Examining Whole Life Costing Construction Essay

Whole life costing (WLC) can contribute significantly to control the financial and non-financial risks objectives of many construction, and construction organisations. This is especially relevant in terms of customer service, internal business processes, and financial performance. WLC is changing the approach to design, procurement, construction and facilities management and delivering major benefits. Many public and private sector clients now procure on cost of ownership, not capital cost. (Your development, 2008) There is a growing awareness that unplanned and unexpected maintenance and refurbishment costs may amount to half of all money spent on existing buildings, according to the Building Research Establishment. Estimates of the value of the unplanned portion in UK construction output range from £8bn to a staggering £20bn a year. This is why whole-life costing (WLC) is beginning to play a crucial role in project management (Bourke, 2005). This time, however, lifecycle costing/Whole life cycle costing is here to stay, for two reasons – PFI and global warming. PFI has made it the basis of the commercial agreement between the client and the provider and global warming has made everybody think about the future impact of decisions to build. (Martin, 2008)

Some of the ideas behind the justification for whole life-cycle costing (WLCC) are synonymous with key issues in today’s construction industry. (Boussabaine, A., Kirkham, R.2004)

Meeting client’s expectations Clients now require buildings that are efficient during and after construction. WLCC techniques can demonstrate real cost savings in design solutions.

Sustainability Achieving sustainable design solutions relies on the consideration of long term operational costs and performance of building components.

Monitoring performance of constructed assets For example, are PFI/PPP (Private Finance Initiative / Public – Private Partnerships) projects really cost effective? Only by considering the whole life costs can this be assessed. Using WLLC also supports benchmarking and key performance indicators.

Monitoring cost effectiveness of constructed assets WLCC provides the means by which to constantly review this and base future capital investment on this information.

Lean construction By considering long term cost and physical performance, waste is minimised both during construction and through the life of the building.

The UK government has challenged the way its organisations deliver services, and has placed on them a duty to continuously improve in order to provide the services that people require economically, efficiently and effectively. This concept of ‘best value’ has dominated public sector capital investment policy in the UK since the 1990s. (Boussabaine, A., Kirkham, R.2004) As a result of the fundamental revisions in public procurement policy that have subsequently taken place, interest in and demand for the use of WLCC techniques have risen to unprecedented levels. These policy changes are clearly demonstrated in recent government publications such as ‘Construction Procurement Guidance, No 7 Whole Life Costs’ (Office of Government Commerce), which states that ‘all procurement must be made solely on the basis of value for money in terms of the optimum combination of whole life costs and quality to meet the user’s requirements’. This view is fully endorsed by National Audit Office (NAO) policy and reinforced in their joint guide ‘Getting value for money from procurement. How auditors can help’. Consequently the award of public construction contracts based on simply the lowest capital cost bid is no longer recognised as good practice; best value must be taken into account and thereby WLCC should be fully appraised as part of the decision making process. (Boussabaine, A., Kirkham, R.2004)

2.2 HISTORY OF WHOLE LIFE COSTING

Figure 2.1 History of whole life costing, Source (Boussabaine, A., Kirkham, R.2004)

According to Ashworth (2008) during the 1960s it was often referred to as costs-in-use, although strictly speaking this term excluded anything to do with initial construction costs. In the 1970s, life cycle costing became the commonly accepted terminology but by the end of the century this had been replaced with whole life costing and this is the description under which it is now most commonly referred.

2.3 DEFINITION OF WHOLE LIFE COSTING

The New construction research and innovation Strategy Panel (nCRISP) defines WLC as

‘…the systematic consideration of all relevant costs and revenues associated with the acquisition and ownership of an asset’. (Constructing Excellence in the building environment, 2009)

At its most basic, WLC includes the systematic consideration of all costs and revenues associated with the acquisition, use and maintenance and disposal of an asset.

Ashworth (2004), Seely (1997), Ashworth and Hogg (2007), Cartlidge (2008) and Ferry and Flanagan (1991); according to BS ISO 15686, WLC can be defined as:

‘a tool to assist in assessing the cost performance of construction work, aimed at facilitating choices where there are alternative means of achieving the client’s objectives and where those alternatives differ, not only in their initial costs but also in their subsequent operational costs.’

Whole life appraisal (costing) is not the universal panacea for the construction sector, but properly understood and used it is a useful and powerful tool. (Flanagan, R., Jewell, C., 2005)

Figure 2.2 The hidden costs, Source (Ellingham, I., and Fawcett, W.,2006)

While initial costs are clear and visible at an early stage, longer-term costs are not – see Figure 2.2. Nevertheless, these longer-term costs can far outweigh initial capital costs, and should have a much stronger influence on decisions with respect to facilities and individual elements

Figure 2.3 Whole life cost, Source (Calford seaden, 2009)

The sequence of the seven phases of a building’s life is described appropriately in British Standard 3811.

Whole life phases

Description

Associated costs

Specification

The formulation of the client’s

Initial costsassociated with land purchase, professional fees and construction.

Requirements at inception and briefing.

Feasibility and viability of different proposals

Design

Translating ideas into working drawings

Cost planning including whole life costing of alternative design solutions

from outline proposals scheme and detail

Deign

Associated contract procurement documentation

Installation

The construction process

Interim payments and financial statements

Commissioning

Handover of the project to the client

Final accounts

Maintenance

The project in use

Recurring costs associated with repairs, running and replacement items

Modification

Alterations and modifications necessary to keep the project to a good standard

Costs associated with major refurbishment items

Replacement

Evaluation of the project for major changes or the site for redevelopment

Redevelopment costs

Table 2.1 Whole life phases (Ashworth.A, 2008)

2.4 WHY RISK ASSESSMENT IN WHOLE LIFE COSTING

Combined with WLCC, risk assessment should from a major element in the strategic decision making process during project procurement and also in value analysis. Project cost, design and operational decision parameters are often established very early in the life of a given building project. Often, these parameters are chosen based on owners and project team’s personal experiences. While these approaches are common, they do not provide a robust framework for dealing with the risks and decisions that are taken in the evaluation process. Nor do they allow for a systematic evaluation of all the parameters that are considered important in the examination of the WLCC aspect of a project. Capital costs and future costs must be quantified, analysed and presented as part of the strategic decision making process in today’s business environment. Cost analysis and value analysis techniques are used to quantify and assess the economic implications of investment in building facilities in general. While these techniques do provide a basis for making project cost decisions, they most often do not account for many of the parameters which may affect the actual project value or cost (Plenty et al.1999).

Risk assessment should be an integral part of the WLCC process. A framework that uses formal decision making processes and risk assessment of each aspect of the decision to be taken in performing WLCC life cycle analysis can help owners, design teams and cost planners in marking strategic decisions based on analysis results that truly the inherent risks and costs related to the project.

2.5 DATA REQUIREMENTS IN WHOLE LIFE CYCLE COSTING AND RISK ASSESSMENT

Flanagan and Norman (1983) highlighted three fundamental requirements in successfully implementing a life cycle costing methodology.

A system by which the technologies can be used: a set of rule and procedures.

Data for the proposed project under consideration: estimates of initial and running costs of elemental life cycles, discount rates, inflation indices, periods of occupancy, energy consumption, cleaning and the like. The data required to carry out WLCC analysis can be derived from a range of possible source

Direct estimation from know costs and components

Historical data from typical applications

Models based on expected performance, average, etc.

Best guesses of the future trends in technology, marking application

Professional skill and judgement.

All these factors have some bearing on the quality of data that is collected and how it is used in modelling and decision making processes. Whilst WLCC is now becoming widely used as a valuable tool in the design process, probably two key factors have undersized its potential impact

A suspicion that life cycle cost estimates are in some sense inaccurate or based merely on guesswork

The absence of sufficient and appropriate cost and performance data.

2.5.1 Data sources

It has been highlighted how important the data and its composition are to WLCC, but where can this data be obtained? Ferry and Brandon (1991) highlighted six main outputs:

Technical press

Builder’s price books

Information services such as the Building Cost Information Service (BCIS)

Government research literature such as from the National Economic Development Office (NEDO)

University research

Technical information services.

Flanagan and Norman (1983) defined these into four subgroups:

Manufacturers’ data

Suppliers and contractors

Modelling techniques

Historical data

Manufacturers’ data

These specialists as a rule will have detailed breakdowns of the life cycle of the product, its material components and its performance characteristics.

This data can also be obtained from other authorities that are responsible for testing the integrity and material for construction. The British Board of Agreement is a UK government testing body which carries out independent testing of materials used in the industry. Materials that meet a set specification and performance are issued with agreement certificates, which give details on service lives and other critical information. The Building Research Establishment also carries out testing on materials and can be a useful source of information.

2.5.3 Forecasts from models

In the absence of any historical or suppliers’ data / feedback, models can be used as a way to analyse the WLCC implications of particular design decisions or choices of materials. The concept behind modelling is to facilitate and introduce a higher degree of accuracy in the estimates made by cost analysts when drawing up life cycle cost profiles.

Historical data

Historical data can be obtained from a variety of sources such as the BMCIS, clients and building occupies and in some cases the design team themselves. The value of historical data is relevant in that the values of initial capital cost and subsequent running cost can be categorised for certain groups of element in the building and this comparison can then be used to identify the elements which will benefit from a life cycle cost approach.

2.6 COMPONENTS OF A WHOLE LIFE COST ANALYSIS

Figure 2.4 Components of a whole life cost analysis,

Source (Boussabaine, A., Kirkham, R.2004)

2.6.1 Service life

The prediction of component service life is a very important aspect in WLCC assessment. One such methodology currently in use is the factor method. The ISO/CD 15686-1 factor method for the estimation of the service life of components or assembly under specific conditions treats the service life as a deterministic value. In reality the service life has a big scatter and should be treated as a stochastic quantity.

2.6.2 Capital costs

Returns on invested capital costs are essential in marking decisions on investment scenarios. Minimum capital commitment would be required if the client wanted to bear most of the cost until the building was handed over. In the event of limited capital budget is the prime consideration of the client, quality, in the form of a reduced specification, is like to be restricted. (Ashworth and Hogg, 2002, p.192).Further the cost of the project is a combination of land ,construction ,fees and finance and the employer will need to balance these against the various procurement systems available (Ashworth,1997,p.107). The capital cost objectives that need to be assessed include.

2.6.3 Operational costs

Operational costs are less certain as the time span increases due to uncertainties in energy costs, maintenance, fees, staff and regulatory changes. It is important to view operational cost estimates in their holistic state; several qualitative factors will have an important effect on the total operational costs. The operational cost objectives that need to be assessed include;

Factors which contribute significantly to the total operational costs

Optimum balance between capital and operational costs

Operational risk management systems

Optimum asset cleaning procedures

Optimum waste management procedures

Optimum utilities management procedures

Optimum staffing level

Minimum disruption due to denial use of the asset.

2.6.4 Maintenance costs

The costs and priority of required maintenance, rehabilitation and replacement can be obtained from historical data but base cost estimates have to be supplemented with expert opinions in order to perform whole life cycle analysis and risk assessment. The maintenance cost objectives that need to be assessed include.

Performance indicators for the assessment of maintenance costs

Remaining service life of facility components

Frequency and replacement costs

In house or subcontracted maintenance

Selection of exterior and interior materials and surfaces

Selection of light fixtures with minimum routine repair and replacement requirements.

Type of preventive maintenance programme.

2.6.5 Financing costs and revenues

The objective here is to deal with WLCC input parameters of discount, inflation rates, taxes, expenses, etc. Critical analysis of investments must include both initial and ongoing costs and returns over the period of the investment. This will allow stakeholders to compare different options and decide which offers the best return for the investment. Usually discount rate is used for computing the value of future revenues. This includes a large degree of risk return. For example, if the discount rate is set too high or too low then future costs may appear insignificant; this could result in high operational costs and capital costs, which will discourage investment. Also, if inflation is different from the selected rates this may lead to inappropriate investment choices. The financing cost objectives that need to be assessed include assumptions about:

Inflation rates, interest and taxes

Level of returns and risks

Optimum discount rate

Economic activity. This has a direct on the economic obsolescence of facilities.

Level of risk financing

Cash inflow versus outflows

Different rates, time periods and cash flows.

2.6.6 Asset characteristics

The characteristics of new or existing facilities are very important aspect of WLCC computation. For the example a relationship may exist between building function and mechanical service costs, a particularly important feature of modern facilities. Little research has been published with regard to the impact of building characteristics on WLCC. Experience shows that an indirect link exists through many aspects, including energy, thus increasing WLCC and possible downtime costs in maintenance. The characteristics that should be assessed and included in the computation of WLCC include.

Layout and location

Functionality

Construction technology

Gross floor area

Number of storeys and storeys height

Glazing area

Occupancy (m2/person)

Shape of the facility

Aesthetics

Energy saving measures

Quality of components

Type and quality of public health system

Type and quality of superstructure building fabric

Type and quality of internal fabric

Type and quality of electrical and mechanical services

Extent of site works

2.6.6 Economic performance measures

The procurement of building facilities involves a variety of decision making who decide on alternatives that generate capital and ongoing costs during a project’s life. These capital costs generative value for different stakeholders and potential for returns to the project owner which should be durable over the life cycle of the asset. Therefore ,economic performance measurement in WLCC is very important for decision making to evaluate and allocate identifiable value from capital cost and continuing costs to relevant stakeholders in the life cycle of a facility. The objective that should be assessed under this heading should include.

What type of performance indicators should be used to aid in the selection of alternatives

The boundaries of these indicators, i.e. minimum and maximum values that the stakeholders are prepared to work to

The best measures of performance in terms of WLCC outputs

Mechanisms for WLCC benchmarking

Measures for mitigating economic risks.

2.7 USE OF WHOLE LIFE COSTING

Ferry and Flanagan (1991) argue that application of WLC, in any environment, exists on two levels. The lower level of life cycle costing is represented as a ‘Management Tool’ to aid the decision making process. The higher level of life cycle costing is termed the ‘Management System’ whose continuous operation dictates that responsibility for asset management should be retained. In general terms, they argue that during the management of a typical project, all stages, except project initiation, have a potential use for WLC.

Whole life costing as a decision-making tool

The primary use of WLC is to be used in the effective choice between a number of competing project alternatives. Although this can be done at any stage of the project, the potential of its effective use is Maximum during early design stages. In addition, the ability to influence cost decreases continually as the project progresses, from 100% at project sanction to typically 20% or less by the time construction starts. Furthermore, once the building is delivered, there is a very slim chance to change the total cost of ownership because the decision to own or to purchase a building normally commits users to most of the total cost of ownership. According to Kirk Al-Hajj ( 2004), 80-90% percent of the cost of running, maintaining and repairing a building is determined at the design stage.

Figure 2.5 the relationship between whole life cost savings and time of implementation

(Source- Al-Hajj,A.,Pollock,R.,Kishk,M.,Aouad,G.,Sun,M.andBakis,N,2004)

Whole life costing as a management tool

WLC can also be used as a management tool to identify the actual costs incurred in operating assets. The primary objective is to relate running costs and performance data. Thus, it could be useful for clients who want to estimate the actual running costs of the building and also for budgeting purposes. In addition, it can be a valuable feedback device to assist in the design (Al-Hajj,A.,Pollock,R.,Kishk,M.,Aouad,G.,Sun,M.andBakis,N,2004)

BARRIERS TO SUCCESSFUL IMPLEMENTATION OF WHOLE LIFE COSTING TECHNIQUES

2.8.1 Industry barriers

The capital cost of construction is almost always separated from the running cost. It is normal practice to accept the cheapest initial cost and then hand over the building to others to maintain. In addition, there is no clear definition of the buyer, seller, and their responsibilities towards the operating and maintenance costs (Bull 1993). Furthermore, there is a lack of motivation in cost optimisation because the design and cost estimating fees are usually a percentage of the total project cost. However, the expansion of new project delivery systems such as private finance initiative (PFI) and build operate and transfer (BOT) seems to overcome these obstacles

2.8.2 Client barriers

Bull (1993) pointed out that there is also a lack of understanding on the part of the client. This may increase the possibility of subjective decision making. In addition, there are usually multiple aspects of needs desired by clients. Most of these aspects cannot be assessed in a strict WLC framework. This is mainly because either they are in conflict with the main WLC objective or because they are mostly ‘non-financial’. Some of these factors are even intangible such as aesthetics. In many cases, these intangibles are also in conflict with results of WLC (Picken 1989; Wilkinson 1996).

Analysis difficulties

The major obstacle facing the analyst is the difficulty of obtaining the proper level of information upon which to base a WLC analysis. This is because of the lack of appropriate, relevant and reliable historical information and data (Bull 1993). In addition, costs of data collection are enormous (Ferry and Flanagan 1991). Furthermore, the time needed for data collection and the analysis process may leave inadequate time for the essential dialogue with the decision-maker and the re-run of alternative options. This is one of the reasons why computerised models are valuable. Another difficulty is the need to be able to forecast, a long way ahead in time, many factors such as life cycles, future operating and maintenance costs, and discount and inflation rates (Ferry and Flanagan 1991). Besides, the uncertainty surrounding the variables in any WLC exercise should be properly assessed (Al-Hajj,A.,Pollock,R.,Kishk,M.,Aouad,G.,Sun,M.andBakis,N,2004)

PRODUCING COSTS – WHAT NEEDS TO BE CONSIDERED?

Before any evaluation of the project’s whole life cycle costs can be made, the following factors need careful identification.

Overall time scale of the building or element i.e. the life cycle;

Statement of all costs and revenues attributable by disposal time;

The design lives of the various components and equipment so that any calculation can include for replacements and repairs at appropriate times;

Obsolescence – where changes in technology, land values, working styles make the economic life of the building shorter than the planned design use;

Tax implications – allowances for certain items of plant and equipment can be offset against tax, thereby reducing their costs to the building owner;

The time value of money (discounting) – which incorporates allowances for interest and can consider inflation

– (iii) are relatively easy to calculate; (iv) – (vi) are much more unpredictable as they tend to be guesses.

From these elements come the typical WLC/LCC approach;

STEP 1 – establish the objective of the calculation

STEP 2 – choice of costing method

STEP 3 – formulate assumptions from list above

STEP 4 – identify the costs and the life cycle

STEP 5 – compare alternative solutions and rank

STEP 6 – sensitivity analysis (technique whereby costs revisited to identify items likely to change and the impact of those changes)

STEP 7 – report costs to client

WHOLE LIFE COST / SUSTAINABILITY

Contractors, particularly those involved with public private partnerships are recognising the importance of sustainability issues and the early consideration of whole life cost.

The process of getting the minimum whole life cost and environmental impact is so complex, being a three dimensional problem as indicated below.

Figure 2.6 Whole life cost considerations, Source (Cartidge, 2006)

Each design option will have associated impacts and costs, and trade-offs have to be made between apparently unrelated entities

Environmental value. This focuses on environmental aspects of development such as pollution, waste and CO2 emissions. These issues involve the initial manufacture of construction materials, the construction of the project, its use and eventual replacement. In this context value is maximised when environmental pressures are minimised to the level of the carrying capacity of ecological systems while using natural resources effectively and safeguarding natural capital and its productivity.

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