 1987

Draft IEC/TC 56, Draft - Life Cycle Costing - Concepts, procedures and

applications, IEC, 1987.

IEC, 1996

International Standard, IEC 300-3-3, Dependability management - Part 3: Application

Guide - Section 3: Life Cycle Costing, IEC. First edition 1996.

NORSOK, 1994NORSOK P-CR-002, Common Requirements - Life Cycle Cost, Rev. 1, December

1994.

NORSOK, 1995

NORSOK O-CR-002, Life Cycle Cost for Production Facility, Draft 1, September

1995.

NPD, 1990

Norwegian Petroleum Directorate, Regulations concerning implementation and use ofrisk analyses in the petroleum activities, 1990.

SINTEF, 1989

S. Lydersen and R. Aar, Life Cycle Cost Prediction Handbook; Computer-Based

Process Safety Systems, SINTEF Report STF75 A89024, 1989.

Akselsson andBurstrm, 1994

H. Akselsson and B. Burstrm, 1994, Life cycle cost procurement of Swedish State

Railways high-speed train X2000. Proc. Instn. Mete. Engrs. Vol. 208, pp 51 - 59.

Burstrm et al, 1994

B. Burstrm, G. Ericsson and U. Kjellson, 1994, Verification of Life-Cycle Cost and

Reliability for the Swedish High Speed Train X2000. Proceedings Annual Reliability

and Maintainability Symposium, pp 166 - 171.

Vatn, 1998

J. Vatn, 1998. Strategic Maintenance Planning in Railway Systems (RESMAP).

Technical Report STF38 A98425, SINTEF Industrial management, N7034 Trondheim,Norway. ISBN 82-14-00451-9.


24/32


5. APPENDIX. Questionnaire for LCC input dataThe following pages present the questionnaire particularly developed in REMAIN for

obtaining input data to the LCC analysis.


25/32


1. General Data

Entry Parameter Value Comments

No. Symbol Description1.1 m Number of years in operation.

The average life length of a turnout

(from installation to disposal)

1.2 NSW Number of turnouts.

The number of turnouts being the

basis for the assessments

1.3 MHR Man-hour rate.

The total cost associated with an

employee (wages, taxes, insurance,

canteen, ....)

1.4 k "Interest rate".

The interest rate used for economic

planning in the company.

The real (nominal) interest rateshould be compensatedfor the effect

of inflation:Provide the interest rate minus the

rate of inflation!


26/32


2. (Primary) Investment Data


No. Symbol Description2.1 EPC Equipment and Material Purchase

Cost.

Cost for one turnout

2.2 ENC Engineering Cost.

Total engineering cost for one

turnout

2.3 INC Installation Cost.

Total installation cost for one

turnout

2.4 ISPC Initial Spare Parts Cost.

Total cost for initial spare parts of

one turnout

2.5 ITC Initial Training Cost.

Total cost required for initial

training of personnel for operation

of one turnout

2.6 INV Investment Cost.

Total cost, prior to start of operation

for one turnout


27/32


3. Maintenance and Operating Cost Data (yearly costs)


No. Symbo

l

Description

3.1 CMC Corrective Maintenance Cost.

Total annual cost for corrective

maintenance of one turnout.

3.2 PMC Calendar based Preventive

Maintenance (PM) Cost.

Total annual cost for calendar based

PM of one turnout.

3.3 CONC Condition based PM Cost.

Total annual cost for condition based

PM of one turnout.

3.4 ADC Administrative Cost.

All annual costs of one turnout in

addition to those of 3.1-3.3, e.g.

including preparedness, training.

3.5 ECC Energy Consumption Cost.

Total annual energy cost for one

turnout.

3.6 AMC Annual Maintenance and Operating

Cost.

Total operation and maintenance cost

per yearfor one turnout.

1)Second term only is included in the LCC analysis of turnouts


28/32


3.1 Corrective Maintenance (CM) Data (detailing the data given in 3.1)


No. Symbol Description

3.1.1 NCM Number of failures per yearrequiring Corrective Maintenance

(CM).

Total number of failures per year for

one turnout.

3.1.2 MHCM Number of man-hours required for

each failure repair.

Total number of man-hours,

including travel, fault finding, testingafter repair, etc., for one failure

(=Mean Time To Repair multiplied

with the number of men required todo the job)

3.1.3 SPCM Spare Parts Cost per repair.

Total average cost of spare partsduring the repair ofone failure

3.1.4 LSCM Logistic Support Cost for CM.

Total annual cost for logistic support

for corrective maintenance of oneturnout (i.e. CM cost in addition to

those following from 3.1.2 - 3.1.3)


29/32


3.2 Calendar based Preventive Maintenance (PM) Data (detailing the data given in 3.2)



Number of calendar based PMactions per year.

Total number of calendar based PMactions per yearfor one turnout.

3.2.2 MHPM Number of man-hours required for

each calendar based PM action.

Total number of man-hours for PM ofone turnout, including e.g. travel.

3.2.3 SPPM Spare Parts Cost per calendar based

PM action.

Total average cost of spare parts

during the PM of one turnout.

3.2.4 LSPM Logistic Support Cost.

Total annual cost for logistic support

for calendar based PM of one turnout(i.e. calendar based PM cost in

addition to those following from

3.2.2 - 3.2.3)


30/32


3.3 Condition based Preventive Maintenance Data (detailing the data given in 3.3)



3.3.1 MHCON Number of man-hours required forCondition based PM per year

Total number of man-hours

required for condition based PMper year, including e.g. travel, for

one turnout.

3.3.2 SPCON Spare Parts Cost required for

Condition based PM per year.

Total average cost of spare parts

required for Condition based PMper year, for one turnout.

3.3.3 LSCON Logistic Support Cost.Total annual cost for logistic

support required for Condition

based PM of one turnout (i.e.Condition based PM cost in

addition to those following from

3.3.2 - 3.3.3)


31/32


4. Delay Cost Data (yearly costs)



4.1 NSD Number of Short Term Delays perYear.

Total no. of events per year resulting

in "short" train delays, caused by

failure of one turnout. Exclude very

short delays, which are not expected

to incur any cost,

(include delays of duration up to say

1 hour, that e.g. will not require

alternative transportation).

4.2 SDC Short Term Delay Cost.

Total costper delay, caused by anaverage "short term delay".

4.3 NLD Number of Long Term Delays per

Year.

Total no. of events per year resulting

in "long" train delays, caused by

failure of one turnout,

(include delays that require specific

measures to be taken, e.g. providing

alternative transportation).

4.4 LDC Long Term Delay Cost.Total costper delay, caused by an

average "long term delay".

4.5 ADC Annual Delay Cost.

Total annual cost related to

unavailability/delay caused by one

turnout.


32/32

5. Hazard Cost Data (yearly costs)


No. Symbol Description5.1 NHE Number of Hazardous/Accidental

Events per Year.

Total no. of hazardous events per

year, caused by failure of one

turnout.

A hazardous event is an accident

causing a threat to human safety,

environment or material damage.

5.2 HEC Hazardous/Accidental Event Cost.

The total cost caused by one

"average" hazardous-/accidentalevent. Includes e.g. personal injuries,

fatalities, material/environmental

damage and cleaning/rebuilding costs

after accidents.

("How much is the company willing

to pay to avoid such an event"?)

5.3 AHC Annual Hazard Cost.

Total annual cost related to

hazardous/accidental events, caused

by one turnout.

Introduction to LCC

Documents

Transcript of Introduction to LCC