Procurement Glossary
Life cycle costing: complete cost analysis over the entire product life cycle
November 20, 2025
Life cycle costing covers all the costs of a product or investment over its entire useful life. This holistic approach enables purchasers to make well-founded decisions that go beyond the purchase price alone. Find out below what life cycle costing is, which methods are used and how you can use them strategically in procurement management.
Key Facts
- Takes into account acquisition, operating, maintenance and disposal costs over the entire useful life
- Enables objective supplier comparisons beyond the purchase price
- Reduces hidden follow-up costs through early identification of cost drivers
- Supports sustainable procurement decisions by including end-of-life costs
- Improves budget planning through precise long-term forecasts
Contents
Definition: Life cycle costing
Life cycle costing is a comprehensive cost accounting method that systematically records and evaluates all costs incurred by a product, system or service over its entire life cycle.
Core elements of life cycle costing
The method is divided into four main cost categories:
- Acquisition costs: purchase price, installation, commissioning
- Operating costs: energy, personnel, consumables
- Maintenance costs: Maintenance, repairs, spare parts
- Disposal costs: dismantling, recycling, environmental regulations
Life cycle costing vs. traditional cost accounting
In contrast to conventional cost-plus accounting, life cycle costing considers not only the acquisition costs, but all expenses incurred over the product's useful life. This holistic approach often reveals considerable cost differences between seemingly favorable and actually economical solutions.
Importance of life cycle costing in Procurement
Life cycle costing is indispensable for strategic procurement decisions, as it creates an objective basis for evaluating the total cost of ownership. It enables purchasers to make optimal long-term investment decisions and to professionalize procurement controlling.
Methods and procedures
The practical implementation of life cycle costing requires structured procedures and proven analysis methods in order to systematically record all relevant cost factors.
Phase model of cost recording
The methodical approach follows a structured phase model:
- Definition phase: Determination of the observation period and system boundaries
- Data collection: Recording of all cost-effective factors per life cycle phase
- Valuation: Monetary quantification and discounting of future costs
- Analysis: Comparison of different alternatives and sensitivity analyses
Cost driver analysis and data sources
A well-founded cost driver analysis identifies the main factors influencing the overall costs. Internal empirical values, manufacturer information, industry benchmarks and external studies are used as a data basis. Activity-based costing supports the precise allocation of indirect costs.
Valuation method and discounting
Future costs are discounted to the date under review using present value methods. Various interest rates are applied, depending on the risk class and corporate strategy. Sensitivity analyses check the robustness of the results in the event of changes in assumptions.
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Key figures for controlling life cycle costing
Effective key figures enable the measurement and control of life cycle costing and the evaluation of its effectiveness in procurement management.
Cost structure key figures
The distribution of costs over the various life cycle phases provides information on optimization potential:
- Proportion of acquisition costs: ratio of purchase price to total life cycle costs
- Operating cost ratio: running costs as a proportion of total costs
- Maintenance intensity: Maintenance costs per usage unit or period
Forecast quality and deviation analysis
The quality of life cycle costing is measured by comparing the forecast and actual costs. Important key figures are the average forecast deviation, the hit rate for critical cost drivers and the improvement in forecast quality over time. These metrics support the continuous refinement of the cost-benefit analysis.
Profitability and ROI key figures
The ROI in Procurement through life cycle costing is measured via costs saved in relation to the analysis effort. Other relevant key figures are the amortization period of investments, the net present value (NPV) and the internal rate of return (IRR) of various procurement alternatives.
Risks, dependencies and countermeasures
The application of life cycle costing involves various risks and challenges that can be minimized by taking appropriate measures.
Data quality and forecast uncertainty
Incomplete or inaccurate data leads to incorrect calculations and suboptimal decisions. Historical comparative values are often lacking, particularly in the case of innovative technologies. Countermeasures include the establishment of standardized data collection processes, regular validation of assumptions and the creation of a company-wide cost database.
Complexity and resource expenditure
The comprehensive analysis of all life cycle phases requires considerable human and time resources. The risk of over-analysis can lead to delays in decision-making. A risk-adequate level of detail, the use of standard models and a focus on key cost drivers reduce the effort required while maintaining the same level of informative value.
Organizational resistance and acceptance
The transition from traditional procurement practices to lifecycle-oriented approaches often encounters internal resistance. Short-term budget pressures and a lack of understanding of long-term cost benefits make implementation more difficult. Training, pilot projects and integration into purchasing controlling promote organizational acceptance.
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Practical example
A mechanical engineering company is faced with the decision between two industrial robots: model A costs 80,000 euros, model B 120,000 euros. The life cycle cost calculation over 10 years shows: Model A incurs annual energy costs of 15,000 euros and maintenance costs of 8,000 euros, while Model B only requires 9,000 euros in energy costs and 4,000 euros in maintenance costs. The total life cycle costs for model A are 310,000 euros, for model B 250,000 euros. Despite higher acquisition costs, model B is 60,000 euros cheaper.
- Systematic recording of all cost categories over the useful life
- Consideration of energy efficiency and susceptibility to maintenance
- Sound basis for decision-making beyond the purchase price
Trends & developments in life cycle costing
Life cycle costing is constantly evolving, driven by technological innovations, sustainability requirements and new analysis options.
Digitalization and AI-supported forecasts
Artificial intelligence is revolutionizing life cycle costing through more precise forecasting models and automated data analysis. Machine learning algorithms recognize cost patterns and continuously improve the quality of forecasts. Predictive analytics makes it possible to identify maintenance requirements and failure risks at an early stage and incorporate them into budgeting.
Sustainability integration and ESG criteria
Environmental, social and governance (ESG) aspects are increasingly being integrated into life cycle costing. Carbon footprints, recyclability and social impacts are given monetary valuations. This extended view supports sustainable procurement strategies and fulfills regulatory requirements.
Real-time monitoring and IoT integration
Internet of Things technologies enable the continuous monitoring of systems and products. Sensor data provides real-time information on consumption, wear and performance. This data flows directly into life cycle costing and significantly improves the accuracy of the cost-benefit analysis.
Conclusion
Life cycle costing is an indispensable tool for strategic procurement decisions that goes beyond the pure purchase price. It enables objective supplier comparisons and uncovers hidden cost drivers. Despite methodological challenges and forecasting uncertainties, the advantages clearly outweigh the disadvantages, especially for capital-intensive investments. The integration of digital technologies and sustainability criteria will further increase the importance of this method.
FAQ
What is the difference between life cycle costing and total cost of ownership?
Life cycle costing is a comprehensive cost accounting method, while total cost of ownership is a specific concept for recording all ownership costs. Life cycle costing can include various valuation approaches, while TCO focuses primarily on the total cost of ownership from the user's perspective.
What data is required for a meaningful analysis?
Purchase prices, operating costs (energy, personnel, consumables), maintenance and repair costs, downtimes, spare parts prices, disposal costs and technical specifications such as service life and performance parameters are required. Historical data from similar systems significantly improves the forecast quality.
How are uncertainties in the long-term forecast dealt with?
Sensitivity analyses examine the effects of changed assumptions on the result. Scenario analyses consider different development paths, while Monte Carlo simulations use probability distributions for critical parameters. Regular updates of the forecasts reduce uncertainties over time.
What organizational requirements are necessary?
Successful implementation requires interdisciplinary teams from Procurement, technology and controlling, standardized evaluation processes, a central cost database and corresponding IT systems. Employee training and integration into existing procurement processes are just as important as management commitment to long-term cost optimization.
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