Project Evaluation

Module Number: EBB_7_147

Whole Life Costing

(1)

Lynne Michael
Last week …..

Building Cost Management - Techniques

Estimating methods
Cost plan development
Single rates methods
Multiple rates methods
 Whole Life Costing (1)

Outline:
What the concept is all about
Who needs it?
Design options - Evaluation
Key problems and examples
 WHAT IS WHOLE LIFE COST?

Whole Life Cost (WLC) is a concept

• It is the total cost of a facility measured over

a period of financial interest of the owner
• It is sum of all funds expended or used in support
of a facility from its conception, through its
operation to the end of its useful life
• It includes the initial capital expenditure (for
planning, design, construction) and the operating
expenditure (for maintenance, energy, cleaning, etc)
WLC AND LIFE CYCLE COSTS (LCC)

RICS NRM3
RICS NRM1 & NRM3
RICS NRM3
RICS NRM1 & NRM3

SFG20 = standard maintenance specification for building engineering services;

CIBSE = Chartered Institution of Building Services Engineers
VISIBLE AND HIDDEN COSTS?
EXAMPLE – WLC OF ASCHOOL
 WHAT IS WHOLE LIFE COSTING?

It is an application of the concept of ‘whole life

cost’, an appraisal technique or method….

...that attempts to optimise or balance the cost of

acquiring AND cost of operating/ disposing of a
facility by quantifying all significant costs during
the life of the facility using present value/
discounting technique

• Sometimes the term ‘whole life appraisal’

isused where both cost and performance are
considered
 WHAT IS WLC USED FOR?
Decision making – all costs arising from a
project are relevant for investment decisions

• Compare and choose between design alternatives

• Facilitate realistic estimating, budgeting and

cash flow analysis

• Useful for planning and managing a facility

• Provide value for money

 WHY THE USE OF WLC ?(1)

The use of WLC is increasing for a number

of reasons
• Clients are changing - both public and private

o Treasury encouraging public sector clients

to take a whole life approach - shift from the
practice of separating capital and recurrent
budgets

o Increased awareness from private sector

clients in considering whole life
performance in making investment decisions
 WHY THE USE OF WLC? (2)

• Growing use of alternative procurement systems

focusing on operation, use or function of
facilities (e.g DBFO, BOT,PPP/PFI)

• Importance and growth of facilities

management (FM) industry

• Environmental debate on energy use and effects

on global warming
 WHY THE USE OF WLC ?(3)
Deterioration and Obsolescence!

Obsolescence Deterioration
Not easily controlled Can be controlled
Random process A continuous process
Can’t forecast Predictable

Technological Physical decay and

damage
Functional
Economic
Social Maintenance
Legal Repair
Renovation
Renewal
Modernisation
Retrofitting
Depreciati
on
Ashworth and Perera (2010)
 WHO USES WLC
Everybody involved in developing, owning,
operating or managing a facility
• Clients - most are not in the business of
construction but require a facility (e.g office,
factory or road) to provide a function
• Design and cost specialists (e.g architects,
engineers, quantity surveyors, etc.)
• Facility managers

• Manufacturers and suppliers of building materials

and components (e.g roofing, windows, carpets etc)

• Contractors (e.g Design and Build, BOT, PPP/PFI etc)

 LEVELS OF WLC APPLICATION

There are several levels of

application

Project
Element

Systems
Materials/
Finishes
 EVALUATION OF DESIGN OPTIONS (1)
WLC is used to evaluate alternative
solutions to design problems at different
levels

• Overall project

• Elements (e.g external walls, roof, doors, windows

etc)

• Materials or finishes (e.g aluminium, softwood,

 EVALUATION OF DESIGN OPTIONS (2)

Key factors to consider

• Cost factors (e.g. initial capital costs, operating

costs)

• Performance factors (e.g. thermal properties,

life expectancy, appearance/ aesthetics etc)

• Period of analysis (e.g. building life, functional

life, economic life, legal life)
 EVALUATION OF DESIGN OPTIONS (2)

Some sources of lifespan data:

• British Standards Institution (BSI)

• Building research organisations e.g. Building
Research Establishment (BRE)
• Building Services Research and Information
Association (BSIRA)
• Construction Industry and Information
Association
(CIRIA)
• Timber Research and Development Association
(TRADA)
• British Cement Association (BCA)

Component longevity or obsolescence?

 EVALUATION OF DESIGN OPTIONS (2)

Some sources of running cost:

• Building Running Costs (Indices) Online

• Building Maintenance Cost Indices

• BCIS component life expectancy

 LIFE CYCLE  Some typical
examples:

Sharma et al (2011) Building Type Typical

Life
(Years)
Car factory 10
Component/Material/ Typical
Office development 35-60
System Life
(Years) Supermarket 25-40
Hardwood windows 28-55 Local authority school 20
Carpet flooring 3-5 Social housing 60
Heating system 20-30 Cathedral 100
EVALUATION OF DESIGN OPTIONS (3)

• Economic factors (e.g discount rate,

inflation, interest rates, taxation etc)

• The option with the lowest whole life cost is

selected provided other performance criteria are met
(i.e all options must comply with minimum
specification)
TAXATION

 Capital expenditure (CapEx)

– Tax-deductible as
depreciation
– Capital allowances – see
specialist systems eg air
conditioning piping etc,

 Operating expenditure (OpEx)

– Generally tax deductible
– Based on level of corporation
tax
EXAMPLES – WLC OF BUILDINGS (1)
 EXAMPLES – WLC OF BUILDINGS (2)

Recall…. (1-PV)/r £11,918 = £87,715 / 7.360

EXAMPLES – WLC OF BUILDINGS (3)
EXAMPLES – WLC OF BUILDINGS (4)
EXAMPLES – WLC OF BUILDINGS (5)
Example – Heating System
A client is considering replacing his heating system. System A is the
standard scheme whereas System B relies on additional insulation
being provided. Evaluate the alternatives.
Initial Costs System A System B
Boiler £160,000 £145,000
Pipework and units £48,000 £42,000
Insulation £12,000 £32,000
Recurring Costs
Repairs £3,000 per annum £2,800 per annum
Replacement £40,000 (every 20 years) £32,000 (every 30
years)
Overhaul £15,000 (every 5 years) £15,000 (every 10
years)
Fuel £15,000 per annum £11,000 per annum

The expected life of each building is 60 years and the discount rate to
be used is 8%
 HEATING SYSTEM A

System A – NPV 8%/60 years

Initial costs (£160,000 + £48,000 + £12,000) £220,000
Repairs £3,000 x 12.377 £37,131
Replacement: Year 20 £40,000 x 0.21455 £8,582
Year 40 £40,000 x 0.04603 £1,841
Overhaul: Year 5 0.68058
Year 10 0.46319
Year 15 0.31524
Year 20 Replace
Year 25 0.14602
Year 30 0.09938
Year 35 0.06763
Year 40 Replace
Year 45 0.03133
Year 50 0.02132
Year 55 0.01451
Year 60 Demolish
£15,000 x 1.83920 £27,528
Fuel: £15,000 x 12.377 £185,655

TOTAL £480,797
ANNUAL EQUIVALENT (AE) £480,797/12.377 = £38,846
HEATING SYSTEM B

System B – NPV 8%/60 years

Initial costs (£145,000 + £42,000 + £32,000) £219,000
Repairs £2,800 x 12.377 £34,656
Replacement: Year 30 £32,000 x 0.09938 £3,180
Overhaul: Year 10 0.46319
Year 20 0.21455
Year 30 Replace
Year 40 0.04603
Year 50 0.02132
Year 60 Demolish
£15,000 x 0.74509 £11,176
Fuel: £11,000 x 12.377 £136,147

TOTAL £404,159
ANNUAL EQUIVALENT (AE) £404,159/12.377 =£35,654
EXAMPLES – USING DISCOUNT FACTORS (2)
EXAMPLES – USING ANNUITY FACTORS (3)
EXAMPLES – USING ANNUITY FACTORS (4)
EXAMPLES – FLOOR FINISH (6)
EXAMPLES – FLOOR FINISH (7)
 EXAMPLE – DIFFERENT LIFE CYCLES
A client is considering three alternative machinery options (A-C) with
unequal lives ranging from 5-8 years and with initial / annual costs
as shown below:
Option Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Cost
A £5000 £500 £500 £700 £900 £1200 N/A N/A N/A
B £5600 £300 £350 £550 £750 £1000 £1200 N/A N/A
C £5800 £200 £200 £300 £400 £600 £800 £1000 £1200

Determine the WLC of each option based on a

discount rate of 5%, indicating the preferred
option based on the lowest Annual Equivalent
(AE).
EXAMPLES – DIFFERENT LIFECYCLES
Using Discount Factors
Using Discount Factors
EXAMPLES – DIFFERENT LIFECYCLES
Past Exam Question
Past Exam Question - Answer
Using Discount Factors
Using Discount Factors
 KEY PROBLEMS (1)

General

• WLC methodology based on long-term

forecasting is still evolving - e.g recent research at
Dundee, Salford, Robert Gordon Universities

• Availability, reliability and consistency of data

o e.g. Data classification – accounting purposes
or budgeting needs?

• Difficulties in predicting the future - e.g.

policy, economic, social, environmental,
technological changes
 KEY PROBLEMS (1)

General ….

• Maintenance policies: budget-oriented or needs-

driven? …….or perhaps least initial cost mostly?
o design and cost estimating fees are traditionally
a percentage of the total project cost. Although
new delivery options emerging.

• Causes of component failure

o e.g. Bad design? poor specification? poor
workmanship and inspection standards?

• Delay in problem detection, reporting or

repair
 KEY PROBLEMS (2)

Specific

• Performance factors - life cycle, physical,

functional, economic life (problems with
obsolescence due to changes or vagaries in
fashion)

• Economic factors – difficulties in predicting

discount rates, interest rates, inflation and
taxation
END OF
LECTURE

Questions?