Examining Whole Life Costing Construction Essay

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 cost ing/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 todays construction industry. (Boussabaine, A., Kirkham, R.2004) Meeting clients 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 users requirements. This view is fully endorsed by National Audit Office (NAO) policy an d 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 clients 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 buildings life is described appropriately in British Standard 3811. Whole life phases Description Associated costs Specification The formulation of the clients 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 teams 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 todays business environment. Cost analysis and value analysis techniques are used to quantify and assess the economic implications of investment in building facilities in general. Whi le 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 Builders 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. Land acquisition cost. The location, and land viability may have a direct effect on the whole life cost and life expectancy of a facility. Predesign costs. The amounts of time and quality of information generated at this stage have great consequences on the quality and operation of a facility. The investors have a good opportunity to optimise the whole life cost of a facility through the selection of component and functional flexibility. Ideally, the issues relating to obsolescence should be investigated, accounted for as costs at this stage. Design costs. The quality of design in terms of error, detailing and buildability will have a direct effect on the cost of production and operation. A high quality building might also require higher costs in use in order to maintain its high aesthetic quality in use (Ashworth and Hogg, 2000) Development and production costs. The quality of workmanship is directly related to the level of maintenance. It is important to ensure that quality control is in place to ensure sound construction practices are used. Fees Risk costs Financial costs, tax, interest, etc. 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. 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. 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 projects 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 projects 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.