Life Cycle Costs (LCC) and Total Ownership Costs (TOC) - A Study in Contrasts
If you have ever inadvertently used the terms Life-Cycle Costs (LCC) and Total Ownership Costs (TOC) interchangeably, or in case you ever wondered exactly what the differences actually are, perhaps one of the best and most comprehensive source of information is the Defense Acquisition Guidebook (DAG) Chapter 3.1. According to DAG Section 3.1.1, “both DoD Directive 5000.01, The Defense Acquisition System, and DoD Instruction 5000.02, Operation of the Defense Acquisition System, make reference to life-cycle cost and total ownership cost. This section of the Guidebook explains the meaning for each of these terms. The terms are similar in concept but somewhat different in scope and intent. For a defense acquisition program, life-cycle cost consists of research and development 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 indirect costs that would be logically 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.
The concept of total ownership cost is related but broader in scope. Total ownership cost includes the elements of life-cycle cost as well as other infrastructure or business process costs not normally attributed to the program. Section 3.1.5 defines and describes this concept in more detail.”
DAG Section 3.1.5. (entitled Total Ownership Costs) goes on to state “as explained in DAG Section 3.1,, total ownership cost includes the elements of a program's life-cycle cost as well as other related infrastructure or business processes costs not necessarily attributed to the program in the context of the defense acquisition system. Infrastructure is used here in the broadest possible sense and consists of all military department and defense agency activities that sustain the military forces assigned to the combatant and component commanders. Major categories of infrastructure are support to equipment (acquisition and central logistics activities), support to military personnel (non-unit central "school-house" training, personnel administration and benefits, and medical care), and support to military bases (installations and communications/information infrastructure).
In general, traditional life-cycle cost estimates are often adequate in scope to support the review and oversight of cost estimates made as part of the acquisition system. However, depending on the issue at hand, the broader perspective of total ownership cost may be more appropriate than the life-cycle cost perspective, which may be too narrow to deal with the particular context. As discussed previously, for a defense acquisition program, life-cycle costs include not only the direct costs of the program but also certain indirect costs that would be logically attributed to the program. In a typical life-cycle cost estimate, however, the estimated indirect costs would include only the costs of infrastructure support specific to the program's military manpower (primarily medical support and system-specific training) and the program's associated installations or facilities (primarily base operating support and facilities sustainment, restoration, and modernization).
Many other important support or infrastructure activities such as recruiting and accession training of new personnel, individual training other than system-specific training, environmental and safety compliance, contract oversight support from the Defense Contract Management Agency and the Defense Contract Audit Agency, and most management headquarters functions, are normally not considered in the scope of a traditional acquisition program life-cycle cost estimate. In addition, important central (i.e., wholesale) logistics infrastructure activities such as supply chain management are implicitly incorporated in a traditional life-cycle cost estimate. The costs associated with central logistics infrastructure activities are somewhat hidden because the costs are reflected in the surcharges associated with working capital fund arrangements and are not explicitly identified. However, there could easily be cases where explicit consideration of such infrastructure activities would be important and would need to be recognized in a cost estimate or analysis. Examples of such cases are cost analyses tied to studies of alternative system support concepts and strategies; reengineering of business practices or operations; environment, safety, and occupational health considerations; and competitive sourcing of major infrastructure activities. In these cases, the traditional life-cycle cost structure may not be adequate to analyze the issue at hand, and the broader total ownership cost perspective would be more appropriate. For such instances, the typical life-cycle cost tools and data sources would need to be augmented with other tools and data sources more suitable to the particular issue being addressed. One special case in which traditional life-cycle cost models and data sources need to be augmented is the inclusion of the fully burdened cost of delivered energy in trade-off analyses for certain tactical systems.”
Other excellent sources of related information include the DAU Financial Management Platinum Card and several Differences Between LCC and TOC slides on the Life Cycle Logistics Community of Practice (LOG CoP) Life Cycle Cost site.
As a side note, this blog post represents the eighth in this occasional “Study in Contrasts” series. Intended as a means to clarify both the differences and linkages between commonly used terms in our defense acquisition and life cycle logistics lexicon, previous posts in this series include:
- CLS, ICS and PBL - A Study in Contrasts (7 Aug 2013)
- O&M, O&S and O&S - A Study in Contrasts (30 Aug 2013)
- Product Support Manager and Product Support Management - A Study in Contrasts (6 Sep 2013)
- Product Support and Sustainment - A Study in Contrasts (18 Nov 2013)
- Specifications and Standards - A Study in Contrasts (2 Dec 2013)
- Sustainment and Sustainability - A Study in Contrasts (16 Jan 2014)
- Integrated Logistics Support (ILS) and Integrated Product Support (IPS) - A Study in Contrasts (12 Feb 2014)