By Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al-Hammad, Dr. M. Osama Jannadi, Mr. Sami Abu Saad

1. Assessment of the Problems of Application ofLife Cycle Costing in ConstructionProjects in Saudi Arabia By Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al-Hammad, Dr. M. Osama Jannadi, Mr. Sami Abu Saad College of Environmental Design, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia

2. CONTENTS • Introduction • Objectives of the Study • Methodology • Problems of Applications • Results of the Study • Other Problems • Conclusions

3. 1. INTRODUCTION Life Cycle CostingConcept O In the past, economic assessment of alternative designs,construction, or other investment has been based on initial (first cost which ignores the total cost incurred for the investment throughout its lifetime.O The concept of life cycle costing provides an economic tool which takes into account total costs for an invest- ment during its life span.

4. 1. INTRODUCTION (Continued) O The life cycle costing can be defined as follows: aneconomic assessment of alternatives designs, construction, or other investment considering all significant costs of initial costs and ownership costs over economic life of each alternative, expressed in equivalent economic units.O The life cycle costing analysis can not be carried out without considering the following: A - total costs B - concept of the time value of money

5. 1. INTRODUCTION (Continued) A - Total CostsO initial costs O ownership costs O Initial costs. They include the followings: - initial construction costs - design costs - land costs - finance costsO Owner costs. They include the followings: - operating costs o maintenance costs o utility bills o staffing fee

6. 1. INTRODUCTION (Continued) B - The concept of the time value of money o The value of money today is not equal to the same amount of money in the past or in the future. o The concept of the time value of money considered the following: - initial costs (P) (present value) - discount or interest rate (i%) - life time of an investment (n)

7. 1. INTRODUCTION (Continued) o To make an equivalent value of money for an assessment along its economic life, many methods can be used such as: 1. Present worth method 2. Uniform annual method

8. Project A Project B First Cost Annual Maintenance Cost Annual Labor Cost Extra Income Taxes Salvage Value Life, Years $26,000,000 $800,000 $11,000,000 --- $2,000,000 6 $36,000,000 $300,000 $7,000,000 $2,600,000 $3,000,000 10 1. INTRODUCTION (Continued) An Illustrated Example: If the minimum required rate of return is 15% , which project should be selected ? Using Uniform Annual Worth Method EUAC A = $18,442,000 EUAC B = $16,925,000

9. 2. OBJECTIVES OF THE STUDY o To identify the problems of application of life cycle costing in Saudi Arabia. o To assist the relative severity of those problems from point of views of the government and the private sectors.

10. 3. RESEARCH METHODOLOGY This investigation was undertaken into two phases. • The first phase include a literature search and interviews. * The identification of five groups of main problems and a total of 26 specific problems • In the second phase * A survey was conducted to assess the relative severity of these causes. * The survey was filled buy 11 government agencies and 12 consulting offices that apply life cycle costing.

11. 4. PROBLEMS OF APPLICATION There are five main categories of problems of life cycle costing:First: Knowledge ProblemsSecond: Data ProblemsThird: Procedures ProblemsFourth: Management ProblemsFifth: Cost Problems

12. 4. PROBLEMS OF APPLICATION (Continued) First: Knowledge Problems:1. Unfamiliarity with design-to-cost concept2. Lack of knowledge of the concept 3. Unknown relation between initial cost and future cost4. Unavailability of enough references

13. 4. PROBLEMS OF APPLICATION (Continued) Second: Data Problems5. Unavailability of capital cost data:6. Unavailability of maintenance data: 7. Unavailability of operation data:8. Unavailability of discount or interest rate data9. Unavailability of time life data10. Large volume of data needed11. Unavailability of standard method for collecting & recording of data 12. Unavailability of data base management system

14. 4. PROBLEMS OF APPLICATION (Continued) Third: Procedures Problems:13. Unreliability of decision taken14. Lack of Integrity of forecast15. Majority of LCC calculations involve uncertainty16. Unavailability of qualified staff17.Unavailability of qualified consultants 

15. 4. PROBLEMS OF APPLICATION (Continued) Fourth: Management Problems:18. Unacceptance of the concept19. Government non-enforcement20. Management (client) pressure to meet budget limit21. Management (client) pressure to meet time deadline on design:22. Unclear benefits of LCC to management (client) 23. Improper planning and control of management tasks at different LCCstages

16. 4. PROBLEMS OF APPLICATION (Continued) Fifth: Cost Problems:24. Cost to be paid for designer to conduct LCC:25. Cost to be paid for collection of data:26. Difficulties in defining cost elements:

17. 5. RESULTS OF THE SURVEY Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups. The severity indexes were grouped to reflect the respondents' ratings as follows:* Strongly severe 87.5 < I  100* Severe 62.5 < I 87.5 * Somewhat severe 37.5 < I 62.5* Somewhat not severe 12.5 < I  37.5* Not severe 0 < I  12.5

18. 5. RESULTS OF THE SURVEY (continued) Table 1 shows the severity index for individual problems in government agencies. Table 2 shows the severity index for individual problems in consulting offices. In the same manner. Table 3 shows the severity index for problem groups in government.Table 4 shows the severity index for problem groups in consulting offices.

19. Problem Definition [1] Strongly Severe [2] Severe [3] Somewhat Severe [4] Somewhat Not Severe [5] Not Severe [6] Severity Index [7] Uniformilization of design-to-cost concept Lack of knowledge of the concept Unknown relation between initial and running cost Unavailability of satisfactory references 4 5 2 5 2 3 3 2 4 2 5 3 0 1 1 0 1 0 0 1 68 77 64 73 5. RESULTS OF THE SURVEY (continued) Table 1 - Results of Government Agencies' Survey of Problems (a)Knowledge Problems

20. Problem Definition [1] Strongly Severe [2] Severe [3] Somewhat Severe [4] Somewhat Not Severe [5] Not Severe [6] Severity Index [7] Uniformilization of design-to-cost concept Lack of knowledge of the concept Unknown relation between initial and running cost Unavailability of satisfactory references 3 0 0 1 2 5 4 2 4 4 3 7 1 2 1 0 2 1 4 2 56 52 40 50 5. RESULTS OF THE SURVEY (continued) Table 2 - Results of Consulting Offices’ Survey of Problems (a)Knowledge Problems

21. Group Group Description Average Sev. Index A B C D E Knowledge Problems Data Problems Procedure Problems Management Problems Cost Problems 70 69 74 73 61 5. RESULTS OF THE SURVEY (continued) Table 3 - Severity Index of Problem Groups in Government

22. Group Group Description Average Sev. Index A B C D E Knowledge Problems Data Problems Procedure Problems Management Problems Cost Problems 49 60 56 57 55 5. RESULTS OF THE SURVEY (continued) Table 4 - Severity Index of Problem Groups in Firms

23. 5. RESULTS OF THE SURVEY (continued) Based on the foregoing results shown in Tables 1, 2, 3 & 4, the following could be indicated: For government agencies:* Individual problems: Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe".* Problem Groups: Four groups fall in the "severe" category and one group falls in the "somewhat severe".

24. 5. RESULTS OF THE SURVEY (continued) For consulting firms:* Individual Problems: Six individual problems rated as "severe" and twenty problems rated "somewhat severe".* Problem Groups: All groups fall in the "somewhat severe" category.

25. 5. RESULTS OF THE SURVEY (continued) For government agencies:* Individual Problems: Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively.* Problem Groups: Procedure problems, management problems and knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively.

26. 5. RESULTS OF THE SURVEY (continued) For consulting firms:* Individual Problems: Unavailability of data base management systems and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively.* Problem Groups: Data problems, management problems, and procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively.

27. 6. OTHER PROBLEMS ADDED BY RESPONDENTS • *In government agencies: Contradiction of LCC concept to government policy which is based on initial cost in selecting alternatives and in bidding. • *In consulting offices:Resistance of management to introduction of new concepts. • Unclear concepts to clients. • Time and cost incurred to update the in-house data base management system.

28. 7. CONCLUSION It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application. However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are: • client or management pressure to meet deadlines for design approval. • lack of human resources (qualified consultants and staff) and material resources (sufficient data and data quality)

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