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Life Cycle vs. Environmental Full-Cost Accounting

Life Cycle Costing

The visible cost of any purchase may represent only a small proportion of the total cost of ownership. Often the responsibility for acquisition cost and subsequent support cost are held by different areas/department and, consequently, there may be little or no incentive for a project manager/department/internal client to apply the life cycle analysis (LCA) at the time of purchase because they will not see the benefits resulting from their efforts. Therefore, the use of LCA to represent the real cost of a purchase often falls on the purchasing professional.

LCA is based on the premise that to arrive at meaningful purchasing decisions all significant expenditures of resources which are likely to arise as a result of any purchase must be addressed. Completing an LCA will help the purchaser develop sustainable specifications that consider all relevant costs for each purchasing option - from initial consideration through to disposal (cradle to grave).

LCA involves identifying the total cost relating to the procurement of the product or service. These are often referred to as direct and indirect costs.   Direct costs are the “one-time” costs paid for the acquisition whereas indirect costs are the recurring costs incurred throughout the life of the product or service. Furthermore, recurring costs can increase with time.  For example increase maintenance costs as equipment ages. The types of costs incurred will vary according to the goods or services being acquired, some examples are given below.

Examples of direct costs include:

  • Purchasing priceInitial training
  • Transportation and brokerage costs
  • Installation cost
  • Residual value/disposal cost

Examples of indirect costs include:

  • Retraining
  • Inventory management
  • Operating costs
  • Labour
  • Preventative maintenance
  • Corrective maintenance
  • Service charges
  • Downtime/non-availability

The use of LCA is an important tool when making the business case for a sustainable product and service.  Using LCA, the argument that sustainable products and services are more expensive can often be debunked.  In addition to providing a more accurate picture of financial cost, many LCA approaches for sustainable products provide the purchaser with insight on the environmental impacts/benefits associated with purchasing decisions. Understanding the impacts and benefits is important to ensure the sustainable requirements of your organization are taken into consideration at the time of purchase.

Environmental full-cost accounting

Environmental full-cost accounting (EFCA) is different than LCA. In addition to the indirect costs noted above, EFCA accounts for additional indirect costs called externalities. Externalities are the environmental costs to society that are not reflected in the cost of the good or service. Examples of externalities include climate change, loss of biodiversity, air/water pollution, etc.  It is difficult for purchasers to fully understand the supply chain and manufacturer impacts on the environment. However, sustainable procurement is asking us to include externalities when making purchasing decisions. 

A number of manufacturers produce goods and services with EFCA in mind. They conduct assessments to determine the environmental and social impacts of a product or service from its design through to production and final disposal and modify their processes to reduce externalities. Many manufacturers base their assessment on the externalities defined by third-party organizations who set environmental and social criteria for a variety of goods and services. In addition, third-party organizations often conduct EFCA assessments on behalf of the manufacturers to validate the claims made by the manufacturers. Goods and services that pass the organization’s assessment are allowed to affix an environmental label on their product. For example, Forest Stewardship Council certified paper, EcoLogo certified cleaning products, EPEAT certified computers, etc. These label let consumers/purchasers know that the product claims have been substantiated and externalities are being mitigated. A number of well known third party labels that are often requested by purchasing professionals to help with the selection of sustainable products are noted as subtabs under this Labels & Logos menu.

The “Calculators” section of this website has a number of web links to sites that support LCA and EFCA.

 

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