What Is Life-Cycle Budgeting?

by Naomi Smith

    Life-cycle budgeting incorporates all aspects of a product -- from planning, research and development to marketing, sales and phaseout. It's an expansion of the typical cost-benefit analysis and can cover a period as long as 50 or 100 years in the case of public-sector infrastructure development. The process is standard practice for companies that are deciding which products to produce or which investments to make, and the public sector is beginning to learn valuable lessons in allocating scarce tax dollars.

    In the private sector, life-cycle budgeting is primarily used for product development and to choose which of several possible investments will produce the largest profit over time. Some products may have low research and development costs and high revenue, but if they include high customer service costs or have too short of a sales cycle before becoming obsolete, they may not be the best decision for the firm.

    State and local governments produce short-term budgets, often only one or two years out, which don't take into account future costs of projects -- especially construction projects -- with a longer construction or use lifetime. Life-cycle budgeting allows governments to better understand the full cost of a bridge or railway project, for example. Forecasting planning and construction costs, expected use and future maintenance helps governments set correct prices for tolls and use community tax resources more efficiently. Taxpayers want transparent budgeting processes that include the expected life of each expenditure.

    Individuals and families can learn from business and government. By making a long-term budget plan for major purchases -- such as a car, boat or vacation home or even a pet -- you can better understand the full costs before you buy and avoid expensive surprises such as maintenance costs, repairs, taxes and other add-ons that could be deal breakers.

    Life-cycle budgeting makes it easier to compare the cost or profitability of projects of different scopes and lengths by using cost and return data for the full life of any project or product cycle. Businesses can determine which product will maximize profits over the life of the investment and plan ahead for future expenditures, hiring or training related to introducing and later retiring the product. Traditionally, public-sector budgeting addresses construction costs and rarely looks beyond the ribbon-cutting ceremony to issues of maintenance, repair and replacement.

    Forecasts and estimates are only as good as the data they use. If business models are poorly developed, they can produce inaccurate estimates. For public-sector projects, political forces can distort some estimates, making neutral oversight of the process necessary. Time and money are added costs when conducting a more comprehensive budgeting and accounting process in the planning stages, and this drives up the total cost of the project.

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    About the Author

    Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.

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