BISRA - Whole Life Costing Analysis

A BSRIA Guide www.bsria.co.
uk
Whole-Life Costing Analysis
By David Churcher
Supported by
BG 5/2008
BG 5-2008 (Whole-life cover) pre print.p65 3 29/05/2008, 15:19

PREFACE
Barry Nealon, Chairman.
The publication of Whole-Life Costing Analysis is a very welcome

addition to BSRIA’s expanding library of guides for those involved in
the construction and building services industry.
While the principles of whole-life costing are simple, encouraging us

all to consider the ongoing cost of operation, maintenance and
disposal, rather than just the upfront price tag, we have traditionally
been driven by short-term demands to buy the cheapest.
Whole-life costing is a much more intelligent way of thinking about

investments. By taking a longer view we can sow the seeds for a
better tomorrow, not only in terms of reducing our operating costs
but also in other areas such as reduced energy consumption, reduced
environmental impact, reduced maintenance and longer gaps between
costly and disruptive replacement projects.
This isn’t an exact science and I think you’ll find this report reflects
and understands that. It will even provide you with some guidance on
when it is appropriate to apply the principles and when the potential
benefits are outweighed by the cost of the exercise. However, using
the whole-life costing principles correctly in the right circumstances
should improve your decision-making.
Reliance Facilities Management embraces the concept of whole-life

costing. Whether you are new to the subject or are brushing up on
best practice, I hope you find this publication a welcome addition to
your knowledge.
Barry Nealon
Chairman
Reliance Facilities Management
WHOLE-LIFE COSTING ANALYSIS
© BSRIA BG 5/2008
ACKNOWLEDGEMENTS
BSRIA is grateful to John Langmaid of ACDP (Integrated Building

Services) for developing BSRIA’s original guidance on whole-life
costing, and his valuable assistance and comments during the preparation
of this guide.
BSRIA also acknowledges the support of Reliance Facilities

Management Services.
This guide is written by BSRIA’s David Churcher and designed and

produced by Ruth Radburn, BSRIA, 2008.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means electronic or mechanical including photocopying,
recording or otherwise without prior written permission of the publisher.
©BSRIA May 2008 ISBN 978 0 86022 676 5 Printed by ImageData Ltd.
02/06/08 WHOLE-LIFE COSTING Analysis © BSRIA BG 5/2008

SUMMARY
This guide has been prepared by BSRIA to complement existing

knowledge of whole-life costing, and training courses provided by
BSRIA. These theoretical and practical training courses are intended
to help engineers, architects, facilities managers and clients understand
the mechanics of calculating whole-life costs. The draft forerunner to
this guide was also developed by John Langmaid and has been issued
to delegates attending the BSRIA training courses.
The analysis of whole-life costs is something that we all do in our

everyday lives. Its principles help us decide whether to replace our
car as the servicing and MOT costs grow in relation to its trade-in
value, or whether to buy a cheap and cheerful dishwasher instead of a
premium brand that we hope will last longer. In these circumstances
we do not go through the process in a systematic, step-by-step way as
we work on the basis that our intuition is good enough. However,
business decisions can be much more significant, involving larger sums
of money and longer timescales.
There is also the issue of good stewardship of corporate or public

resources to be considered. For these reasons, more emphasis is being
placed on whole-life costing analysis as part of the decision-making
process for new-build, refurbishment and plant replacement projects
so that all the costs – not just the initial capital investment – can be
taken into account.
This guide presents a simple process for the practical calculation of

whole-life costs, with examples to show how the different stages of
the process relate to one another, to show how the results are
obtained and what they mean. Of course, whole-life costing analysis
is only one form of project appraisal, focusing on the economic
outcome. Ultimately, a decision will be a compromise between this
and other assessments, be they technical, environmental or political,
but these are outside the scope of this guide.
This guide has been deliberately kept short by omitting some of the
more complex aspects of whole-life costing. Clients, estates
managers, engineers, consultants, quantity surveyors or cost advisers
will find some parts of the guide more relevant than others, but all are
recommended to read the entire guidance.
Whole-life costing analysis is just one of a number of assessment

techniques that help identify the appropriate solution to a problem. It
focuses on economic assessment using profiles of current and future
costs and benefits to arrive at a discounted net present value of the
whole-life costs, incorporating lump-sum investments, operating
costs, end of life costs, and end of study benefits such as residual value.
Although the whole-life costs calculated during the analysis can be

presented to any number of decimal places this is not necessarily
appropriate. The users of the results must be made aware of the level
of confidence that the analysts have in the whole-life costs. Cynics
may say that whole-life costs are nothing more than educated guesses.
© BSRIA BG 5/2008
SUMMARY
BSRIA’s view, in line with that of HM Treasury, the Office of

Government Commerce and a wide range of academic and practitioner
commentators, is that this is actually a marked improvement on making
significant decisions based on uneducated guesses or gut instinct.
In addition, the whole-life costing process forces the client and the
project team to challenge their own assumptions and those of others.
This will lead to proposed solutions that have been thought through
more rigorously and which will stand up to scrutiny. The discipline of
documenting assumptions such as sources of life expectancy and cost data
will significantly assist those who need to examine the analysis at some
future date. The data that is acquired for the whole-life costing models
will also contribute to a building or estate-specific database that can be
re-used in future analyses.
Finally, it is worth considering that the whole-life costing analysis

requires time and effort to complete. The overhead of carrying out the
analysis must always be considered in relation to the potential savings that
emerge from the modelling and calculations.
David Churcher
BSRIA, April 2008
© BSRIA BG 5/2008
CONTENTS
INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS 2
1 DEFINING THE PROBLEM 7
2 ALTERNATIVE SOLUTIONS 8
2.1 Identifying alternative solutions 8
2.2 Specifying the fundamentals 9
2.3 Building the whole-life costing models 12
2.4 General data collection 14
2.5 Timing of activities data collection 16
2.6 Cost data collection 17
2.7 Storing data for future use 20
3 CALCULATING WHOLE-LIFE COSTS 21

3.1 Net present values for lump sum costs and benefits 21
3.2 Net present values for recurring costs and benefits 26
3.3 Summarising net present values 33
3.4 Calculating equivalent annual costs 33
4 FINE-TUNING WHOLE-LIFE COST MODELS 35
5 INTERPRETING THE RESULTS 38

5.1 Alternative technical solutions 38
5.2 Independent projects 38
5.3 Precision in whole-life costing analysis 40
APPENDICES
APPENDICES
APPENDIX A1 – LOOK-UP TABLES 41
APPENDIX A2 – EXAMPLE 44
APPENDIX A3 – GLOSSARY OF TERMS 55
© BSRIA BG 5/2008
TABLES
Table 1: Discount rates for long-term public sector projects 9

Table 2: Selecting the required data 12
Table 3: Cost data 18
Table 4: Model of whole-life costing analysis 34
Table 5: Example of projects with limited initial investment 39
Table 6: Example of projects with maximum savings for a
limited initial investment 40
Table 7: Present value of £1 (discount factors for lump sums) 41
Table 8: Present value of £1 per year (discount factors for
recurring sums) 42
Table 9: Equivalent annual cost discount factors 43
FIGURES
FIGURES
Figure 1: The step-by-step process for whole-life costing analysis 2

Figure 2: Assessments required for project decision-making 3
Figure 3: 30-year profile of inflation and Bank of England base
rate 10
Figure 4: Example of project timelines 14
Figure 5: The types of data to include at different stages of
project development 15
Figure 6: Project timelines for the base case and
alternatives 1-3 19
Figure 7 Timeline for escalating energy costs 20
Figure 8: Graph of recurring cost net present value 26
Figure 9: Discount factor for a deferred recurring cost 28
Figure 10: The effect of different gas price rises on
whole-life costs 36
Figure 11: Effect on whole-life costs of varying the discount rate 37
© BSRIA BG 5/2008
INTRODUCTION TO WHOLE-LIFE
INTRODUCTION COSTING
TO WHOLE-LIFE ANALYSIS
COSTING ANALYSIS
INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS
This guide presents a practical approach to whole-life costing analysis for

the construction and operation of buildings. A detailed example is used
throughout to illustrate the principles as they are discussed. Other
publications use the terms life-cycle costing or life-cycle analysis. These
terms are more or less interchangeable, but for consistency BSRIA refers
only to whole-life costing analysis.
HOW TO USE THIS For ease of use, the process of whole-life costing analysis is broken
GUIDE down into five sequential, colour-coded logical steps that are used
throughout this guide. These are illustrated in Figure 1 (other guides to
whole-life costing may use different numbers of steps, but the overall
process is the same). As the figure also shows, whole-life costing analysis
is an iterative process. The number of iterations will depend on the
degree of precision required from the end result, the type of assumptions
made in Steps 1 and 2, and the quality of the data obtained for the costs
and timings of the activities that make up the project.
Define the problem
Develop the models
Perform calculations
Sensitivity analysis
Interpret the results
Figure 1: The step-by-step process for whole-life costing analysis.
2 WHOLE-LIFE COSTING ANALYSIS
© BSRIA BG 5/2008
Whole-life costing analysis is about providing an economic appraisal of

different solutions to a given problem, so that a better decision can be
made. Of course there are other assessments that also have to be taken
into account, as shown in Figure 2, (based on BS15686). The final
decision will be a compromise between the recommendations desired
from the different assessments.
Figure 2: Assessments required for project decision-making.
This guide explains why whole-life costing analysis is particularly

important, sets out when it can and cannot be used, and concludes with
guidance on defining the problem (Step 1 from Figure 1). Subsequent
sections of the guide explain each step in the whole-life costing analysis
process in turn.
IMPORTANCE OF It is important that the underlying arguments supporting whole-life

WHOLE-LIFE COSTING costing analysis, its core principles and the restrictions on how it can be
used, are understood by everyone involved in scoping, designing and
delivering the project.
THE LONG TERM The built environment is a key ingredient in the UK’s post-industrial
PICTURE OF BUILDING economy. It is a visible statement of our achievement and progress.
OWNERSHIP
This applies both where the built environment is the means to an end,
as in existing factories, warehouses and office buildings, or whether it is
the end in itself, as in new-build and refurbishment work that generates
8-10% of GDP and employment for 2 million people in the UK.
The longevity of the built environment, and of the organisations that use
it, means that its cost cannot be judged just in terms of capital
investment. The operational costs of construction and infrastructure are
significant and have to be taken into account. The precise nature of the
balance between construction cost, operation and maintenance costs, and
the costs of the business processes enclosed in a building, have been
argued in the papers published by the Royal Academy of Engineering
The Long Term Costs of Owning and Using Buildings, and by Hughes,
WHOLE-LIFE COSTING ANALYSIS 3

© BSRIA BG 5/2008
Ancell, Gruneberg and Hirst, Exposing the Myth of the 1:5:200 Ratio
Relating Initial Cost. The most important message is that these different
types of cost and benefits, traditionally managed by separate groups of
people, are not independent of each other. They all contribute to the
economic value of a project.
The case for higher capital investment in return for lower running costs
or improved worker productivity is there to be argued. Whole-life
costing analysis is one of the tools that can be used to support decision-
making that takes account of the long-term view of the costs and benefits
involved in building and infrastructure projects. Some other relevant
assessments are shown in Figure 2.
In our own lives, we find no difficulty in balancing a higher capital

investment with a reduced operating cost or a higher resulting value –
these are the judgements we make when justifying the purchase of low-
energy lamps, loft insulation, or a new car with a higher resale value or
greater fuel efficiency. Why then, should organisations find it so difficult
to apply the same rational approach to their investments in buildings and
plant?
Part of this is due to the much greater complexity of the projects,

together with the fact that organisations break down complexity by
dividing up roles and responsibilities, to the extent that they fail to see
the big picture. Another issue is the difficulty of obtaining data with
which to calculate whole-life costs. A third part may be a perception
that very precise results are required if these are not available then it’s
better not to bother at all.
This guide shows how these issues can be overcome or dealt with, and
the ways in which whole-life costing analysis can provide valuable
information for appraising projects.
THE CORE PRINCIPLES Whole-life costing analysis involves a number of core principles. If, for
OF WHOLE-LIFE whatever reason, it is decided that these principles are not appropriate
COSTING ANALYSIS
for a project, then whole-life costing analysis is not an appropriate tool
to help decision-making.
Comparison not prediction

Whole-life costing analysis is designed to compare the economics of
alternative solutions to a specific problem. It is not designed to predict
what the actual future costs will be. This is because whole-life costing
analysis uses discounting to convert future costs and benefits into a value
today. The amounts calculated in the analysis are, not therefore, the
same as the actual payments that will need to be made in future years.
Ignore common factors that occur in each alternative solution

This follows from the previous principle. As whole-life costing analysis
is about comparison, then any item of cost or benefit that is identical
across all the options being compared can be ignored. It has the same
effect in each case. In the days when whole-life costs were calculated by
hand, this gave valuable savings in both time and opportunity for error.
© BSRIA BG 5/2008
But since whole-life costs are usually calculated in computer spreadsheets,

this is less important.
The opportunity cost of money

This is the jam today principle. This principle means that cash available
now has a greater value than the same quantity of money in the future.
Whole-life costing analysis uses the principle of discounting to convert
money in the future (whether paid or received) into present day money,
by applying a discount factor to future payments and receipts. The
discount factor depends on how far into the future the payment or
receipt is made, and the discount rate that is applied. The selection of a
discount rate is explained further in Section 2.2.
Stick to the study period

This is the don’t look back principle. This principle means that any costs
or benefits that occurred in the past are ignored – the past cannot be
undone and money that has already been spent cannot be recovered.
Similarly, any costs and benefits that occur after the study period are also
ignored. For this reason, study periods have to be chosen with care and
the reasons for choosing them have to be clearly stated. This is also
covered in more detail in Section 2.2.
Whole-life costing analysis is a quantitative process

This is the ‘garbage in, garbage out’ principle. This principle means that
the value of the numerical results obtained from the modelling and
calculation procedures is directly related to the precision and accuracy of
the data that is fed into the models. Two types of data are required: data
about the cost of individual activities and components that make up the
projects; and data about the timing of future events. The latter is mainly
concerned with the life expectancies of building components or items of
plant and machinery.
The future occurs in finite blocks of time

This principle means that the study period is divided into time periods,
typically years. Costs and benefits that occur within any one year are all
treated as though they happened at the same time, at the end of the year
(The Green Book, published by HM Treasury, uses mid-year rather than
end-of-year, but the effect is exactly the same). If this sub-division is too
coarse for your project, you can use months or weeks instead, provided
the discount rate is expressed in similar terms (x% per month or week).
Summary
Whole-life costing analysis is about being approximately right rather than
precisely wrong. These principles also mean that whole-life costing
analysis is not a trivial exercise, and it can take significant resources to
build the models, assemble the data, run and fine-tune the calculations.
Of course it is sensible to keep the amount being spent on the analysis
under review, particularly in comparison with the potential savings.

© BSRIA BG 5/2008
WHAT WHOLE-LIFE Make economic judgements between alternative technical solutions

COSTING ANALYSIS This is the most usual application of whole-life costing analysis. This
CAN DO
uses a golden rule – the option with the lowest whole-life cost is the
preferred solution. Many clients have fallen into the trap of believing
that the lowest capital cost is the most economically advantageous
solution, but this is often not the case and is one reason why whole-life
costing analysis is becoming more and more widely used. Neither can it
be assumed that higher capital costs automatically lead to lower
operating costs.
Convert whole-life costs into equivalent annual costs

Whole-life costs are given as a single figure for each solution over a
whole study period with reference to the discount rate (for example, the
whole-life cost of Option A is £123 456 over 15 years at 3·5% discount
rate). However, the same whole-life cost can be expressed in equivalent
annual terms, using the appropriate factor (the equivalent annual cost of
Option A is £10 716 per year for 15 years at 3·5%). Care must be taken
in these cases not to confuse the equivalent annual cost with a quotation
for a budget figure.
Judge the economic worth of independent projects

If a budget holder has proposals for several independent projects, then
whole-life costing analysis can help decide the order in which projects
should be given the go-ahead to guarantee the maximum level of savings
in operation, maintenance and repair costs.
WHAT WHOLE-LIFE Define future budgets for capital and revenue works
COSTING ANALYSIS Whole-life cost analysis will not calculate the actual amounts of
CANNOT DO
expenditure in future years, but the data collected as part of whole-life
cost analysis can be used to generate these future budget amounts.
Take account of non-monetary costs and benefits

Whole-life cost analysis can only take account of factors that can be
expressed in monetary terms. Anything else (for example, better
community relations from a renewable energy installation) has to be
included in a different kind of assessment (see Figure 2).
Compare alternatives that do not produce the same technical

outputs
Whole-life cost analysis assumes that the different alternative solutions
have the same functionality; for example, that alternative heating systems
produce the same levels of comfort, or that alternative office buildings
house the same numbers of staff. If this is not the case then the whole-
life cost analysis is not valid unless the difference can be quantified and
allowed for.
© BSRIA BG 5/2008
DEFINING THE PROBLEM
DEFINING THE PROBLEM 2
1 DEFINING THE PROBLEM
The first steps of whole-life costing analysis require a thorough definition

of the problem to be analysed. Time spent here, in preparation for the
next stage of constructing the whole-life costing models, will avoid
wasted effort and rework later.
Someone, usually the client or project sponsor, will have a clear idea of
what they want the project to achieve. This vision of success needs to be
expressed in functional terms. This means describing the problem in
terms of what the end-result has to achieve rather than what it looks like,
what size it is, what colour it is, who manufactures it, and so on. For
example: “Save 25% of energy costs without disrupting the existing use
of the building” (rather than specifying new boilers); or “Accommodate
2
45 new members of staff” (rather than specifying a two-storey, 500 m
office extension).
It is the client’s responsibility to make sure that everyone on the project

team shares the definition of the project’s functional outcome, and it is
also the whole team’s responsibility to make sure that assumptions are
challenged and that the pre-defined boundaries, beyond which they
cannot go, are fully understood.
There are many existing techniques to help develop this shared

understanding (such as the five-whys, boundary examination/relaxation,
and goal orientation), but they are not explained in detail here.
Example of Step 1 Defining the problem

Project: Upgrade At ACME Ltd, the facilities manager expressed concerns at the annual
energy and maintenance costs of the company’s existing heating and
ventilation systems. The facilities manager has been comparing notes with
fellow facilities managers who work for other firms with similar sized offices
2
(2000 m ) and similar patterns of occupancy (weekdays, 07.00 – 19.00 h).
ACME’s directors have asked the facilities manager to investigate the case
for upgrading the systems to provide cost savings for the remainder of their
lease, which has 17 years to run.
To reach this point, the facilities manager had already collected some data
about the systems installed in the building and the operational costs of
running and maintaining them. This came from an inspection of the plant,
documentation in the operation and maintenance manuals, and collation of
the last five years energy bills for gas and electricity.

© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
2 ALTERNATIVE SOLUTIONS
Step two of whole-life costing analysis is to use the statement of the

problem to develop a range of possible solutions, each of which is able to
deliver the performance, outcomes or results that have been identified as
the criteria for success. A separate mathematical model should be
developed for each solution that is being investigated. During the course
of developing the possible solutions and building the models there will
need to be further discussions with the client or project sponsor. These
should resolve any uncertainties about the assumptions previously made,
to test the validity of new assumptions, and to agree on the range of
solutions that are to be modelled.
2.1 IDENTIFYING Once the nature of the problem is properly understood, a range of
ALTERNATIVE
SOLUTIONS
solutions can be developed. It is not the purpose of this guide to
explain how these solutions are arrived at, only to say that the analysis
can cope with as much or as little creativity within the project team as
the client allows. The only limitation is that, for realistic comparison,
each solution must deliver the same functionality.
As whole-life costing analysis is a technique for comparing options, it

follows that more than one option needs to be considered. One of the
options is called the base case. All other options are labelled as
alternatives (A, B, C, or 1, 2, 3). The simplest situation is where one
solution is being compared with the status quo. Here the status quo is a
‘do nothing’ option, and is the base case, while the ‘do something’
option is the alternative. ‘Do nothing’ options do not usually apply in
new build projects, since the decision to build something has already
been taken before the whole-life costing analysis starts as part of the
client’s business planning. A typical project where ‘do nothing’ is an
option is: “Do we update our building services to save energy, or do we
stick with what we’ve already got and accept the existing level of costs?”
Whole-life costing analysis can be applied to as many options as required.

However, each brings its own overhead of time and effort needed for
data collection and modelling. BSRIA’s recommendation is that three or
four options are used in most cases.
The base case and alternatives should have some significant differences
between them. For example in response to a problem to accommodate
45 new staff, the base case could be to convert existing meeting rooms
into new office space and hire external meeting space, alternative 1 could
be to add an extra floor to the existing office building, alternative 2 could
be to lease office space elsewhere in the town.
© BSRIA BG 5/2008
Example of Step 2 Part 1: Identifying alternative solutions
In the case of project ‘Upgrade’, the facilities manager has identified four
alternative ways forward.
Base case Do nothing; retain the existing equipment, and live with existing levels of
energy usage, maintenance and expected service life, replacing the
equipment as and when it reaches the end of its life. The existing boilers
use 250 000 kWh of gas each year and the air handling unit uses 100 000
kWh of electricity. The replacement equipment will have the same
performance as alternative 1.
Alternative 1 Replace the boilers and the air handling unit with items of plant at the
lower end of the available price range, which are 10% more energy efficient
than the existing plant and still require annual maintenance.
higher end of the available price range, which are 25% more energy
efficient than the existing plant and require maintenance only every two
years.
Alternative 3 Replace the existing boilers with a combined system comprising a smaller
boiler and a double façade on the south-facing side of the building to pre-
heat internal air in the winter. Maintain the existing air-handling unit but
replace it as per the base case. The combination of a small boiler and the
double façade reduces the gas required for heating by 60%.
These hypothetical options will be examined in more detail by

constructing whole-life costing models and collecting data about costs
and timing of activities.
2.2 SPECIFYING THE Selecting the discount rate

FUNDAMENTALS The discount rate is a fundamental characteristic of the analysis. The
same discount rate must be applied to all the models within the analysis
so that the comparison is valid.
For whole-life costing analysis on public sector projects, then a discount
rate of 3·5% per annum is stipulated by Treasury rules for all projects up
to 30 years. For longer timescale public sector projects, typically
infrastructure or prestige buildings, then a series of lower discounts rates
is applied to different project years (see Table 1):
Table 1: Discount rates for long-term public sector projects.
Years 0-30 31-75 76-125 126-200 201-300 301+

Discount rate 3·5% 3·0% 2·5% 2·0% 1·5% 1·0%
For private sector projects, the client or project sponsor must select the
discount rate. For help in setting an appropriate discount rate, it is worth
considering what the discount rate is trying to do. It represents the
premium that an investor would require to get a financial benefit at some
point in the future rather than today. This is the same principal as
earning interest on funds in the bank, or paying interest on money
borrowed. Choosing a discount rate that will be appropriate for a project
lasting many years or decades is like trying to predict interest rates.

© BSRIA BG 5/2008
It is normal practice, when selecting a discount rate for whole-life

costing, to deduct the effects of underlying inflation. This gives what is
known as a real discount rate. The Treasury rates given above already
include a deduction for inflation. Using real discount rates has one big
advantage, as it means that underlying inflation does not have to be
factored into the estimates of future costs and benefits.
Corporate accounts departments will often apply a specific discount rate

to projects. If not, then a project specific estimate will need to be made,
as whole-life costing cannot be done without it. This is not an easy
estimate to make, since both inflation and the cost of capital change over
time. Figure 3 shows how consumer inflation and Bank of England base
rates have fluctuated over the last 30 years. It is usual for the private
sector to use higher discount rates than the public sector, and a rate
between 4% per annum and 7% per annum would be typical at present.
Figure 3: 30-year profile of inflation and Bank of England base rate.
The discounting used in whole-life costing calculations means that a

higher rate will put greater emphasis on short-term costs and benefits.
A lower discount rate will increase the contribution of longer-term costs
and benefits to the overall whole-life costs.
Selecting the study period

The study period is another fundamental factor in whole-life costing
analysis. The usual situation is that a single study period is applied to all
the options being assessed. There are special circumstances when
different study periods are applied to different options, but in this case the
calculated results must be presented as equivalent annual costs. (See
Section 3.4 for more information.)
The study period may be defined by the client or may be proposed by

the project team. As we shall see, the outcomes of whole-life costing
analysis can be extremely sensitive to the study period, and the choice
should always be backed up with strong argument. For new build or
refurbishment projects, study periods of between 15 and 25 years are
commonly used, but longer or shorter periods can be used. Shorter
periods may be used for projects concerned with building services
© BSRIA BG 5/2008
systems or interior fit-out. For whole-life costing analysis of a building

services installation, the life expectancy of the equipment is often used as
the study period. Longer periods may be used for infrastructure works.
In all cases, the study period should be informed by the client’s business
plan.
The choice of a suitable study period may be arrived at through

negotiation between project team members, and it is a prime candidate
for sensitivity analysis (see Section 4). The following example illustrates
the difficulty of choosing an appropriate study period:
ABC Bank is building its new data centre in partnership with a

developer, XYZ Properties. ABC will take a 25-year lease with 5-
yearly break clauses. The structural engineers have used a 60-year design
life for the building’s concrete frame. The services engineers reckon the
major plant will last 20 years. ABC’s IT department thinks it may
relocate the data centre to India in 5 or 10 years.
In this scenario, is the study period 60 years, 25 years, 20 years, or five

years? Arguments could be made for each of these, but the consequences
of such a wide range of possible study periods will be dramatic on the
whole-life costs. The final choice will be a matter of negotiation,
calculated, or laid down by the client or project sponsor.
If a study period measured in years does not provide the level of detail
the analysis requires, then months or weeks can be used. In this case, the
discount rate must be expressed in percent per month or week, to match.
Monthly or weekly discount rates must be calculated with care. The

monthly equivalent of 3·5% per year is not 3·5 divided by 12 (0·2917%
per month). Instead it is 0·2869% per month, to allow for the
compounding of monthly interest during the year. (The full explanation
of how monthly or weekly discount rates are calculated is beyond the
scope of this guide.)
Example of Step 2 Part 2: Specifying the discount rate and study period
Project upgrade The discount rate and study periods are selected in line with corporate
policy. The whole-life costing analysis will use a real discount rate of
5%. The study period has been specified by the company’s directors as
17 years, as this is the length remaining on the lease for the office
building (see page 7).

© BSRIA BG 5/2008
2.3 BUILDING THE Once the number of alternatives to be modelled has been decided, along
WHOLE-LIFE
COSTING MODELS
with the discount rate and study period, then the work of assembling
the data for each separate model can start. Two types of data are
required:
• When are activities expected to happen during the study period?

• What the cost or benefit will be of each activity?
Neither of these questions can be answered with absolute accuracy, so

further questions will need to be asked:
• How accurate are the data believed to be?

• How much does the accuracy matter?
We will deal with these latter questions in Sections 4 and 5. For now we
will concentrate on the first two questions about timing and cost. The
actual data required to put into the model depends on the nature of the
activity (see Table 2):
Table 2: Selecting the required data.
Type of activity (see Note 1) Timing data (see Note 2) Cost data (see Note 3)
Lump sum/one-off activity In which year does this activity occur? What would the actual cost or benefit be
in today’s prices?
Typical examples: Use year 0 for activities happening now. Remember that today’s prices can be used
because the discount rate takes care of
initial installation
general inflation.
end-of-life replacement Use year 1, 2, 3, up to the final year of the
study period for activities happening in the
major repair or maintenance work part-
way through the study period future.
decommissioning costs
residual value at end of study period.
Recurring activity Which years do this recurrence start and What is the yearly amount (in today’s
end? prices) associated with this activity?
Typical examples:
annual maintenance/cleaning contracts
energy costs
Specify a range. The earliest start date is Remember that the same amount of cost
staff costs year 1. The latest end date is the final or benefit (using today’s prices) is assumed
rent or lease payments. year of the study period. for each year.
Notes:
1 Depreciation and capital charges are not included in the appraisal (HM Treasury Green Book, paragraph 5.21).
2 All costs and benefits occurring during a year are assumed to be paid or received at the end of the year.
3 The convention in whole-life costing analysis is for costs to be positive and for benefits to be negative.
Every whole-life cost model is just a list of activities with the year when
they occur and their respective cost or benefit. The complexity of the
model depends on the length of the list, and how much detail the
activities go into. As whole-life costing involves many separate
mathematical calculations, computer spreadsheets are the most flexible
software packages to use for building the model. However, proprietary
systems and databases can also be used.
© BSRIA BG 5/2008
Residual values and decommissioning costs

Residual values can be estimated in a number of different ways. For
whole buildings or sites, the residual value is usually taken as the value of
the land the site or building occupies, but if all the options are based on
the same site, then this becomes a common factor throughout the
analysis and can be ignored.
For mechanical equipment, the residual value is usually taken as the scrap
or resale value, though for equipment that is beyond the first few years of
its life then the resale value is usually nil. For building components such
as roofing or paving the residual value can be estimated as the unexpired
portion of the expected service life of the component, so that a roof with
an expected life of 30 years would have a residual value equal to 33% of
its installation cost after 20 years when there are 10 years left. Some
building elements, such as wall coverings or paints, are essentially
unrecoverable so will have no residual value at all. In all cases, residual
values are still subject to the appropriate discount factor. In practice this
means that small residual values at the end of a lengthy study period will
have no discernable effect on the outcome of an analysis.
Decommissioning costs are sometimes included in the cost of installing

replacement equipment, but it can be helpful to list them separately to
make sure they are not overlooked. Where a scrap or resale value is
included for equipment at the end of the study period, then the
decommissioning cost must also be accounted for.
Project timeline
Another useful technique when starting to build whole-life cost models is
the project timeline. This is an intermediate step between the raw data
and the spreadsheet model. Project timelines are particularly helpful to
understand exactly when specified events occur, as in the following
example:
The project is the replacement of air handling equipment in three years time
with existing equipment being used up until this time. The base case uses
central plant with an expected life of 15 years (costing £50 000), the
alternative uses central plant with an expected life of 25 years (costing
£65 000) but where the main fan bearing needs replacement every 10 years
(costing £5000 each time). For clarity it is assumed that residual values are
zero.
It is easy to miss the fact that the initial capital costs occur in year three,
and this must be included in the model so that the right discount factors
are used. In effect, the study period is 28 years. But using a timeline,
this becomes obvious:

© BSRIA BG 5/2008
Figure 4: Example of project timelines.
Whole-life cost models should be presented in a standard format to make

it easy for the reader to see how the results have been reached.
This guide uses the layouts adopted in the BSRIA Whole-Life Cost
Calculator, a simple spreadsheet that has been developed by BSRIA to
support its Practical Whole-Life Costing training course. The whole-life
cost models shown in Sections 3 and 4 are in the same layout as the latest
BSRIA spreadsheet. This spreadsheet keeps capital items separate from
operational items so that savings-to-investment ratios can be calculated if
required. It also helps that capital items tend to be lump sums (single
items of expenditure or revenue occurring in a particular year) whereas
operational items tend to be recurring sums where the same cost or
benefit occurs every year. This separation is also helpful because lump
sums and recurring sums are treated differently when the net present
values are calculated. (See Section 3.)
2.4 GENERAL DATA Deciding which activities to include in the analysis

COLLECTION Whole-life costing analysis can and should be carried out at different
stages throughout a project, from initial feasibility, through to outline
design, and detailed design, to make sure that the decisions taken at each
stage take account of the economic assessment of the various technical
options.
As a project proceeds from initial feasibility through outline proposals to

detailed design work, then it is appropriate that the cost and time data
used in the whole-life cost models becomes progressively more detailed
and more certain. This has implications for the sources of information
that are appropriate at each project stage.
At feasibility and outline proposal stages (RIBA stages B and C), only the
design philosophies and big design decisions are considered. There is no
point trying to include information about specific equipment as these
choices have not been made at this stage. For cost data and timing data it
© BSRIA BG 5/2008
is appropriate to use industry averages such as those taken from BCIS

indices or the CIBSE’s economic life tables. Similarly, there is no point
spending time and effort collecting information about small items of cost
or benefit at this stage.
As the design becomes more detailed (RIBA stages D, E and F), then it is
appropriate to use more specific information, such as actual
manufacturer-quoted prices or life expectancy data that incorporates
factors reflecting the location of the site, the expected maintenance
regime, the quality of the installation and so on. A detailed explanation
of one model for applying these project specific factors to life
expectancies is given in BS 15686.
This progression is presented in Figure 5, where the size and quality of

the information to be included moves from top-right towards bottom-
left as the project becomes better defined. However, cost items in the
very top-right will always be too imprecise to include in an analysis
because they will outweigh everything else. Time and effort should be
spent to define these costs more precisely. Similarly, cost items in the
very bottom-left, which are small relative to others, appear towards the
end of the project and are precisely known, do not need to be included
because they will have a small effect on the overall analysis. Do not
waste time putting these into the models.
Figure 5: The types of data to include at different stages of project development.

© BSRIA BG 5/2008
2.5 TIMING OF Whether the activities represent lump sums or recurring sums, their
ACTIVITIES DATA
COLLECTION
timing during the project will affect how accurately they can be
estimated.
More accurate
Activities that occur at the start, or near the start, of a project are usually
connected with the initial installation or construction. The timing of
these activities can be estimated quite accurately from construction
programmes and periods required for design or planning permission, or
because the project has pre-determined deadlines (an opening date for a
new supermarket, or the start of an academic year for a school or
university building). It is important to estimate these timings as
accurately as possible. As they occur near the start of the study period
they will have a relatively large effect on the overall whole-life cost.
The timing of activities that occur at the end of the study period is
known precisely once the study period has been established. There are
generally relatively few of these activities, and many of them are related
to the residual value of the building or items of plant at the end of the
study period. As these costs or benefits are the furthest in the future,
they have a relatively small effect on the overall whole-life cost.
The timing of activities that recur throughout the study period are also
known precisely. These may represent annual maintenance, or staff
employment.
Less accurate
Less accurate date relates to one-off activities, occurring at some point
during the study period. These are mainly concerned with replacement
of items of plant or components or parts of the building. The choice of
each replacement date has to be supported by clear explanation. A
starting point would be information from a manufacturer (likely to be
based on ideal operating conditions or on a warranty period), from
standard component life tables (for example, Economic Life Factors
published by CIBSE – but this will be very generic data and may not be
suitable), or from previous experience (usually good project-specific data,
but not many clients or estates owners maintain adequate records).
Least accurate
The least accurate data may be some of the recurring costs, where it is
decided that using a flat rate throughout the whole project is not realistic
because their inflation rate is different from underlying inflation. The
most frequent item modelled in this way is energy cost. This decision is
usually defined by the client or recommended by the cost consultant.
Even so, the way in which these costs will fluctuate will have to be
agreed, and must be documented. For example, it may be assumed that
energy costs can be fixed for five-year periods, but will jump by 5%
above inflation at each re-negotiation. This pattern of inflation should
be based on some specific forecast information, or it must be made
crystal-clear that this is an assumption made by the project team.
© BSRIA BG 5/2008
2.6 COST DATA Ideally, all cost data should be generated through specific quotations or
COLLECTION
estimates so that project-specific characteristics can be taken into
2
account. Industry average £/m costs can be used for feasibility or
scoping studies, provided that the generic nature of these estimates is
clearly understood.
At least the use of a discount rate that allows for general cost inflation
means that obtaining quotes and estimates for costs is made simpler. All
estimates and quotations should be for carrying out the activity
(maintenance, repair, replacement, decommissioning and installation) at
the time the model is developed.
Historic cost data may be used, particularly if there is another building on

the client’s estate that is similar to the one being modelled, but the actual
costs incurred in the past must be adjusted to reflect present-day prices.

© BSRIA BG 5/2008
Example of Step 2 Part 3: Collecting data about timing and cost of activities
The following data has been collected by the facilities manager for the four
different alternatives for the aforementioned project upgrade. The
following cost data applies to all the scenarios.
Table 3: Cost data.
Cost item Current cost Price rise/fall on top of inflation (price
escalation)
Gas 4·5 pence per kWh 10% increase every five years
Electricity 13·5 pence per kWh 7% increase every five years
All other items As specified Increase in line with inflation (0% escalation)
For this analysis the facilities manager has decided to ignore equipment
decommissioning costs, and to base the residual value of nearly-new
equipment on straight-line depreciation over five years.
In addition to the general data outlined above, the following specific cost
and timing data has been assembled for each option.
Base case Annual maintenance contracts for the existing plant (boilers plus air-
handling unit) cost £10 000 per year. The boiler is expected to last
another seven years, but will then be replaced with the same boiler that is
being proposed for alternative 1. The air-handling unit is expected to last
another 10 years, but will then be replaced with the same air-handling unit
that is being proposed for alternative 1.
Alternative 1 The immediate (year 0) purchase and installation costs of the low-end
boilers and air-handling unit are £75 000 and £25 000 respectively. The
annual maintenance contracts for these items are the same as for the existing
boilers and air-handling unit. The life expectancies for the new boilers and
air-handling unit are 15 years and 18 years respectively.
Alternative 2 The immediate (year 0) purchase and installation costs of the high-end
two-yearly maintenance contracts for these items cost £10 000 for the
boilers and £4000 for the air handling unit. The life expectancies for the
new boilers and air-handling unit are 22 years and 25 years respectively.
Alternative 3 The purchase and installation costs of the smaller boiler is £40 000 and it
has a life expectancy of 20 years. The construction cost of the double
façade, associated air-circulation and control equipment is £125 000, and
the air-circulation equipment has a life expectancy of 20 years. A one-year
planning and construction period is required, during which the existing
equipment will still be used. The maintenance for the boiler will cost
£3500 per year. The maintenance of the solar-wall is incorporated into the
maintenance of the air-handling unit at a combined cost of £4000.
The lump-sum cash flows and the annual maintenance charges, have
been put onto project timelines, for each alternative, so that they can be
visualised. Energy costs have not been included to keep the diagrams
clear.
© BSRIA BG 5/2008
Figure 6: Project timelines for the base case and alternatives 1-3.

© BSRIA BG 5/2008
Energy costs escalating every five years are shown in the following
timeline:
Figure 7 Timeline for escalating energy costs.
2.7 STORING DATA A client or project team that puts time and effort into generating
FOR FUTURE USE
meaningful data for one whole-life costing model should take steps to
make sure that the data can be used again in the future. At an estate
level, a client with a regular works programme should be able to
compile a valuable database of cost and life expectancy data over a few
years, simply by not throwing away all the effort put into separate
whole-life costing analyses.
Once established, this data set is cheap and easy to maintain and provides
valuable data that is specific to the client, the building or the estate.
When this data is used to build future whole-life costing models these
will be automatically more reliable than models based solely on industry
averages of cost or life expectancy.
There may even be value in groups of clients with similar buildings or

estates working together to share the cost of setting up their own cost
and life-expectancy database. Care is needed to make sure that the
database does not become so diverse that it starts to resemble the industry
average.
© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE
CALCULATING COSTS COSTS
WHOLE-LIFE
3 CALCULATING WHOLE-LIFE COSTS
Net present value is the technique used to turn a cost to be paid or a

benefit to be received in the future into an equivalent value today (the
present) by applying a discount factor. Once all future costs and benefits
have been translated into present values, they can be added up to give an
overall net present value for the project. If the activities for which costs
and timings have been estimated represent all the activities involved in
the life of a building or a component, then this overall net present value
is the whole-life cost.
This part of the guide explains how the calculations are done. Although
all the maths would be done on a spreadsheet or other software package,
it is important that anyone using whole-life costing understands where
the end-results come from.
3.1 NET PRESENT Translating a future item of expenditure (such as a replacement boiler)
VALUES FOR LUMP
SUM COSTS AND
into a present cost is an essential calculation in whole-life costing. The
BENEFITS conversion of a lump sum in the future (whether a cost or a benefit),
into a present value is the basic calculation in whole-life costing. All
other calculations are based on this. The formula that we apply is as
follows:
Present value = future value × discount factor
where the future value is the cost or benefit of any given item at some
point in the future and the discount factor is calculated from the discount
rate and the year in which the cost or benefit occurs. The mathematical
expression for the lump sum discount factor is
1
Discount factor =
(1 + r )n
where r is the discount rate (expressed as a decimal) and n is the year of
occurrence.
So to convert a future value of £325 in year 8 into a net present value

when the discount rate is 5%, the discount factor is calculated as
1
= 0·6768
(1 + 0·05)8
so the net present value is calculated as
£325 × 0·6768 = £220
For manual calculations, the discount factors for lump sums are given in
Table 7 in Appendix A1. In the Table, each column represents a
different discount rate, in whole number percentages except for 3·5%.
Each row represents a year of occurrence from 0 to 50.
·
There are three things to notice about this table:
• For year 0, the discount factor is always 1·000, in other words, there
is no discounting.
• As the discount rate increases, the discount factor for a given year
gets smaller, so the net present value gets smaller.
• As the year of occurrence increases, the discount factor for a given
discount rate gets smaller, so the net present value gets smaller.

© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE COSTS
Also remember that the future value is the cost or benefit at today’s
prices, as no account needs to be taken for underlying inflation.
In Microsoft Excel (in these paragraphs, an example is shown to

represent the formula that would be typed into Excel), the PV function is
used to calculate a lump-sum present value. This is a general Excel
function that uses five pieces of information:
Information Description
1. Discount rate Or definition in Step 2 of the analysis
2. Number of regular payments The same as the year of occurrence
3. Amount of each intermediate payment Zero
4. Future value The same as the future cost or benefit
5. Are payments made at the end or Zero, as payments are made at the end of
beginning of each period? each period (see “the future occurs in finite
blocks of time” page 5)
So, for a lump sum present value the following formula can be used in an
Excel worksheet, where PV() is the Excel function:
(The minus sign is included at the beginning of the formula because the Excel PV
function returns a negative value that needs to be turned back into a positive value)
so for the example used above, the formula would be:
which calculates to £219.97
© BSRIA BG 5/2008
Example of Step 3 Part 1: Calculation of lump-sum net present-values
For project upgrade, the summary information about discount rate, study
period and the date of the analysis is as follows:
Project title Project Upgrade

Project number 99999/1
Date of analysis 18-Jan-08
Discount rate used for analysis 5·00
Study period 17
To calculate the lump-sum costs for the four alternatives, the capital
expenditures under each scheme are used, with the relevant years in which
they occur (see the project timelines in Figure 6). This includes all one-off
payments such as initial investment, end-of-life replacement, major repairs,
decommissioning costs and any lump-sum benefits such as residual value at
the end of the study period.
Remember that any immediate expenditure is counted as year 0, and has a

discount factor of 1·000. Also note that alternative 1 includes replacement
of the boilers near the end of the study period. According to the
assumptions for this analysis, the new boiler is still new enough when the
study period ends to trigger the residual value calculation. As the residual
value is an income to the project, it is put into the lump-sum calculation as
a negative figure so it reduces the whole-life cost of this option, but
remember that the appropriate discount factor still needs to be applied.

© BSRIA BG 5/2008
Lump sums – Base case NPV total £68 648.93
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Replacement boiler 1 £75 000.00 £75 000.00 7 0·7107 £53 301.10
Replacement air
1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
handling unit
Example from Table 7 (see page 41)
© BSRIA BG 5/2008
Lump sums – Alternative 1 NPV total £116 442.93
factor source of
information
Purchase and install
1 £75 000.00 £75 000.00 0 1·0000 £75 000.00
new boiler

1 £25 000.00 £25 000.00 0 1·0000 £25 000.00
new air handling unit
Replace boiler 1 £75 000.00 £75 000.00 15 0·4810 £36 076.28
Residual value of boiler

1 -£45 000.00 -£45 000.00 17 0·4363 -£19 633.35
(2 years use)*
* See assumption about residual value for this analysis in Step 2: Part 3.
factor source of
information
1 £110 000.00 £110 000.00 0 1·0000 £110 000.00
new boiler

1 £37 000.00 £37 000.00 0 1·0000 £37 000.00
factor source of
information
1 £40 000.00 £40 000.00 1 0·9524 £38 095.24
new boiler
Design and install

1 £125 000.00 £125 000.00 1 0·9524 £119 074.62
double façade
Replace air handling

1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
unit
The outcome of these calculations is that the base case has the lowest whole-life cost, based on lump
sums. So if this was the only information being taken into account, then the golden rule mentioned on
Page 6 would conclude that the base case was the preferred solution.

© BSRIA BG 5/2008
3.2 NET PRESENT The net present value for a recurring cost such as an annual maintenance
VALUES FOR
RECURRING
charge, represents the amount of capital that needs to be set aside in year
COSTS AND 0 such that the credit that would be received every year by way of
BENEFITS interest if the money were on deposit at the bank, less the regular
payment made every year exactly reduces to £0.00 after the final
payment is made. This can be seen in the chart below, which is for 15
payments of £1000 each year at a 5% discount rate. Each year the
balance grows due to the interest received, and falls due to the payment
being made.
Figure 8: Graph of recurring cost net present value.
Recurring costs starting in year 1

The calculation of a recurring cost’s net present value also requires the
use of a discount factor to convert the recurring future payment into a
single present value in year 0. The recurring costs can be thought of as a
series of identical lump sums, one occurring each year. The appropriate
discount factor is found by adding together the lump sum discount
factors, starting in year 1 and finishing in the final year of occurrence.
So, to calculate the discount factor for a cost that recurs from year 1 to
year 8, when the discount rate is 5%, the formula is as follows:
1 1 1 1 1
Discount Factor = + + + +
1·05 (1·05)2 (1·05)3 (1·05)4 (1·05)5
1 1 1
+ + +
(1·05)6 (1·05)7 (1·05)8
Notice that the final term in this example is the same factor calculated for
the lump-sum net present value in Section 3.1. Adding all the terms
together gives a discount factor of 6·4632. To calculate the recurring
cost net present value, we multiply the annual cost by the factor, so the
net present value of a recurring payment of £325 per year for eight years
at a 5% discount rate is:
Net present value = £325 × 6·4632 = £2100.50
For manual calculations, the discount factors for the different discount
rates and the different periods of recurrence are given in Table 8
Appendix A1. The factors in this table always assume that the recurrence
starts in year 1. Note that the discount factors in the year 1 of Table 8
are the same as the year 1 row of Table 7.
© BSRIA BG 5/2008
In Excel, the same PV function formula is used for calculating a recurring

cost net present value, but this time a value is used for the regular
payment each period, with 0 for the future value:
so for the example used above, the formula would be
which calculates to £2100.54
Net present values for deferred recurring costs and benefits

The explanation of calculating net present values for recurring costs in
Section 3.2 assumed that the recurring cost or benefit always started in
year 1. There are many occasions when this will not be the case, so
calculating the net present value of a recurring costs, that starts later than
year 1, needs to be considered.
Deferred recurring costs can be very useful in whole-life costing, as they

cater for projects that include a lengthy construction period before
operating costs start. They also cater for more complex models of
recurring costs to be constructed where the annual payment may increase
every few years to allow for price escalation over and above inflation.
An example of this would be energy prices, where the project team may
decide that its more realistic to re-price these every five years to allow for
market fluctuations.
Net present values for deferred recurring costs can be calculated in a

number of ways, but this guide will only look at one in detail. This is
called subtracting the gap. The example is the calculation of the net
present value of a £10 000 per year maintenance cost that has to be paid
from year 6 to year 20, using a discount rate of 4%:
1. Look up the discount factor for the end of the recurrence period (in
this case 20 years, 4%). Table 8 gives this as 13·5903. Now look up
the discount factor for the year before the start of the recurrence
period. Since the recurring cost starts at the beginning of year 6, the
discount factor is needed for year 5. Table 8 gives this as 4·4518.
2. Subtract one discount factor from the other, giving 9·1385. Apply
this to the recurring cost to give the net present value of the
recurring cost.
Hence net present value = £10 000 × 9·1385 = £91 385
Figure 9 shows this method on a project timeline. The difference

between the two discount factors from Table 8 gives the factor for the
period year 6 to year 20. It is really important to understand which year
costs and benefits are attributed to. Remember that in whole-life costing
analysis all costs and benefits are assumed to occur at the end of the year,
and the year markers in Figure 9 correspond to these end-of-year dates.

© BSRIA BG 5/2008
Figure 9: Discount factor for a deferred recurring cost.
Figure 9 shows, deferred recurring costs can also be calculated as a series

of lump sums for the relevant years, in this case taking the discount factor
for each year in turn from Table 7 (see page 41).
In Excel there is no direct way of calculating net present values for

deferred recurring costs. Instead, the PV function must be used twice,
once for the whole period, and then again to deduct the initial years that
are not required:
So for the example used above, the formula would be:
which calculates to £91 385.04
© BSRIA BG 5/2008
Example of Step 3 Part 2: Calculation of recurring-cost net present values
To calculate net present values for recurring costs, the regular items that
comprise operating and maintenance costs should be used. In the case of
project upgrade, these are the energy costs for gas and electricity, and the
maintenance contracts. The summary information is shown below:

Study period 17
The spreadsheet below shows the recurring costs for the base case, with an
extract from Table 8 (next page), showing where the discount factors for
the electricity calculations have come from.
Recurring sums – Base

NPV total £403 382.58
case
Start year can range from 1 to study period
End year can range from start year to study period
Item description Units per Unit cost Cost per Start End Discount NPV of Item assumptions
year * year year year factor item and source of
information
Annual maintenance 1 £10 000.00 £10 000.00 1 17 11·2741 £112 740.66
contract (boiler plus
AHU)
- - -
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04950 £12 375.00 6 7 1·4569 £18 029.10
Energy – gas 225 000.00 £0.04950 £11 137.50 8 10 1·9354 £21 555.09
(replacement boiler)
Energy – gas 225 000.00 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
Energy – gas 225 000.00 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
- - -
Energy – electricity 100 000.00 £0.13500 £13 500.00 1 5 4·3295 £58 447.94
(replacement AHU)
(replacement AHU)
* Annual consumption of gas and electricity is stated in Step 2: Part 1.

© BSRIA BG 5/2008
Extract from Table 8 (see page 42)
Spreadsheets for the alternatives are shown opposite. In the recurring costs for the base case and for
Alternative 1 there is one line item for maintenance, since the same payment applies to each year of the
study period. In alternative 2, the fact that maintenance is only required every two years is represented
by a series of single-year recurrences. In fact, these are the same as lump sums, but it is useful to keep
these maintenance costs separate from the proper lump sums so savings-to-investment ratios can be
calculated.
© BSRIA BG 5/2008
Recurring sums – Alternative 1 NPV total £385 964.09

Item description Units Unit cost Cost per Start End Discount Npv of item Item assumptions
per year year year year factor and source of
information
contract (boiler +
AHU)
- - -
Energy – gas 225 000 £0.04500 £10 125.00 1 5 4·3295 £43 835.95
Energy – gas 225 000 £0.04950 £11 137.50 6 10 3·3923 £37 781.28
Energy – gas 225 000 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
Energy – gas 225 000 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
- - -
Energy – electricity 90 000 £0.13500 £12 150.00 1 5 4·3295 £52 603.14

Item description Units Unit cost Cost per Start End Discount NPV of item Item assumptions
per year year year year factor and source of
information
Energy – gas 187 500 £0.04500 £8437 50 1 5 4·3295 £36 529.96
Energy – gas 187 500 £0.04950 £9281 25 6 10 3·3923 £31 484.40
Energy – gas 187 500 £0.05445 £10 209.38 11 15 2·6579 £27 135.73
Energy – gas 187 500 £0.05990 £11 230.31 16 17 0·8944 £10 044.48
- - -
Energy – electricity 75 000 £0.14445 £10 833 75 6 10 3·3923 £36 750.88
- - -
Maintenance 1 £14 000.00 £14 000.00 2 2 0·9070 £12 698.41
Maintenance 1 £14 000.00 £14 000.00 4 4 0·8227 £11 517.83
Maintenance 1 £14 000.00 £14 000.00 6 6 0·7462 £10 447.02
Maintenance 1 £14 000.00 £14 000.00 8 8 0·6768 £9475.75
Maintenance 1 £14 000.00 £14 000.00 10 10 0·6139 £8594.79
Maintenance 1 £14 000.00 £14 000.00 12 12 0·5568 £7795.72
Maintenance 1 £14 000.00 £14 000.00 14 14 0·5051 £7070.95
Maintenance 1 £14 000.00 £14 000.00 16 16 0·4581 £6413.56
In every option, the escalation of gas and electricity prices is dealt with by treating them as separate
recurring costs. It is important to notice that the beginning and end-years do not overlap, and that a
recurring cost calculated from year six to year 10 means, from the beginning of year six to the end of year
10, and therefore does cover a five-year period.

© BSRIA BG 5/2008
Finally, for alternative 3, the planning and construction period for the double-façade needs to be
accommodated, so one set of maintenance and energy costs relates just to year 1 when the existing plant is
still being used.

Item description Units Unit cost Cost per Start End Discount NPV of Item
per year year year year factor item assumptions
and source of
information
Maintenance for existing 1 £10 000.00 £10 000.00 1 1 0·9524 £9523.81
boiler and AHU
Energy – gas (existing 250 000 £0.04500 £11 250.00 1 1 0·9524 £10 714.29
boiler)
(existing AHU)
Annual maintenance 1 £7500.00 £7500.00 2 17 10·3217 £77 412.64

contract (new plant)
Energy – gas 100 000 £0.04500 £4500.00 2 5 3·3771 £15 196.93

(new boiler)
Energy – gas 100 000 £0.04950 £4950.00 6 10 3·3923 £16 791.68
(new boiler)
Energy – gas 100 000 £0.05445 £5445.00 11 15 2·6579 £14 472.39
(new boiler)
Energy – gas 100 000 £0.05990 £5989.50 16 17 0·8944 £5357.06
(new boiler)
(existing AHU)
(existing AHU)
(replacement AHU)
(replacement AHU)
© BSRIA BG 5/2008
Item description Units Unit cost Cost per Start End Discount Npv of item Item assumptions
per year year year factor and source of
year information
3.3 SUMMARISING NET Once all the separate net present values have been calculated for the
PRESENT VALUES
lump sum and recurring costs and benefits, these can be added together
to give an overall whole-life cost for each alternative.
Example of Step 3 Part 3: Overall whole-life costs
For project upgrade the summary is as follows:
Base case Alternative 1 Alternative 2 Alternative 3

NPV lump sums (capital costs and benefits) £68 648.93 £116 442.93 £147 000.00 £172 490.69
NPV recurring sums (operational and maintenance) £403 382.58 £385 964.09 £301 700.23 £307 203.65
NPV of total whole-life cost £472 031.51 £502 407.03 £448 700.23 £479 694.34
The lowest whole-life cost is given by alternative 2, which is

approximately £36 000 lower than the base case.
What level of difference between two whole-life costs is actually

significant, and shows that one option is clearly better than another?
There is no hard and fast answer to this. Some analysts like to apply a
simple rule of thumb, such as: two whole-life costs that are within 10%
of one another can be taken as equal. Guidance on the precision of
whole-life costs is given in Section 5.3.
3.4 CALCULATING The example used earlier in this section (and much of the discussion so
EQUIVALENT
ANNUAL COSTS
far in this guide), has been working towards a whole-life cost expressed
as a single net present value. If all the alternatives being compared
involve the same study period, then this is all that is needed in order to
apply the golden rule (lowest whole-life cost gives the most
economically advantageous solution). This is the preferred method for
whole-life costing analysis.
However, if the alternatives cannot use the same study period because
this would unfairly favour or penalise one or more options, then a bit
more work is required before comparisons can be made. Another reason
to use dissimilar study periods is where meaningful residual values cannot
be estimated. Remember that residual value is the income from selling
an asset at the end of the study period, either for re-use or for scrap.
This extra step is to use annual cost factors to turn a whole-life cost into
an annual equivalent. This is not as simple as dividing the whole-life cost
by the study period, as the discount rate also needs to be taken into
account. Table 9 in Appendix A1 gives annual cost factors for a range of
discount rates and study periods.

© BSRIA BG 5/2008
For example, suppose options are being compared for replacing an air
conditioning system. Perhaps the base case involves a chiller with an
expected life of 15 years, and alternative 1 involves a different make of
chiller, possibly more expensive, with an expected life of 19 years. The
running costs will differ, as will the maintenance regimes. A 15-year
whole-life cost cannot be compared with a 19-year whole-life cost as
these options are technically different – one gives four more years of
service than the other. A 19 year study period could be applied in both
cases, in which case the model must include a replacement chiller in the
base case at the end of year 15 and the residual value of the four-year old
chiller at the end of the study period. However, there might not be any
reliable data for this residual value, so including it could reduce the
precision of the whole-life costing.
Instead, two models can be assembled– one over a 15-year period for the
base case, and the other over 19 years for the alternative, using reliable
data. Then we convert the year 0 whole-life costs into equivalent annual
costs, over 15 years and 19 years respectively using annual cost factors.
This gives two annualised whole-life costs for the purposes of
comparison.
Using the example outlined above, with a 5% Discount Rate:
Table 4: Model of whole-life costing analysis.
Item Base case Alternative 1
Capital cost in year 0 £85 000 £105 000
Energy cost £2750 per year for 15 years £2500 per year for 19 years
Maintenance contract £1500 per year for 15 years £1300 per year for 19 years
Net present value of energy and

£44 114 (15-year factor is 10·3797) £45 924 (19-year factor is 12·0853)
maintenance
Total whole-life cost £129 114 £150 924
Annual cost factor from Table 9 0·0963 (15 years, 5%) 0·0827 (19 years, 5%)
Equivalent annual cost £12 434 per year £12 481 per year
Despite the capital cost for the base case being much less than that for the
alternative, the equivalent annual cost calculations actually show that
there is very little between the two options, in economic terms. The
golden rule still applies, but now to the equivalent annual costs. So the
base case is slightly more advantageous as it has the lower equivalent
annual cost.
When equivalent annual costs are being used (and quoted in reports), it is
very important that they are not confused with actual budget forecasts. It
is easy to inadvertently introduce this confusion since both are quoted as
£x per year. The actual costs that will be incurred for either of the two
options will be very different from the equivalent annual costs calculated,
not least because the actual annual running costs for energy and
maintenance will go up every year due to inflation.
© BSRIA BG 5/2008
FINE-TUNING
FINE-TUNING WHOLE-LIFE
WHOLE-LIFE COSTCOST MODELS
MODELS
4 FINE-TUNING WHOLE-LIFE COST MODELS
Once the whole-life cost models have been built and the first set of
whole-life costs calculated and compared, the models can be fine-tuned
and tested for sensitivity.
Whole-life costing analysis incorporates many assumptions and estimates.
This includes the timing of future events, such as equipment replacement,
future costs or benefits, and fundamental issues such as the length of the
study period or the discount rate to be applied. Ideally, these estimates
should be equally precise, but that is not always possible. Where particular
suspicions exist about an estimate, different values for this item of data can
be put into the models to gauge the effect. If there are no particularly
suspicious values in the input data, then this step can be bypassed.
The technique used to test the models with different choices of input data
is sensitivity analysis. When different figures for an item are put into the
models, the results will reveal the models’ degree of sensitivity to that
range of data.
Example of Step 4 Sensitivity analysis

If in the case of project upgrade the 10% cost escalation for gas every five
years cannot be fully justified. Instead it is believed the cost of gas could
escalate anywhere between 0% and 30% in addition to inflation every five
years, it would be important to know what effect this would have on the
whole-life costs calculated for the different options. To test this hypothesis
different cost data are input to the models and the effects studied. To save
the time and trouble of going through every small difference in gas prices, it
is usual to start with the most extreme values. First consider the situation if
gas price escalation is 0% – meaning that prices will only rise by the
underlying inflation rate that is built into the discount rate. The model for
the recurring costs in the base case is as follows.
Recurring sums – Base case NPV total £391 135.11

year year year year factor item and source of
information
contract (boiler + AHU)
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04500 £11 250.00 6 7 1·4569 £16 390.09
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 8 10 1·9354 £19 595.54
boiler)
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 11 15 2·6579 £26 911.47
boiler)
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 16 17 0·8944 £9055.88
boiler)
(replacement AHU)
(replacement AHU)

© BSRIA BG 5/2008
FINE-TUNING WHOLE-LIFE COST MODELS
This can be compared with the recurring sums (see the base case shown on page 29). The model now has
a constant unit cost for gas, rather than one that increases every five years. The net present values for each
five-years’ worth of gas have reduced and this has reduced the overall net present value from £416 322.25
to £391 135.11. If the same change is applied to the other alternatives, the following summary of net
present values emerges:
Base case Alternative 1 Alternative 2 Alternative3

NPV recurring sums (operational and £391 135.11 £373 880.53 £291 630.59 £301 833.17
maintenance)
Alternative 2 is still preferred, as it has the lowest whole-life cost. At the other extreme the gas price
escalation could be 30%. This assessment provides the following net present values:

maintenance)
The gap between the base case and alternative 1 has narrowed, to the point where there is no significant
difference between the results. The results can be plotted on a graph as shown in Figure 10:
Figure 10: The effect of different gas price rises on whole-life costs.
Although the graph reveals that alternative 2 is always the most economic in the range of values studied, at
higher levels of gas price escalation alternative 3 becomes the second preference. Alternative 1 is always
the least economic option. Note that the line for the base case is not straight. This is because the level of
consumption of gas changes part way through the study period. As gas becomes progressively more
expensive it has a greater effect on the whole-life cost.
© BSRIA BG 5/2008
FINE-TUNING WHOLE-LIFE COST MODELS
Any variable in the whole-life cost models can be analysed for its
sensitivity on the results. Figure 11 shows the results if the discount rate
is altered between 2% and 10%.
Figure 11: Effect on whole-life costs of varying the discount rate.
Figure 11 is a much more interesting picture. The order of preference of

the options changes markedly as the discount rate changes. Generally, if
a major change in a variable has no effect on the overall outcome of the
whole-life cost analysis (such as for gas as shown above), then, the
variability of this item can be ignored. If, on the other hand, the
outcome does change, as for discount rate, then it would be prudent to
investigate the assumptions behind that variable more closely.
Although the economic preference as shown by the lowest whole-life

cost may be clear, the effect of the other assessments shown in Figure 2
may affect the overall decision.
Sensitivity analyses can also be carried out for two or more variables at
the same time. However, the scenarios become much more complex
and are outside the scope of this guide.

© BSRIA BG 5/2008
INTERPRETING THE RESULTS
5 INTERPRETING THE RESULTS
The purpose of putting time and effort into developing robust whole-life
cost models is to provide reliable information to support decision-
making.
5.1 ALTERNATIVE The most common use of whole-life cost analysis is to be able to select
TECHNICAL
SOLUTIONS
between different alternative solutions to a single problem or scenario.
This uses the golden rule of whole-life costing analysis: The lowest
whole-life cost represents the most economically advantageous option.
This rule works equally well whether the whole-life cost, or the
equivalent annual cost is being studied. Bear in mind that, the level of
precision in the whole-life costing analysis will affect whether or not the
difference between two whole-life costs is significant (see Section 5.3).
Example of Step 5 Interpreting the results
The whole-life costs calculated on the basis of the original data are as
follows:
£472 031.51 £502 407.03 £448 700.23 £479 694.34
The golden rule leads us to conclude that alternative 2 is the preferred

option. A sensitivity analysis on the price of gas across all options does not
alter this conclusion.
A sensitivity analysis on the discount rate suggests that the base case would
be the preferred option at discount rates above 7·5%, with alternative 2
preferred at all discount rates below 7·5%.
The recommendation from the facilities manager for project upgrade is
that the best economic option should be either from alternative 2 or the
base case, depending on the long term view of how the discount rate may
change over the next 17 years.
While this is not conclusive it does eliminate two of the alternatives that
were considered in the whole-life costing analysis.
5.2 INDEPENDENT The results of a whole-life costing analysis can be used to help identify
PROJECTS
suitable candidates from among a basket of independent projects. This is
particularly useful when the available budget for immediate investment
in new projects is not sufficient to allow all of them to go ahead.
The basis of the judgement in these cases is the measure of how

efficiently each project turns its capital investment into savings. To do
this, the savings-to-investment ratio is used for each preferred alternative
for the different projects.
The process for applying this to a range of independent projects, each of

which has a number of options being modelled, is as follows:
1. Analyse each project separately using the whole-life costing

modelling and calculation techniques described in this guide. Keep
the net present values of lump sums separate from the net present
values of recurring sums
© BSRIA BG 5/2008
2. For each project in turn: identify the option with the lowest lump
sum net present value and designate this as the base case for that
project
3. For each project in turn: select the option with the lowest whole-life
cost and calculate the savings-to-investment ratio for that alternative,
in relation to the base case for that project:
Savings - to - investment ratio =
Base case recurring costs - alternative recurring costs
Alternative lump sums - base case lump sums
This equation shows why it is helpful to keep lump sums (investment
costs) separate from recurring sums (operating costs)
4. If the savings-to-investment ratio for the chosen alternative is less

than 1·0, use the base case instead with a savings-to-investment ratio
of 1·0
5. List the preferred alternatives for each different project and select
them in order of their savings-to-investment ratio, highest first, until
the available investment budget is exhausted by the cumulative lump
sum net present values.
Interpreting the results

In the table below, six different projects are being proposed but the
organisation wishes to limit its initial investment to £7000. The initial
costs and the total savings listed are those from the most economic
alternative for each of the separate projects.
Table 5: Example of projects with limited initial investment.
Initial cost Total saving Savings-to- Net saving

investment
ratio %
Project A £1000 £10 000 10 £9000
Project B £5000 £15 000 3 £10 000
Project C £3000 £10 000 3·3 £7000
Project D £4000 £6000 1·5 £2000
Project E £2000 £8000 4 £6000
Project F £1000 £5000 5 £4000
To select the projects which will give the maximum saving for the
£7000 investment, the projects need to be sorted according to their
savings-to-investment ratio. Projects are then selected until the
cumulative investment meets the available budget. In this case, projects
A, F, E and C are selected in that order. The use of savings-to-
investment ratio guarantees that this set of projects provides the
maximum cumulative net saving from among those being proposed.

© BSRIA BG 5/2008
Table 6: Example of projects with maximum savings for a limited initial investment.
Initial cost Total saving Savings-to- Net saving Cumulative Cumulative

investment investment net saving
ratio %
Project A £1000 £10 000 10 £9000 £1000 £9000
Project F £1000 £5000 5 £4000 £2000 £13 000
Project E £2000 £8000 4 £6000 £4000 £19 000
Project C £3000 £10 000 3·3 £7000 £7000 £26 000
Project B £5000 £15 000 3 £10 000 £12 000 £36 000
Project D £4000 £6000 1·5 £2000 £16 000 £38 000
5.3 PRECISION IN In earlier sections of this guide much of the data used in whole-life
WHOLE-LIFE
COSTING
costing is only known approximately. The scale of these
ANALYSIS approximations will affect the precision with which the calculated
whole-life costs can be quoted.
For guidance on the level of precision to which whole-life costs can

realistically be quoted, a parallel is drawn with the overall accuracy
expected of a cost estimate at different stages of design development.
The following figures are from Gowers Handbook of Project Management as
a basis, and reflect practices in a wide range of industries:
Pre-design (roughly equivalent to RIBA stage B or ACE stage C2) ±30%

Feasibility stage (roughly equivalent to RIBA stage C or ACE stage C3) ±25%
1
Detailed design stage (RIBA stage F or ACE stage C6) ±10%
Bid stage (incorporating data from specialist suppliers) ±5%
1
This stage is not quoted in Gower, it is included here as an interpolated guideline.
If project upgrade used data at detailed design stage, then the whole-life
costs can be expressed as follows:
Option Calculated whole-life cost Realistic range (±10%)

(see page 31)
Base Case £472 032 £425k – £520k
Alternative 1 £502 407 £450k – £550k
Alternative 2 £448 700 £405k – £490k
Alternative 3 £479 694 £430k – £530k
The conclusion from this reassessment of the whole-life costs is that there
is very little difference between any of the options.
A more sophisticated analysis of whole-life costs, particularly at the later

stages of design and project pricing, is to develop a frequency distribution
of the whole-life costs of different options by using probabilities of input
cost variation. However, this is outside the scope of this guide.
© BSRIA BG 5/2008
INTERPRETING
APPENDIX – LOOK-UP TABLES THE RESULTS A1
7
CONCLUSION
APPENDIX A1 – LOOK-UP TABLES
Table 7: Present value of £1 (discount factors for lump sums).

© BSRIA BG 5/2008
A1 APPENDIX – LOOK-UP TABLES
Table 8: Present value of £1 per year (discount factors for recurring sums).
© BSRIA BG 5/2008
APPENDIX – LOOK-UP TABLES A1
Table 9: Equivalent annual cost discount factors.

© BSRIA BG 5/2008
A2
A2 APPENDIX – EXAMPLE
APPENDIX – EXAMPLE
APPENDIX A2 – EXAMPLE
Step 1 Defining the problem
Project: Upgrade At ACME Ltd, the facilities manager expressed concerns at the annual
energy and maintenance costs of the company’s existing heating and
ventilation systems. The facilities manager has been comparing notes with
fellow facilities managers who work for other firms with similar sized offices
2
(2000 m ) and similar patterns of occupancy (weekdays, 07.00 – 19.00 h).
ACME’s directors have asked the facilities manager to investigate the case
for upgrading the systems to provide cost savings for the remainder of their
lease, which has 17 years to run.
To reach this point, the facilities manager had already collected some data
about the systems installed in the building and the operational costs of
running and maintaining them. This came from an inspection of the plant,
documentation in the operation and maintenance manuals, and collation of
the last five years energy bills for gas and electricity.
Step 2 Part 1: Identifying alternative solutions
In the case of project ‘Upgrade’, the facilities manager has identified four
alternative ways forward.
Base case Do nothing; retain the existing equipment, and live with existing levels of
energy usage, maintenance and expected service life, replacing the
equipment as and when it reaches the end of its life. The existing boilers
use 250 000 kWh of gas each year and the AHU uses 100 000 kWh of
electricity.
lower end of the available price range, which are 10% more energy efficient
than the existing plant and still require annual maintenance.
higher end of the available price range, which are 25% more energy
efficient than the existing plant and require maintenance only every two
years.
Alternative 3 Replace the existing boilers with a combined system comprising a smaller
boiler and a double façade on the south-facing side of the building to pre-
heat internal air in the winter. Maintain the existing air-handling unit but
replace it as per the base case. The combination of a small boiler and the
double façade reduces the gas required for heating by 60%.
Step 2 Part 2: Specifying the discount rate and study period
Project upgrade The discount rate and study periods are selected in line with corporate
policy. The whole-life costing analysis will use a real discount rate of
5%. The study period has been specified by the company’s directors as
17 years, as this is the length remaining on the lease for the office
building (see page 7).
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
Step 2 Part 3: Collecting data about timing and cost of activities
The following data has been collected by the facilities manager for the four
different alternatives for the aforementioned project upgrade. The
following cost data applies to all the scenarios.
Table 10: Cost data.
Cost item Current cost Price rise/fall on top of inflation (price
escalation)
Gas 4·5 pence per kWh 10% increase every five years
Electricity 13·5 pence per kWh 7% increase every five years
All other items As specified Increase in line with inflation (0% escalation)
For this analysis the facilities manager has decided to ignore equipment
decommissioning costs, and to base the residual value of nearly-new
equipment on straight-line depreciation over five years.
In addition to the general data outlined above, the following specific cost
and timing data has been assembled for each option.
Base case Annual maintenance contracts for the existing plant (boilers plus air-
handling unit) cost £10 000 per year. The boiler is expected to last
another seven years, but will then be replaced with the same boiler that is
being proposed for alternative 1. The air-handling unit is expected to last
another 10 years, but will then be replaced with the same air-handling unit
that is being proposed for alternative 1.
Alternative 1 The immediate (year 0) purchase and installation costs of the low-end
annual maintenance contracts for these items are the same as for the existing
boilers and air-handling unit. The life expectancies for the new boilers and
air-handling unit are 15 years and 18 years respectively.
Alternative 2 The immediate (year 0) purchase and installation costs of the high-end
two-yearly maintenance contracts for these items cost £10 000 for the
boilers and £4000 for the air handling unit. The life expectancies for the
new boilers and air-handling unit are 22 years and 25 years respectively.
Alternative 3 The purchase and installation costs of the smaller boiler is £40 000 and it
has a life expectancy of 20 years. The construction cost of the double
façade, associated air-circulation and control equipment is £125 000, and
the air-circulation equipment has a life expectancy of 20 years. A one-year
planning and construction period is required, during which the existing
equipment will still be used. The maintenance for the boiler will cost
£3500 per year. The maintenance of the solar-wall is incorporated into the
maintenance of the air-handling unit at a combined cost of £4000.

© BSRIA BG 5/2008
Step 3 Part 1: Calculation of lump-sum net present-values
For project upgrade, the summary information about discount rate, study
period and the date of the analysis is as follows:

Study period 17
To calculate the lump-sum costs for the four alternatives, the capital
expenditures under each scheme are used, with the relevant years in which
they occur (see the project timelines in FIG). This includes all one-off
payments such as initial investment, end-of-life replacement, major repairs,
decommissioning costs and any lump-sum benefits such as residual value at
the end of the study period.
Remember that any immediate expenditure is counted as year 0, and has a

discount factor of 1·000. Also note that alternative 1 includes replacement
of the boilers near the end of the study period. According to the
assumptions for this analysis, the new boiler is still new enough when the
study period ends to trigger the residual value calculation. As the residual
value is an income to the project, it is put into the lump-sum calculation as
a negative figure so it reduces the whole-life cost of this option, but
remember that the appropriate discount factor still needs to be applied.
© BSRIA BG 5/2008
Lump sums – Base case NPV total £68 648.93
factor source of
information
Replacement boiler 1 £75 000.00 £75 000.00 7 0·7107 £53 301.10
Replacement air
1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
handling unit
Example from Table 7 (see page 41)

© BSRIA BG 5/2008
factor source of
information
1 £75 000.00 £75 000.00 0 1·0000 £75 000.00
new boiler

1 £25 000.00 £25 000.00 0 1·0000 £25 000.00
Replace boiler 1 £75 000.00 £75 000.00 15 0·4810 £36 076.28
Residual value of
1 -£45 000.00 -£45 000.00 17 0·4363 -£19 633.35
boiler (2 years use)*
* See assumption about residual value for this analysis in Step 2: Part 3.
factor source of
information
1 £110 000.00 £110 000.00 0 1·0000 £110 000.00
new boiler

1 £37 000.00 £37 000.00 0 1·0000 £37 000.00
factor source of
information
1 £40 000.00 £40 000.00 1 0·9524 £38 095.24
new boiler
Design and install

1 £125 000.00 £125 000.00 1 0·9524 £119 074.62
double façade
Replace air handling

1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
unit
The outcome of these calculations is that the base case has the lowest whole-life cost, based on lump
sums. So if this was the only information being taken into account, then the golden rule would conclude
that the base case was the preferred solution.
© BSRIA BG 5/2008
Step 3 Part 2: Calculation of recurring-cost net present values
To calculate net present values for recurring costs, the regular items that
comprise operating and maintenance costs should be used. In the case of
project upgrade, these are the energy costs for gas and electricity, and the
maintenance contracts. The summary information is shown below:

Study period 17
The spreadsheet below shows the recurring costs for the base case, with an
extract from Table 8 (next page), showing where the discount factors for
the electricity calculations have come from.
Recurring sums – Base NPV total £403 382.58

case

year * year year year factor item and source of
information
contract (boiler plus
AHU)
- - -
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04950 £12 375.00 6 7 1·4569 £18 029.10
Energy – gas 225 000.00 £0.04950 £11 137.50 8 10 1·9354 £21 555.09
Energy – gas 225 000.00 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
Energy – gas 225 000.00 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
- - -
(replacement AHU)
(replacement AHU)
* Annual consumption of gas and electricity is stated in Step 2: Part 1.

© BSRIA BG 5/2008
Extract from Table 8 (see page 42)
Spreadsheets for the alternatives are shown opposite. In the recurring costs for the base case and for
Alternative 1 there is one line item for maintenance, since the same payment applies to each year of the
study period. In alternative 2, the fact that maintenance is only required every two years is represented
by a series of single-year recurrences. In fact, these are the same as lump sums, but it is useful to keep
these maintenance costs separate from the proper lump sums so savings-to-investment ratios can be
calculated.
© BSRIA BG 5/2008

Item description Units Unit cost Cost per Start End Discount NPV of Item assumptions
per year year year year factor item and source of
information
contract (boiler +
AHU)
- - -
Energy – gas 225 000 £0.04500 £10 125.00 1 5 4·3295 £43 835.95
Energy – gas 225 000 £0.04950 £11 137.50 6 10 3·3923 £37 781.28
Energy – gas 225 000 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
Energy – gas 225 000 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
- - -

Item description Units Unit cost Cost per Start End Discount NPV of Item assumptions
per year year year factor item and source of
year information
Energy – gas 187 500 £0.04500 £8437 50 1 5 4·3295 £36 529.96
Energy – gas 187 500 £0.04950 £9281 25 6 10 3·3923 £31 484.40
Energy – gas 187 500 £0.05445 £10 209.38 11 15 2·6579 £27 135.73
Energy – gas 187 500 £0.05990 £11 230.31 16 17 0·8944 £10 044.48
- - -

- - -
Maintenance 1 £14 000.00 £14 000.00 2 2 0·9070 £12 698.41
Maintenance 1 £14 000.00 £14 000.00 4 4 0·8227 £11 517.83
Maintenance 1 £14 000.00 £14 000.00 6 6 0·7462 £10 447.02
Maintenance 1 £14 000.00 £14 000.00 8 8 0·6768 £9475.75
Maintenance 1 £14 000.00 £14 000.00 10 10 0·6139 £8594.79
Maintenance 1 £14 000.00 £14 000.00 12 12 0·5568 £7795.72
Maintenance 1 £14 000.00 £14 000.00 14 14 0·5051 £7070.95
Maintenance 1 £14 000.00 £14 000.00 16 16 0·4581 £6413.56
In every option, the escalation of gas and electricity prices is dealt with by treating them as separate
recurring costs. It is important to notice that the beginning and end-years do not overlap, and that a
recurring cost calculated from year six to year 10 means, from the beginning of year six to the end of year
10, and therefore does cover a five-year period.

© BSRIA BG 5/2008
Finally, for alternative 3, the planning and construction period for the double-façade needs to be
accommodated, so one set of recurring maintenance costs relates to year 1 when the existing plant is still
being used.

Item description Units Unit cost Cost per Start End Discount NPV of Item
per year year year year factor item assumptions
and source of
information
Maintenance for existing 1 £10 000.00 £10 000.00 1 1 0·9524 £9523.81
boiler and AHU
Energy – gas (existing 250 000 £0.04500 £11 250.00 1 1 0·9524 £10 714.29
boiler)
(existing AHU)
Annual maintenance 1 £7500.00 £7500.00 2 17 10·3217 £77 412.64

contract (new plant)
Energy – gas 100 000 £0.04500 £4500.00 2 5 3·3771 £15 196.93

(new boiler)
Energy – gas 100 000 £0.04950 £4950.00 6 10 3·3923 £16 791.68
(new boiler)
Energy – gas 100 000 £0.05445 £5445.00 11 15 2·6579 £14 472.39
(new boiler)
Energy – gas 100 000 £0.05990 £5989.50 16 17 0·8944 £5357.06
(new boiler)
(existing AHU)
(existing AHU)
(replacement AHU)
(replacement AHU)
Step 3 Part 3: Overall whole-life costs
For project upgrade the summary is as follows.

maintenance)
© BSRIA BG 5/2008
Step 4 Sensitivity analysis

If in the case of project upgrade the 10% cost escalation for gas every five
years cannot be fully justified. Instead it is believed the cost of gas could
escalate anywhere between 0% and 30% in addition to inflation every five
years, it would be important to know what effect this would have on the
whole-life costs calculated for the different options. To test this hypothesis
different cost data are input to the models and the effects studied. To save
the time and trouble of going through every small difference in gas prices, it
is usual to start with the most extreme values. First consider the situation if
gas price escalation is 0% – meaning that prices will only rise by the
underlying inflation rate that is built into the discount rate. The model for
the recurring costs in the base case is as follows.
Recurring sums – Base NPV total £391 135.11

case
year year year year factor item and source of
information
contract (boiler + AHU)
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04500 £11 250.00 6 7 1·4569 £16 390.09
Energy – gas 225 000.00 £0.04500 £10 125.00 8 10 1·9354 £19 595.54
Energy – gas 225 000.00 £0.04500 £10 125.00 11 15 2·6579 £26 911.47
Energy – gas 225 000.00 £0.04500 £10 125.00 16 17 0·8944 £9055.88
(replacement AHU)
(replacement AHU)
This can be compared with the recurring sums (see the base case shown on page 29). The model now has
a constant unit cost for gas, rather than one that increases every five years. The net present values for each
five-years’ worth of gas have reduced and this has reduced the overall net present value from £416 322.25
to £391 135.11. If the same change is applied to the other alternatives, the following summary of net
present values emerges:
Alternative 2 is still preferred, as it has the lowest whole-life cost. At the other extreme the gas price
escalation could be 30%. This assessment provides the following net present values:

© BSRIA BG 5/2008
The gap between the base case and alternative 1 has narrowed, to the point where there is no significant
difference between the results. The results can be plotted on a graph as shown in Figure 10:
Figure 10: The effect of different gas price rises on whole-life costs.
Although the graph reveals that alternative 2 is always the most economic in the range of values studied,
at higher levels of gas price escalation alternative 3 becomes the second preference. Alternative 1 is
always the least economic option. Note that the line for the base case is not straight. This is because the
level of consumption of gas changes part way through the study period. As gas becomes progressively
more expensive it has a greater effect on the whole-life cost.
Step 5 Interpreting the results
The whole-life costs calculated on the basis of the original data are as
follows:

£472 031.51 £502 407.03 £448 700.23 £479 694.34
The golden rule leads us to conclude that alternative 2 is the preferred

option. A sensitivity analysis on the price of gas across all options does not
alter this conclusion.
A sensitivity analysis on the discount rate suggests that the base case would
be the preferred option at discount rates above 7·5%, with alternative 2
preferred at all discount rates below 7·5%.
The recommendation from the facilities manager for project upgrade is
that the best economic option should be either from alternative 2 or the
base case, depending on the long term view of how the discount rate may
change over the next 17 years.
While this is not conclusive it does eliminate two of the alternatives that
were considered in the whole-life costing analysis.
© BSRIA BG 5/2008
APPENDIXOF
APPENDIX – GLOSSARY – GLOSSARY
TERMS OF TERMS A3
A3
APPENDIX A3 – GLOSSARY OF TERMS

Alternative One of the options considered in the whole-life costing analysis. All the
alternatives for a single analysis must give the same functional results to the
client so the comparison between them is valid.
Base case The first option considered in the whole-life costing analysis. For an
upgrade of existing facilities it is usually the ‘do nothing’ option.
Discount rate The percentage by which costs or benefits occurring one year in the future
are deemed to be less valuable than costs or benefits today. In whole-life
costing analysis, the discount rate is the difference between the interest rate
charged for borrowing money and the inflation rate.
For public sector projects, the discount rate is 3·5% per annum.
Discount rates can be expressed using different time periods (such as

months) provided the study period is expressed in a consistent manner.
Equivalent annual cost The expression of a whole-life cost in annual terms rather than as a year 0
value. Equivalent annual costs are the only way to compare whole-life
costs for two alternatives where the models use different study periods.
Future value The value of a cost or benefit at some point in the future. For example,
the cost of repairing a pump might be £500 in year 8 of the project. Note
that this £500 is the same that this repair would cost today because in
whole-life costing analysis (the effects of general inflation can be
disregarded).
Lump sum cost A cost that occurs in one particular year in the whole-life cost model.
Typical lump sums relate to capital investment such as initial construction,
or plant replacement, or decommissioning costs.
Recurring costs can be expressed as a series of identical lump sum costs, but
this complicates the whole-life cost model and introduces unnecessary
calculations.
Present value The value of a cost or benefit at the present time. A future value is
discounted by applying the discount rate and knowing how many years (or
time periods) into the future it occurs.
Recurring cost Costs that occur at the same amount in successive years. For the simplest
recurring costs the start date is year 1. More complex recurring costs have
a start date after year 1.
Typical recurring costs would relate to energy costs, annual maintenance

contracts, rent payable to a landlord, or salary costs for staff.
Recurring benefits can also occur, but are less common.
Residual value The value of an asset (a site, a building, a component or an item of plant)
at the end of a study period. This is counted as a benefit to the project and
is entered in the whole-life costing model as a negative amount.

© BSRIA BG 5/2008
A3 APPENDIX – GLOSSARY OF TERMS
Savings to investment A measure of economic performance for a project, particularly where an

ratio alternative solution proposes additional capital investment in return for
operational savings.
In whole-life costing analysis, the savings-to-investment ratio can be used

to help select independent projects where the available resources will not
stretch to the most economically advantageous solution for every project
being proposed.
Study period The time over which a whole-life costing model is constructed. It is
usually measured in years but does not need to be, provided it is consistent
with the discount rate. For analyses in this guide, the study period always
starts at year 0, which represents ‘today’. Only costs and benefits that
occur within the study period are included in the whole-life costing
model.
The Treasury Green Book (Appraisal and Evaluation in Central Government)

suggests that 15-25 years would be a typical study period for a new
building.
Whole-life cost The single result, in monetary terms, from one whole-life costing model
calculated as the total of all the individual net present values from each item
of cost or benefit in the model.
Whole-life costing The overall process of identifying a range of potential solutions to a

analysis problem, one of which may be ‘do nothing’, and building whole-life
costing models for each solution, such that the most economically
advantageous option may be identified.
Whole-life costing analysis is one aspect of appraising options and should

always be considered in parallel with technical analyses, environmental
analyses, and so on.
Whole-life costing The mathematical model used to represent the costs and benefits of one of
model the possible solutions being considered within the whole-life costing
analysis. The model runs from year 0 to the end of the study period.
© BSRIA BG 5/2008
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A BSRIA Guide www.bsria.co.

Whole-Life Costing Analysis

BG 5-2008 (Whole-life cover) pre print.p65 3 29/05/2008, 15:19

Barry Nealon, Chairman.

The publication of Whole-Life Costing Analysis is a very welcome

While the principles of whole-life costing are simple, encouraging us

Whole-life costing is a much more intelligent way of thinking about

Reliance Facilities Management embraces the concept of whole-life

WHOLE-LIFE COSTING ANALYSIS

BSRIA is grateful to John Langmaid of ACDP (Integrated Building

BSRIA also acknowledges the support of Reliance Facilities

This guide is written by BSRIA’s David Churcher and designed and

WHOLE-LIFE COSTING ANALYSIS

02/06/08 WHOLE-LIFE COSTING Analysis © BSRIA BG 5/2008

This guide has been prepared by BSRIA to complement existing

The analysis of whole-life costs is something that we all do in our

There is also the issue of good stewardship of corporate or public

This guide presents a simple process for the practical calculation of

Whole-life costing analysis is just one of a number of assessment

Although the whole-life costs calculated during the analysis can be

WHOLE-LIFE COSTING ANALYSIS

BSRIA’s view, in line with that of HM Treasury, the Office of

Finally, it is worth considering that the whole-life costing analysis

WHOLE-LIFE COSTING ANALYSIS

INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS 2

1 DEFINING THE PROBLEM 7

3 CALCULATING WHOLE-LIFE COSTS 21

4 FINE-TUNING WHOLE-LIFE COST MODELS 35

5 INTERPRETING THE RESULTS 38

APPENDIX A1 – LOOK-UP TABLES 41

APPENDIX A3 – GLOSSARY OF TERMS 55

WHOLE-LIFE COSTING ANALYSIS

Table 1: Discount rates for long-term public sector projects 9

Figure 1: The step-by-step process for whole-life costing analysis 2

WHOLE-LIFE COSTING ANALYSIS

INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS

This guide presents a practical approach to whole-life costing analysis for

Define the problem

Develop the models

Interpret the results

Figure 1: The step-by-step process for whole-life costing analysis.

2 WHOLE-LIFE COSTING ANALYSIS

Whole-life costing analysis is about providing an economic appraisal of

Figure 2: Assessments required for project decision-making.

This guide explains why whole-life costing analysis is particularly

IMPORTANCE OF It is important that the underlying arguments supporting whole-life

WHOLE-LIFE COSTING ANALYSIS 3

In our own lives, we find no difficulty in balancing a higher capital

Part of this is due to the much greater complexity of the projects,

Comparison not prediction

Ignore common factors that occur in each alternative solution

4 WHOLE-LIFE COSTING ANALYSIS

But since whole-life costs are usually calculated in computer spreadsheets,

The opportunity cost of money

Stick to the study period

Whole-life costing analysis is a quantitative process

The future occurs in finite blocks of time

WHOLE-LIFE COSTING ANALYSIS 5

WHAT WHOLE-LIFE Make economic judgements between alternative technical solutions

Convert whole-life costs into equivalent annual costs

Judge the economic worth of independent projects

Take account of non-monetary costs and benefits

Compare alternatives that do not produce the same technical

6 WHOLE-LIFE COSTING ANALYSIS