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Lincoln Institute

Accountability, Responsibilitty, Efficiency

by Frank Ryan

I am a Certified Public Accountant, a CPA. My profession's ethics standards require me to be objective, to maintain the orderly function of commerce, and to not subordinate my judgment.

Objectivity requires that I be impartial, intellectually honest, and free of conflicts of interest.

The ethical standards for CPAs mandate that we protect the public. One way that my profession can assist is in the area of life cycle costing.

The dire state of finances in many municipalities and states is causing many leaders to consider alternatives to traditional government budgeting approaches.
At the same time, many wonder if a budgeting approach can impact the finances of a community at all.

Life cycle budgeting is an approach to recognize the entire cost of a project BEFORE project approval to include costs of research, design, development, completion and finally all the way to the shutdown and dissolution of the project.
Failure to understand the life cycle costs of infrastructure and program decisions may, in fact, be fatal to the finances of our government and wreak havoc on discretionary spending during difficult economic times.

Communities are already dealing with life cycle costs. They are, however, merely victims of life cycle costs rather than beneficiaries of life cycle budgeting.
It is not your decision as to whether or not you adopt life cycle costing. It is, however, your decision to adopt life cycle budgeting and reap the benefits of planning and efficiency in government. The difficulty is that most do not know the life cycle costs until a budget crisis develops and the legislators and executive branches have no discretionary funds left to allocate.

We are being cornered into dealing with life cycle costs after the fact. Programs are cut due to fund shortages and not based upon priorities.

Any government is faced with concepts of discretionary versus non-discretionary spending. The distinction between the two is merely a different version of life cycle costing.

Non-discretionary spending occurs when commitments are made now which must be paid in the future. Social security, retirement programs and most personnel related costs are viewed as non-discretionary. In reality, all infrastructure related costs are non-discretionary as well.

In life cycle budgeting, we refer to cost drivers. A cost driver is anything that causes cost. For example, infrastructure is a cost driver. Failure to consider the long term costs of infrastructure before full approval of a budget is a major cause of the problems communities are facing today.

The basic tenets of life cycle budgeting include the concepts of "lean operations", "target costing", "value stream analysis, and achieving perfection.

In lean operations, the intent is to identify the value of the program at inception. Value to the community allows government to design an approach to solving problems that focuses on eliminating waste during the design phase of a project. A "lean" question to ask might be: "If you could start over again, what would you do differently". The purpose of this question is to enable the leader to more properly solve the problem rather than trying to solve the problem with historical decisions made by administrations decades before.

Target Costing is the concept whereby a program manager advises what his organization is willing to spend for the project based upon the value to society, and then advises the best approach to meeting the needs of the customer based upon the costs during the entire life cycle of the project. An integral part of target costing is a planned "sunset" of the project should the needs of the customer change or the target costs of the project not be met. This planned review ensures that expected costs do not deviate significantly from actual costs.

In value stream analysis and achieving perfection, the program manager is continuously reassessing the best way to meet the changing needs of the customer. The customer becomes the primary focus of our efforts at all times. A review is done often of the value of the project compared to the costs with the ability to make mid-course corrections. A key obviously then is to provide some flexibility in how customer needs are met.

The focus of life cycle budgeting is the customer. The customer is key. In our society, the customer is both the consumer of the service as well as the taxpayer. Our failure to understand and plan for life cycle costs is a primary cause of the very problems governments are facing today. As revenue declines, the non-discretionary spending caused by substantial unknown life cycle costs is creating havoc in capitols around the nation forcing difficult budget decisions.
Life cycle budgeting allows you to get ahead of the crisis and significantly change how we deal with limited funds and the needs of the customer.

Life cycle costing is mandatory. A life cycle budgeting is voluntary. Adopting lifecycle budgeting will allow communities to reduce catastrophic failures and unexpected tax increases to fix ignored problems.

Something as simple as an accounting convention can protect and serve our nation.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at and twitter at @fryan1951.

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