The acquisition cost of an asset is just a portion of the total cost of owning it. Ongoing maintenance significantly adds to that cost; and for a long-lived asset, that cost can be much greater than the initial design, construction, and installation cost. Moreover, failure to keep up with regular asset maintenance can result in premature deterioration and an increased risk of failure, leading to even greater maintenance and rehabilitation costs.
This presents challenges to maintaining a strong financial foundation for a local government. First, it requires a multiyear strategy to keep assets in good condition at a reasonable cost. Second, the amount of money needed to maintain assets in good condition is not uniform across the local government’s geographic areas. Local governments often mistake equality for equity when they distribute the same amount of money to different areas (districts, wards, etc.) each year for street repair, for example. However, assets do not deteriorate at uniform rates. Therefore, an optimal asset management strategy must distribute money to where it is most needed so that all citizens can enjoy quality infrastructure and see the value from their tax dollars.
A tool that helps solve this challenge is life cycle costing. Life cycle cost analysis considers the entire cost of owning the asset over its useful life. One of the primary benefits of life cycle costing for capital assets is that during initial asset acquisition, the analysis shows which asset is the most cost effective over the long term, not just which is the cheapest to acquire. In addition, after the asset has been acquired, life cycle cost analysis can be used to budget and plan for the most cost-effective maintenance strategies.
Pavement was one of the first asset classes to which governments applied life cycle cost analysis.i This is because pavement is a relatively simple asset to analyze and because of the large cost of paving in government budgets. This article will provide an introduction to life cycle cost analysis, using pavement and the City/County of San Francisco, California, as an illustration.