Life cycle costing

Besides product quality, cost is obviously a major factor in procurement decisions. The approach of life-cycle costing (LCC) considers the expenses of the customer along the entire life-cycle of the product. This includes capital costs (depreciation interest) and operation costs (energy, maintenance etc.). There is no canonical and standardized LCC concept for rail vehicles. Some LCC calculations include costs for operation personnel, costs of downtimes, costs for disposal, others don't.

LCC of rail vehicles

The following table gives an idea of the relevance of energy costs in LCC (Costs for personnel are excluded, since some of the sources specified them while others didn't).

Table 1: LCC for rail vehicles

	Locomotive for    passenger service*	Locomotive for    freight service*	High-speed train   (ICE 3)**
Investment	22,7 %	11,7 %	80,8 %
Energy	46,2 %	73,8 %	7,8 %
Maintenance	31,0 %	14,4 %	11,4 %

Source: * Trümpi 1998 ** Ernst 2001

The figures presented in table 1 have to be treated with caution. They are taken from different sources and are therefore based on somewhat different assumptions (interest rates, energy costs etc.). Moreover, the great differences between locomotives and ICE stems firstly from the fact that LCC of ICE refer to an entire train, whereas LCC for the locomotive excludes coaches/freight wagons, and secondly, that it is assumed that locomotives have a useful life of 25 years compared to 15 years for ICE 3.

Relevance of LCC in purchasing

Most purchasing contracts between operators and manufacturers contain LCC guarantees and foresee penalty clauses for the case of non-compliance. Nevertheless, in many cases purchasing costs rather than LCC are decisive in procurement.

While being theoretically the most complete cost indicator, LCC is difficult to handle and cannot be given in a general and straightforward manner. The reason is its strong dependence on operational conditions, which vary between operators and may not be predictable for the future.

LCC and energy efficiency

Most innovative energy efficiency technologies will improve LCC while raising purchasing costs. More technically speaking, any technology with a payback time shorter than the life-cycle will reduce LCC.

Even though LCC are often squarely in favour of energy efficient rolling stock, procurement decisions often prefer less efficient products due to lower initial investment. LCC-oriented procurement is therefore key factors for saving energy in railways.

The following evaluation refers to barriers and success factors for a more LCC-driven procurement.

Benefit for customer

Cost reduction. Products that are optimised to the customer's operational structures.

Benefit for manufacturer

Focus on LCC allows manufacturers of railway technologies to develop solutions taylored to the operation needs of the customer. This improves customer benefit and creates competitive advantages.

Spreading of LCC to several companies

The concept of LCC collects all costs caused by an investment into one single cost. However today's European railways are vertically disintegrated, i.e. the former state-owned companies are split up into functional sub-companies or independent companies for operation, infrastructure, energy etc. LCC of a rail vehicle are not paid by one company but are split up in a complicated manner between these companies. The train operator usually bears the purchasing and maintenance costs. As far as energy and track wear etc. are concerned, the operator only pays a fee that doesn't always reflect the real costs. Therefore the operator has no incentive to purchase more energy-efficient stock.

Short-sighted management and controlling

Despite the fact that railway vehicles have an economic lifetime of 20 – 40 years, a payback time of 5 years is seen by many managers as far too long and hardly justifiable. The pressure for cost efficiency and budget balance is high and often keeps decision makers from choosing the option which is cheapest in long-term perspective.

Difficult verification

LCC guarantees have only limited value since it is difficult for operators to prove non-compliance. Actual LCC are difficult to verify and strongly depend on operation context.

No standard

There is no standardized LCC model accepted by all manufacturers and by railways. Therefore LCC guaranatees given by different companies often lack comparability. For example there is no reference cycle for energy efficiency of new stock.

Functional, LCC-oriented specifications

It is important to include LCC considerations already during the concept phase of a new purchasing project. Calls for tender should generally focus on functional specifications (including operation context) rather than giving a product description with design specifications. This creates the basis for manufacturers to develop new innovative solutions and to compete for the lowest LCC.

Bonus penalty rules

Procurement contracts often foresee penalty payments for the case that certain requirements (e.g. maintenance costs) are not met by manufacturers. So-called bonus penalty rules, i.e. an additional agreement on bonus payments for the case of "over-performance", could improve the role of energy-relevant or other LCC-relevant parameters such as efficiency of traction equipment or mass per seat in the design of railway vehicles.

Integrated service contracts

The delimitation and attribution of LCC to an individual product is all the more difficult, the less contract partners have an influence on the individual cost components. Investment models where the vehicle supplier also accounts for maintenance and disposal clearly favor an LCC focus. In the field of energy costs such an integrated service approach is of course impossible to realise.

Standardized LCC model

A standard way of calculating and verifying LCC could make competition for a purchasing project more transparent and raise the significance of LCC in procurement. The elaboration of an LCC standard would require a joint effort by major manufacturing companies and railway operators. This could also include the definition of a reference cycle for energy efficiency.