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Topic 4 – Life Cycle Costing

Topic 4 – Life Cycle Costing. Learning Objectives. After studying this topic you will: be able to define Life Cycle Costing (LCC) understand the objectives of LCC know the components of total cost of building understand the LCC techniques understand the difficulties in assessing LCC

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Topic 4 – Life Cycle Costing

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  1. Topic 4 – Life Cycle Costing

  2. Learning Objectives After studying this topic you will: • be able to define Life Cycle Costing (LCC) • understand the objectives of LCC • know the components of total cost of building • understand the LCC techniques • understand the difficulties in assessing LCC • know how to conduct LCC • understand the implementation problem

  3. Definition • An economic evaluation which takes into account of all relevant costs such as capital, finance, energy, maintenance and salvage value over the client’s time horizon and adjusting to an equivalent time difference to give the total cost in present value terms.

  4. Example Cost PV Roof A $12,000 $12,000 Initial Construction Replacement after 30 years $12,000 $2,089.32 $24,000 $14,089.32 Total Cost Roof B $18,000 $18,000 Initial Construction

  5. INITIAL COSTS USER COSTS RUNNING COSTS OCCUPATIONAL CHARGES Land Construction Professional fees Rates Insurance Modifications & Alterations Estate control (management) Maintenance Operating services (operating & cleaning) Energy TOTAL COSTS (LIFE SPAN OF BUILDING)

  6. PLANNED MAINTENANCE UNPLANNED MAINTENANCE Preventive maintenance Corrective (including emergency maintenance) Corrective (including emergency maintenance) Schedule maintenance Condition-based maintenance MAINTENANCE

  7. Maintenance Costs How can it be reached? How can it be cleaned? How long will it last? How can it be replaced?

  8. Breakdown of typical total costs for various types of buildings

  9. Objectives • To achieve a more cost effective design • To achieve the desired function, quality and standard of works for the building as a whole • Identify all relevant costs • To achieve least total cost commitment • Establish historical data

  10. Life Cycle Costing Techniques • Life Cycle Cost Analysis (LCCA) • Life Cycle Cost Management (LCCM) • Life Cycle Cost Planning (LCCP)

  11. Life Cycle Cost Analysis • The collection and analysis of historical data on the actual costs of occupying comparing buildings, having regard to running costs and performance

  12. Life Cycle Cost Management • Identifies those areas in which the costs of using the building as detailed by the LCCA can be reduced. • To assist client to compare building costs in a meaningful way and in assessing and controlling occupancy costs throughout the life of a building.

  13. Life Cycle Cost Planning • Part of LCCM • The prediction of total cost of building • Planning the timing of work and expenditure on the building • Updated as necessary

  14. Budget Forecast Level 1 Feasibility Budget Estimate Level 2 Budget Cost Plan and Price Prediction Outline Proposal Level 3 Scheme Design Detailed Cost Plan Measurement information Client in conjunction with QS establishes Budget range for running cost targets for total building for investment appraisal Inception Establish tax aspects of the building Identify historical data on running costs of homogeneous building Modify running cost targets in light of further information. Breakdown running costs into RM/m2 items (Budget LCCP) Establish use pattern of the building. Define discount rate and produce brief LCCP.

  15. Level 3 Produce detailed LCCP for building Detailed Cost Plan Measurement information Scheme Design Produce LCCP for individual elements Compare LCCP with capital cost plan Evaluate alternative design options for running cost implications Detail Design Undertake cost checks on LCCP as design develops Produce taxation cost plan Production Information Cost Checks Compare capital cost plan with LCCP Check LCCA with LCCP Bill of Quantities Produce detailed information on taxation cost plan Detailed LCCA after 12 Months Occupancy Construction Assist client cash flow by producing details on Capital Allowances as cost is incurred Cost Checks

  16. Difficulties in Assessing Life Cycle Costs • Accurately assessing the maintenance and running costs of different materials, processes and systems • Initial, annual and periodic payments have to be related to a common basis for comparison purposes • Taxation rates and allowances are subject to considerable variation over the life of the building

  17. Difficulties in Assessing Life Cycle Costs • Selection of suitable interest rates for calculation involving periods of up to 60 years • Inflationary tendencies may not affect all costs in a uniform manner • Client’s interest on projects are to be sold as an investment on completion

  18. Difficulties in Assessing Life Cycle Costs • The initial funds available to the building client are severely restricted • Changes of taste and fashion, changing statutory requirements for buildings and the replacement of worn out components by superior updated items • Forecasting lives of different types of buildings

  19. 3 Key Concepts • Time value of money • Time horizon • Relevant costs

  20. Time value for money • Money is capable of growth • The value of $1 today is definitely not equal to $1 in years to come • Apply discounting techniques to enable comparison analysis

  21. Time horizon • The time scale when the client is affected either by incurring expenses or through using the facility until such time his interest in the physical asset ceases

  22. Time horizon (contd.) • Categories of obsolescence • Economic obsolescence • Functional obsolescence • Technological obsolescence • Social and legal obsolescence • Physical obsolescence

  23. Useful lives of buildings (years)

  24. Useful lives of buildings components/equipments (years)

  25. Acquisition costs Construction costs Installation costs Operation/running costs Maintenance costs Replacement costs Fees/charges Demolition, salvage or resale value Other costs such as loan repayment, taxation, etc Relevant costs

  26. When to implement • Impact during the early stages of the design phase i.e. • inception • schematic design • design development phase

  27. When to implement • Important decisions during the early stages • To proceed or to abandon • Best/better ways of utilization of available resources • Choice between alternative design solutions • Financial implications of the options and its selection

  28. How to implement • State the required objectives & constraints • Identify possible options • Collect the relevant data/information • Formulate parameters/assumptions • Identify all relevant costs • Compare options using appropriate appraisal techniques • Apply sensitivity analysis • Report the recommendation

  29. LCC Techniques • Selection depend on the following criteria • Project circumstances • Evaluation stage • Availability of time, resources and expertise • Degree of accuracy required

  30. LCC Techniques • Two categories • Non-discounting techniques • Discounting techniques

  31. Example 1 To find the PV of the running costs of a building with a life of 60 years. Annual cleaning cost = $1,600 Annual decoration cost = $600 Annual repairs = $400 External painting = $4,000 every 5 years A new roof every 30 years = $ 40,000. Interest rate = 5%

  32. Solution 1 $ 49,216 $ 13,489 $ 9,255 $ 71,960

  33. Example 2 To find the annual equivalent cost over the life of the building. Initial construction cost = $400,000 Annual cleaning and minor repairs cost = $16,000 Quinquennial repairs = $40,000 Replacement costs at every 20 years = $80,000 Demolition costs = $5,800 Salvage value at the end of 60 years = $1,800 Life of the building = 60 years Interest rate = 5%; ASF = 2 ½%

  34. Solution 2 Annual equivalent $22,940 Building $400,000 x 0.05735 Interest 5% = 0.05 = 0.00735 0.05735 $16,000 Cleaning and minor repairs $40,000 x 3.3722 = $134,888 Large repairs Replacement $80,000 x (0.3769+0.1420) = $ 41,512 = $ 214 = $176,614 0.05735 $ 10,129 $ 49,069 Annual equivalent of LCC

  35. Example 3 Compare the LCC of the following alternative building schemes. Life of building = 60 years Interest rate = 5% ASF = 2 ½%

  36. Solution 3 Scheme A Cost of site = $40,000 $ 2,000 Annual equivalent in perpetuity at 5% = $40,000 x 0.05 =$200,000 Cost of building First replacement cost in 20 years Second replacement cost in 40 years Replacement cost in 30 years $219,858 PV of building and replacement costs Annual equivalent over 60 years 0.05 Interest at 5% ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 12,609 Annual running costs $ 6,000 LCC $ 20,609

  37. Solution 3 Scheme B Cost of site = $40,000 $ 2,000 Annual equivalent in perpetuity at 5% = $40,000 x 0.05 =$260,000 Cost of building First replacement cost in 20 years Second replacement cost in 40 years Replacement cost in 30 years $272,927 PV of building and replacement costs Annual equivalent over 60 years 0.05 Interest at 5% ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 15,652 Annual running costs $ 4,800 LCC $ 22,452

  38. Example 4 A building which is to be demolished in 25 years times requires repainting now and will also require repainting every 5 years until demolition. The cost of each repainting is estimated at $1,200. In 10 years time $8,000 is to be spent on alterations, and $600 will be spent at the end of each year on sundry repairs. What sum must be set aside now to cover the cost of all work, assuming that the rate of interest obtainable on investment is 6%, and ignoring the effect of taxation?

  39. Solution 4

  40. Example 5 An electrically operated 8 person lift installation to serve 6 floors is required for a new building with planned life of 30 years. The initial cost of the lift installation is $42,000, and the running costs are made up of wiping down finishes 12 times a year at $1.60, vacuuming the floor 100 times a year at $0.12, replacing the carpet tile flooring and painting the lift car every 5 years at $300, replacing the installation after 20 years at a cost of $45,000 and allowing for a comprehensive maintenance contract at $920 p.a. (excluding the first year). Calculate the PV of the LCC for the lift installation at a compound rate of interest of 5%.

  41. Solution 5

  42. Example 6 A temporary building is to be replaced in 15 years’ time by a new building which it is estimated will then cost $240,000. What sum must be set aside at the end of each year, if the interest rate on investment (after deducting for tax) is 3%, to accumulate to the building cost figure in 15 years?

  43. Solution 6 $240,000 Cost of new building in 15 years’ time Sinking fund to provide $1 in 15 years at 3% Sum to be set aside = 240,000 x 0.05377 = $12,905

  44. Example 7 Lift in government building consume 2M Kwh electricity p.a. Present cost of electricity = RM0.06/Kwh Extensive overhaul & modification = RM100,000; reduce power consumption by 10% p.a. Equipment life extended to 25 years. No overhaul, equipment last 6 years, after which, overhaul not feasible New equipment = RM400,000 & cost RM20,000 to remove & dispose old equipment New equipment is 25% more energy efficient than current without overhaul & estimated life of exceeding 25 years Maintenance contract = RM1,000 p.a. Bank interest rate = 12% Inflation (general) = 4% Inflation (fuel) = 6%

  45. Solution – Example 7 Options available • Overhaul & modification • No overhaul, but replace with new after 6 years • Replace with new equipment now

  46. Solution – Example 7

  47. Solution – Example 7

  48. Option 1 – Overhaul and modification RM 100,000 Capital cost for overhaul & modify Operating cost Energy reduced by 10% annually Therefore, cost of energy consumption = RM120,000 x 90% = RM108,000 PV RM1 p.a. for energy cost over 25 years time horizon = RM108,000 x 13.207 RM1,426,356 Maintenance Cost PV RM1 p.a. for maintenance = RM1,000 x 10.964 RM 10,964 RM1,537,320 Total Life Cycle Cost for Option 1

  49. Solution – Example 7

  50. Option 2 – No Overhaul but replace with new after 6 years Operating cost PV RM1 p.a. for energy consumption over 6 years = RM120,000 x 4.97 RM 596,400 Maintenance cost PV RM1 p.a. for maintenance cost over 25 years time horizon = RM1,000 x 4.667 RM 4,667 Capital cost/Replacement For new lift equipment = RM400,000x1.046x0.6411 RM 324,478 Operating cost (thereafter) PV RM1 p.a. for fuel deferred 6 years = RM120,000 x 75% x 8.236 RM 741,240 Maintenance cost PV RM1 p.a. for maintenance deferred 6 years = RM1,000 x 6.297 RM 6,297 Disposal RM20,000 x 1.046 x 0.6411 RM 16,224 Total Life Cycle Cost for Option 2 RM1,689,306

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