Implementation of an environmental –LCC method in an organization at procurement

1. Implementation of an environmental –LCC method in an organization at procurement Camilla Andersson Swedish Defence Research Agency, FOI Best practices in Public Procurement, 2010-12-02

2. Outline of presentation What is LCC? Benefits of LCC How to use LCC When could LCC be used? What is LCA? To combine LCA and LCC Conclusions from our project

3. Life Cycle Costs (LCC) • Valuates the actual costs during a product's life cycle • Focuses on overall costs and not just the initial outlay • Costs for investment, support, maintenance, operation and termination. • The method does not take into account any environmental aspects

4. Life Cycle Costs

5. How to calculate Life Cycle Costs • All costs due to the investment are included • Operation and support costs have to be calculated to present value • Other costs includes for example taxes and fees and are also calculated to present value • By residual value means the value that the product or system is expected to have after its lifetime/use phase. The value can be zero or even negative Life cycle costs= Investment+Operation+Support+Other costs-Residualvalue

6. Calculating into present value • Calculating into present value is done to assess the value of a future cost in todays´value. • Dependson the interest rate and economic lifetime • Normally an interest of 4-8 % is used

7. Usage of life cycle costs • Why using it? • To evaluate different alternatives • Before investments • Gives a long time planning and predicts future costs • To find cost drivers • When to use it? • Both in the beginning and end of a procurement • In the demand assessement and when calculating the value of the contract • In the evaluation to identify the most economically favorable tender

8. Evaluation of tenders Transparency principle requires: • LCC is stated in the request for tender • Parameters specified in the request for tender • If weighting is done this must be specified in the request for tender • A model of the LCC calculation may well be attached to the request for tender for greater transparency

9. Important when using LCC in the evaluation • Clearly define the conditions for the calculus: • The amount to be bought • Lifetime/ Time of using • Rent for calculating • Yearly use of resources • Price of resources • Cost for maintenance • Price changes comparing to the inflation

10. Are the numbers correct? • Separate terms of contract that follows-up • The supplier undertakes to deliver products corresponding to the maximum values that are stated: Example: A fine could be the amount that exceeds 10% including possible measurement errors Important not toget depressed prices that later turns out to be inaccurate

12. Total other costs Costs for fuel Cost for support Cost for purchase Life cycle costs Hybridcar Petrolcar

13. Participants in the project • Swedish Defence Research Agency, FOI • Swedish Defence Material Administration, FMV • Royal Institute of Technology, KTH • Systecon

14. LCC LCA Environmental-LCC Environmental-LCC • Combination of the toolsLCC and LCA. • Based on the existingLCC-tool CATLOC.

15. Life Cycle Assessment (LCA) • LCA is used to determine a product´s environmental impact throughout its lifecycle, which includes • Development • Production • Use • Termination

16. Evaluated environmental costs Environmental taxes and charges Basic costs Environmental-LCC Environmental-LCC • It takes into account both the actual and evaluated environmental costs • General tool - only the input parameters varies between different procurements Traditional LCC

17. Evaluated environmental costs • The evaluated environmental costs are also known as environmental impact costs. • The environmental impact costs are so-called external costs, which means • The cost is not visible for producer • The cost is paid by the society • a deteriorating public health • degraded recreational opportunities • a deterioration of living environment

18. Evaluated environmental costs • Evaluated environmental costs are obtained by: • LCA gives the environmental impact from a product • Environmental impacts are divided into different impactcategories • Quantity in the given impact category is converted to a cost - environmental impact cost • Weighting factors according to EcoValue 09 are used to transform the environmental impact into a cost. Evaluated environmental impact cost = environmental impact (quantity) x weighting factor

19. Environmental impact costs Different environmental impacts Impact categories Multiply by weighting factors Environmental impact costs

20. Impact categories • Impact categories of effects used are • Global warming • Human toxicity • Photochemical oxidation • Acidification • Eutrophication • Energy Resources • Multiply substances in the categories with their global warming potential to get one unit • For example kg CO2 equivalents

21. Weighting factors • Weighting factors according to EcoValue 09 – based on the public's willingness to pay to avoid damage to the environment by: • Various pollutants • Ground-level ozone • Eutrophication • Acidification • EcoValue is developed by The Royal Institute of Technology

22. Performing an Environmental-LCC • Reguest information from the suppliers in the request for tender • Using a document with questions that the suppliers fill in • To be sure that the information is as correct as possible there are a limited numbers of questions • In the document it is clearly stated how we will calculate and what values we will use, for example fuel price. • The method will be tested in 2011 for the first time • Our testcase is going to be a vehicle

23. Quantifying environmental impact costs Identify cost drivers Performing sensitivity analysis regarding Products Components Substances Study the effects of different scenarios Before an investment for example Conclusions of our project The Environmental-LCC tool can be used for

24. The tool and method is described in an article that will be submitted to International Journal of Cleaner Production Contact information: camilla.e.andersson@foi.se