© Chia Fah Choy 2005 Topic 4 – Life Cycle Costing.

© Chia Fah Choy 2005

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• know how to conduct LCC• understand the implementation problem


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.


Example

Roof AInitial Construction

Cost PV

Replacement after 30 years

$12,000 $12,000

$12,000 $2,089.32

$24,000 $14,089.32Total Cost

Roof BInitial Construction $18,000 $18,000


TOTAL COSTS(LIFE SPAN OF BUILDING)

MaintenanceOperating services

(operating & cleaning)Energy

RatesInsuranceModifications &AlterationsEstate control (management)

RUNNING COSTS OCCUPATIONAL CHARGES

LandConstruction

Professional fees

USER COSTSINITIAL COSTS


MAINTENANCE

UNPLANNED MAINTENANCE

PLANNED MAINTENANCE

Schedule maintenance

Condition-based maintenance

Preventive maintenance

Corrective (including emergency maintenance)

Corrective (including emergency maintenance)


Maintenance Costs

How can it be reached?How can it be reached?

How can it be cleaned?How can it be cleaned?

How long will it last?How long will it last?

How can it be replaced?How can it be replaced?


Breakdown of typical total costs for various types of buildings

Type of annual cost Houses High Flats

Industrial Buildings

Schools Offices

Maintenance 14 12 18 16 13

Fuel and attendance for heating and lighting

24 24 30 18 29

Initial costs (amortized)

Building

Land and development

48

14

56

8

47

5

51

15

47

11

Total Costs 100 100 100 100 100


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


Life Cycle Costing Techniques

• Life Cycle Cost Analysis (LCCA)

• Life Cycle Cost Management (LCCM)

• Life Cycle Cost Planning (LCCP)


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


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.


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


InceptionInception

FeasibilityFeasibility

Outline Outline ProposalProposal

SchemeSchemeDesignDesign

Measurement information

Detailed Cost Plan

Budget Forecast

Level 1

Budget Estimate

Level 2

Budget Cost Plan and Price Prediction

Level 3

Client in conjunction with QS establishes Budget range for running cost targets for total building for investment appraisal

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.


Cost Checks

SchemeSchemeDesignDesign

Detailed Cost Plan

Measurement information

Level 3

Bill of Bill of QuantitiesQuantities

ConstructionConstruction

Detail Detail DesignDesign

Cost Checks Production Production InformationInformation

Detailed LCCA after 12 Months Occupancy

Check LCCA with LCCP

Assist client cash flow by producing details on Capital Allowances as cost is incurred

Produce detailed information on taxation cost plan

Compare capital cost plan with LCCP

Produce taxation cost plan

Undertake cost checks on LCCP as design develops

Evaluate alternative design options for running cost implications

Produce LCCP for individual elementsCompare LCCP with capital cost plan

Produce detailed LCCP for building


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



• 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



• 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


3 Key Concepts

• Time value of money

• Time horizon

• Relevant costs


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


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


Time horizon (contd.)

• Categories of obsolescence– Economic obsolescence– Functional obsolescence– Technological obsolescence– Social and legal obsolescence– Physical obsolescence


Useful lives of buildings (years)

Departments 40 Banks 50

Dwelling 45 Factories 45

Farm buildings 25 Hotels 40

Machine shops 45 Office buildings 45

Stores 50 Theaters 40

Warehouses 60


Useful lives of buildings components/equipments (years)

Large equipment 20 Medium equipment 15

Small equipment 10 Boilers/furnaces 20

Gas burners 16 Oil burners 10

Radiators 25 Awnings 5

Clocks 15 Elevators 25

Fire alarm systems 25 Incinerators 14

Lighting fixtures 15 Plumbing fixtures 25

Roofs 20 Transformers 25

Water tanks (metal) 25 Window screens 10


Relevant costs

• 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


When to implement

• Impact during the early stages of the design phase i.e. – inception– schematic design– design development phase


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


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


LCC Techniques

• Selection depend on the following criteria– Project circumstances– Evaluation stage– Availability of time, resources and

expertise– Degree of accuracy required


LCC Techniques

• Two categories– Non-discounting techniques– Discounting techniques


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%

Solution 1

0.051.05

1-1

$2,600 repairs and sdecoration cleaning, PV60

$ 49,216

3722.3$4,000 painting External $ 13,489

301.05

1 $40,000t replacemen Roof $ 9,255

$ 71,960Year 5%5 0.7835

10 0.613915 0.481020 0.376925 0.295330 0.231435 0.181340 0.142045 0.111350 0.087255 0.0683

Total 3.3722

nrPV

1

1


Example 2

To find the annual equivalent cost over the life of the building.

Initial construction cost = $400,000Annual cleaning and minor repairs cost = $16,000Quinquennial repairs = $40,000Replacement costs at every 20 years = $80,000Demolition costs = $5,800Salvage value at the end of 60 years = $1,800Life of the building = 60 yearsInterest rate = 5%; ASF = 2 ½%

Solution 2

1025.01

025.0 1/2% 2at years 60for ASF 60

Year 5%5 0.7835

10 0.613915 0.481020 0.376925 0.295330 0.231435 0.181340 0.142045 0.111350 0.087255 0.0683

Total 3.3722 nr

PV

1

1

Annual equivalentBuildingInterest 5% = 0.05

= 0.007350.05735

$400,000 x 0.05735 $22,940

Cleaning and minor repairs $16,000

Large repairs $40,000 x 3.3722 = $134,888Replacement $80,000 x (0.3769+0.1420) = $ 41,512

1.05

1$1,800-$5,800 Value eSalvageabl-Demolition

60 = $ 214

= $176,6140.05735

$ 10,129

Annual equivalent of LCC $ 49,069


Example 3

Compare the LCC of the following alternative building schemes.

Scheme A Scheme B

Cost of building 200,000 260,000

Site cost 40,000 40,000

Annual running cost 6,000 4,800

Replacement cost at every 20 years 24,000 16,000

Replacement cost at every 30 years 32,000 20,000

Life of building = 60 yearsInterest rate = 5%ASF = 2 ½%

Solution 3

Scheme ACost of site= $40,000Annual equivalent in perpetuity at 5% = $40,000 x 0.05 $ 2,000

Cost of building =$200,000

First replacement cost in 20 years 045,9$05.1

1000,24$

20

Second replacement cost in 40 years 409,3$05.1

1000,24$

40

Replacement cost in 30 years 404,7$05.1

1000,32$

30

$219,858PV of building and replacement costs

Annual equivalent over 60 years

Interest at 5% 0.05

ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 12,609

Annual running costs $ 6,000LCC $ 20,609

Solution 3

Scheme BCost of site= $40,000Annual equivalent in perpetuity at 5% = $40,000 x 0.05 $ 2,000

Cost of building =$260,000

First replacement cost in 20 years 027,6$05.1

1000,16$

20

Second replacement cost in 40 years 273,2$05.1

1000,16$

40

Replacement cost in 30 years 627,4$05.1

1000,20$

30

$272,927PV of building and replacement costs

Annual equivalent over 60 years

Interest at 5% 0.05

ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 15,652

Annual running costs $ 4,800LCC $ 22,452


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?


Solution 4

Cost of painting 1200Present repainting 1.00000PV of $1 in 5 years at 6% 0.74726PV of $1 in 10 years at 6% 0.55839PV of $1 in 15 years at 6% 0.41727PV of $1 in 20 years at 6% 0.31180

3.034723642

Cost of alterations 8000PV of $1 in 10 years at 6% 0.55839

4467Cost of sundry repairs 600PV of $1 pa for 24 years at 6% 12.55036

7530Sum to be set aside 15639

nr1

1

06.006.11

1 24


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%.


Solution 5Initial cost 42000Annual costWipping down finishes: 12X$1.60 19.20Vaccuming floor: 100x$0.12 12.00

31.20PV of $1 pa for 30 years at 5% 15.3725

480Maintenance contract 920PV of $1 pa for 30 years at 5% 15.3725Less first year 0.9524

14.420113266

Replacing floor finish and repainting every 5 years 300PV of $1 in 5 years at 5% 0.7835PV of $1 in 10 years at 5% 0.6139PV of $1 in 15 years at 5% 0.4810PV of $1 in 25 years at 5% 0.2953

2.1738652

Replacing lift installation after 20 years 45000PV of $1 in 20 years at 5% 0.3769

16960PV of LCC of lift 73358

05.005.11

1 30


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?

Solution 6

Cost of new building in 15 years’ time $240,000

Sinking fund to provide $1 in 15 years at 3%

05377.0103.1

03.015

Sum to be set aside = 240,000 x 0.05377 = $12,905


Example 7

Lift in government building consume 2M Kwh electricity p.a.Present cost of electricity = RM0.06/KwhExtensive 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

feasibleNew equipment = RM400,000 & cost RM20,000 to remove &

dispose old equipmentNew equipment is 25% more energy efficient than current without

overhaul & estimated life of exceeding 25 yearsMaintenance contract = RM1,000 p.a.Bank interest rate = 12% Inflation (general) = 4%Inflation (fuel) = 6%


Solution – Example 7

Options available1. Overhaul & modification

2. No overhaul, but replace with new after 6 years

3. Replace with new equipment now


%0566.0106.1

12.1

ratediscount inflation Fuel

%0769.0104.1

12.1

ratediscount General

n

n

ii

i

1

11p.a. RM1 PV

Factortion Multiplica

207.130566.010566.0

10566.01p.a. RM1 PV

ratediscount inflation for Factor tion Multiplica

25

25

964.100769.010769.0

10769.01p.a. RM1 PV

ratediscount generalfor Factor tion Multiplica

25

25


p.a. RM120,000

RM0.062,000,000

n consumptioenergy ofCost

Cost Opeating

RM20,000

equipment old of dispose and Remove

Cost Disposal

Option 1 – Overhaul and modification

Capital cost for overhaul & modify RM 100,000

Operating costEnergy reduced by 10% annuallyTherefore, 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 CostPV RM1 p.a. for maintenance= RM1,000 x 10.964 RM 10,964

Total Life Cycle Cost for Option 1 RM1,537,320


97.40566.010566.0

10566.01p.a. RM1 PV

ratediscount inflation for Factor tion Multiplica

6

6

667.40769.010769.0

10769.01p.a. RM1 PV

ratediscount generalfor Factor tion Multiplica

6

6

236.80566.010566.0

10566.01

0566.1

1

years 6 deferred (fuel) p.a. RM1 PV

19

19

6

297.60769.010769.0

10769.01

0769.1

1

years 6 deferred (general) p.a. RM1 PV

19

19

6

6411.00769.01

1 PV 6

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

Capital cost/ReplacementFor new lift equipment = RM400,000x1.046x0.6411

Disposal RM20,000 x 1.046 x 0.6411

RM 324,478

Maintenance costPV RM1 p.a. for maintenance cost over 25 years time horizon= RM1,000 x 4.667

RM 16,224Total Life Cycle Cost for Option 2 RM1,689,306

RM 4,667

Operating cost (thereafter)PV RM1 p.a. for fuel deferred 6 years= RM120,000 x 75% x 8.236 RM 741,240

Maintenance costPV RM1 p.a. for maintenance deferred 6 years= RM1,000 x 6.297

RM 6,297

Option 3 – Replace with new

Capital cost of new lift equipment RM 400,000

Disposal

Operating cost - energyPV RM1 p.a. for energy over 25 years time horizon= RM120,000 x 75% x 13.207

RM 20,000

Total Life Cycle Cost for Option 3 RM1,619,554

RM1,118,630

Maintenance costPV RM1 p.a. for maintenance cost over 25 years time horizon=RM1,000 x 10.964 RM 10,964



Option 1 - Overhaul & modification

Option 2 - No overhaul, but replace with new after 6 years

Option 3 - Replace with new equipment now 1. RM1,537,320

2. RM1,619,594

3. RM1,689,306


Implementation Problems

• Data collection and its related problems

• Forecasting/accuracy

• Sensitivity analysis


Data collection and its related problems

• LCC demands different types of data– Cost data– Performance data– Physical data– Quality data



• Possible sources of data– Internal/records, etc– Published cost data– Financial institutions– Sub-contractors, suppliers,

specialists, etc– Property& professional bodies– Trade associations, government

bodies, others– BCIS



• Reason for lack of data– Standard method of collection, classifying and recording– Many firms do not keep such record– Running cost and performance are suitable for accounting

purposes only– Long time lag between design stage and running cost

available– Frequency of alterations to fabric and occupancy pattern– Lack of understanding of interrelationship between

components of the system



• Reason for lack of data– Value perceived for such data may not be

worth the time and money involved in its collection

– Data does not indicate expenditure, efficiency or effectiveness on performance of the work involved

– Cost consequences of delayed works are not ascertainable from the available data

– Poor coordination in organising, monitoring and feedback of data



• Reason for lack of data– High variability in running costs data due to un-

identical nature of works– Lack of understanding of the importance and

utilisation of such data for LCC


Forecasting/accuracy

• Forecasting of future costs is heavily dependent upon availability of historical data, professional judgments and expertise

• Historic data may be defective or mismatched• Use of assumptions or default values when

historic data is not available• Variability in cost data• Lack of knowledge over application of LCC

techniques• Lack of reliable cost data


Sensitivity Analysis

• SA is capable of identifying the extent to which a particular result is dependent upon the parameters and assumption made in arriving at the result

• A range of value i.e. maximum and minimum values are incorporated into the suspected variables i.e. discount rate, time horizon, estimation of initial costs or ownership costs

• Re-evaluate the alternative options to determine if the upper and lower limits of the variable affect the original choices


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

© Chia Fah Choy 2005 Topic 4 – Life Cycle Costing.

Documents

chia fah choy

maintenance costs

building costs

life cycle costing slide

emergency maintenance

total cost commitment

total costs100 slide

relevant costs