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© Chia Fah Choy 2005 Topic 4 – Life Cycle Costing

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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.

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© Chia Fah Choy 2005 Example Roof A Initial Construction CostPV Replacement after 30 years $12,000 $2,089.32 $24,000$14,089.32 Total Cost Roof B Initial Construction $18,000

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© Chia Fah Choy 2005 TOTAL COSTS (LIFE SPAN OF BUILDING) Maintenance Operating services (operating & cleaning) Energy Rates Insurance Modifications & Alterations Estate control (management) RUNNING COSTS OCCUPATIONAL CHARGES Land Construction Professional fees USER COSTSINITIAL COSTS

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© Chia Fah Choy 2005 MAINTENANCE UNPLANNED MAINTENANCE PLANNED MAINTENANCE Schedule maintenance Condition-based maintenance Preventive maintenance Corrective (including emergency maintenance)

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© Chia Fah Choy 2005 Maintenance Costs How can it be reached? How can it be cleaned? How long will it last? How can it be replaced?

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© Chia Fah Choy 2005 Breakdown of typical total costs for various types of buildings Type of annual costHousesHigh Flats Industrial Buildings SchoolsOffices Maintenance1412181613 Fuel and attendance for heating and lighting 24 301829 Initial costs (amortized) Building Land and development 48 14 56 8 47 5 51 15 47 11 Total Costs100

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 Life Cycle Costing Techniques Life Cycle Cost Analysis (LCCA) Life Cycle Cost Management (LCCM) Life Cycle Cost Planning (LCCP)

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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.

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 Inception Feasibility OutlineProposal SchemeDesign 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/m 2 items (Budget LCCP) Establish use pattern of the building. Define discount rate and produce brief LCCP.

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© Chia Fah Choy 2005 Cost Checks SchemeDesign Detailed Cost Plan Measurement information Level 3 Bill of Quantities Construction DetailDesign Cost Checks ProductionInformation 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 elements Compare LCCP with capital cost plan Produce detailed LCCP for building

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 3 Key Concepts Time value of money Time horizon Relevant costs

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 Time horizon (contd.) Categories of obsolescence –Economic obsolescence –Functional obsolescence –Technological obsolescence –Social and legal obsolescence –Physical obsolescence

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© Chia Fah Choy 2005 Useful lives of buildings (years) Departments40Banks50 Dwelling45Factories45 Farm buildings25Hotels40 Machine shops45Office buildings45 Stores50Theaters40 Warehouses60

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© Chia Fah Choy 2005 Useful lives of buildings components/equipments (years) Large equipment20Medium equipment15 Small equipment10Boilers/furnaces20 Gas burners16Oil burners10 Radiators25Awnings5 Clocks15Elevators25 Fire alarm systems25Incinerators14 Lighting fixtures15Plumbing fixtures25 Roofs20Transformers25 Water tanks (metal)25Window screens10

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 When to implement Impact during the early stages of the design phase i.e. –inception –schematic design –design development phase

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 LCC Techniques Selection depend on the following criteria –Project circumstances –Evaluation stage –Availability of time, resources and expertise –Degree of accuracy required

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© Chia Fah Choy 2005 LCC Techniques Two categories –Non-discounting techniques –Discounting techniques

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© Chia Fah Choy 2005 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%

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

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© Chia Fah Choy 2005 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%

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

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© Chia Fah Choy 2005 Example 3 Compare the LCC of the following alternative building schemes. Scheme AScheme B Cost of building200,000260,000 Site cost40,000 Annual running cost6,0004,800 Replacement cost at every 20 years24,00016,000 Replacement cost at every 30 years32,00020,000 Life of building = 60 years Interest rate = 5% ASF = 2 ½%

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Solution 3 Scheme A Cost of site= $40,000 Annual equivalent in perpetuity at 5%= $40,000 x 0.05 $ 2,000 Cost of building =$200,000 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 Interest at 5% 0.05 ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 12,609 Annual running costs $ 6,000 LCC $ 20,609

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Solution 3 Scheme B Cost of site= $40,000 Annual equivalent in perpetuity at 5%= $40,000 x 0.05 $ 2,000 Cost of building =$260,000 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 Interest at 5% 0.05 ASF to replace $1 in 60 years at 2 ½% 0.00735 0.05735 $ 15,652 Annual running costs $ 4,800 LCC $ 22,452

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© Chia Fah Choy 2005 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?

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© Chia Fah Choy 2005 Solution 4

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© Chia Fah Choy 2005 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%.

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© Chia Fah Choy 2005 Solution 5

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© Chia Fah Choy 2005 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?

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

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© Chia Fah Choy 2005 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%

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© Chia Fah Choy 2005 Solution – Example 7 Options available 1.Overhaul & modification 2.No overhaul, but replace with new after 6 years 3.Replace with new equipment now

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Solution – Example 7

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Option 1 – Overhaul and modification Capital cost for overhaul & modify RM 100,000 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 Total Life Cycle Cost for Option 1 RM1,537,320

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Solution – Example 7

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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/Replacement For new lift equipment = RM400,000x1.04 6 x0.6411 Disposal RM20,000 x 1.04 6 x 0.6411 RM 324,478 Maintenance cost PV RM1 p.a. for maintenance cost over 25 years time horizon = RM1,000 x 4.667 RM 16,224 Total Life Cycle Cost for Option 2RM1,689,306 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 cost PV RM1 p.a. for maintenance deferred 6 years = RM1,000 x 6.297 RM 6,297

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Option 3 – Replace with new Capital cost of new lift equipmentRM 400,000 Disposal Operating cost - energy PV 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 cost PV RM1 p.a. for maintenance cost over 25 years time horizon =RM1,000 x 10.964 RM 10,964

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© Chia Fah Choy 2005 Solution – Example 7 Option 1 - Overhaul & modification Option 2 - No overhaul, but replace with new after 6 years Option 3 - Replace with new equipment now 1. 1. RM1,537,320 2. 2. RM1,619,594 3. 3. RM1,689,306

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© Chia Fah Choy 2005 Implementation Problems Data collection and its related problems Forecasting/accuracy Sensitivity analysis

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© Chia Fah Choy 2005 Data collection and its related problems LCC demands different types of data –Cost data –Performance data –Physical data –Quality data

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© Chia Fah Choy 2005 Data collection and its related problems 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

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© Chia Fah Choy 2005 Data collection and its related problems 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

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© Chia Fah Choy 2005 Data collection and its related problems 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

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© Chia Fah Choy 2005 Data collection and its related problems 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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© Chia Fah Choy 2005 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

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