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Life Cycle Cost (LCC)

DAU GLOSSARY DEFINITION

For a defense acquisition program, LCC consists of research and development (R&D) costs, investment costs, operating and support costs, and disposal costs over the entire life cycle. These costs include not only the direct costs of the acquisition program, but also include indirect costs that logically would be attributed to the program. In this way, all costs that are logically attributed to the program are included, regardless of funding source or management control.

General Information

Life-cycle cost (LCC) can be defined as the cost to the government of a program over its full life, including costs for research and development; testing; production; facilities; operations; maintenance; personnel; environmental compliance; and disposal. Each of the program’s major stakeholders (Congress, program office, contractors, and DoD decision-makers) prefers to view life cycle costs grouped in a way that reflects its particular perspective. The three major ways of grouping and viewing program LCC are:

  1. By funding appropriation: DoD receives appropriations from Congress falling into five major categories: Research, Development, Test and Evaluation (RDT&E); Procurement; Operations and Maintenance (O&M); Military Construction (MILCON); and Military Personnel (MILPERS). Program life-cycle costs are broken out along these lines to develop internal budgets and submit budget requests to Congress.
  2. By Work Breakdown Structure (WBS): A program WBS provides a framework for program and technical planning, cost estimating, resource allocations, performance measurements, and status reporting. The WBS should define the total system to be developed or produced; display the total system as a product-oriented family tree composed of hardware, software, services, data, and facilities; and relate the elements of work to each other and to the end product. Major acquisition programs shall tailor a program WBS in accordance with the guidance in MIL-STD-881. Cost breakouts by WBS elements are useful to the program office and contractors in managing the program.
  3. By life-cycle cost categories: CAPE's Operating and Support Cost-Estimating Guide, 2014, defines these cost categories:
  • Research & Development (R&D): Consists of costs of materiel solution trade studies and advanced technology development; system design and integration; development, fabrication, assembly, and test of hardware and software for prototypes and/or engineering development models; system test and evaluation; systems engineering and program management; and product support elements associated with prototypes and/or engineering development models. For some programs, this may include additional development costs associated with follow-on builds or increments.
  • Investment: Consists of procurement and related activities from the beginning of low rate initial production (LRIP) through completion of deployment. Investment typically includes costs associated with producing and deploying the primary hardware; systems engineering and program management; product support elements (i.e., peculiar and common support equipment, peculiar training equipment/initial training, technical publications/data, and initial spares and repair parts) associated with production assets; interim contractor support that is regarded as part of the system procurement and is included in the scope of the Acquisition Program Baseline (APB); and military construction and acquisition-related O&M associated with production and deployment activities (e.g., site activation).
  • Operating and Support (O&S): Consists of sustainment costs incurred from the initial system deployment through the end of system operations. Includes all costs of operating, maintaining, and supporting a fielded system. Specifically, this consists of the costs (organic and contractor) of personnel, equipment, supplies, software, and services associated with operating, modifying, maintaining, supplying, and otherwise supporting a system in the DoD inventory.
  • Disposal: Consists of costs associated with demilitarization and disposal of a military system at the end of its useful life. Costs associated with demilitarization and disposal may include disassembly, materials processing, decontamination, collection / storage / disposal of hazardous materials and/or waste, safety precautions, and transportation of the system to and from the disposal site. Systems may be given credit in the cost estimate for resource recovery and recycling considerations. The disposal cost category is used in a life-cycle cost estimate so that design and other decisions made early in a program consider the effects on the long-term costs that can be attributed logically to the program. Note that demilitarization and disposal costs may also be incurred during the sustainment phase prior to formal entry into a distinct disposal phase. Any disposal expenses anticipated during the sustainment phase (due to combat losses, other destruction of systems beyond economical repair, or unique demilitarization activities) are nevertheless considered part of disposal costs.

 

Table 1 and Figure 1 show some typical distributions of costs for major system types based on cost estimates prepared by the military components cost analysis agencies.

 

  R&D Invest O&S
Fixed wing Aircraft 7 30 63
Rotary Wing Aircraft 3 29 68
Ground Systems 4 33 63
Surface Ships 5 26 69
Submarines 7 33 60
UAVs 10 35 55
Space Systems 40 45 15

Table 1