Chap 6 MAINTENANCE & LIFE CYCLE COST

Life Cycle Cost Objectives To effectively evaluate investment options and opportunities To consider the cost throughout a project’s whole life rather than just initial capital cost To assist in the effective management of buildings or asset throughout their whole life

INTRODUCTION LIFE CYCLE COST concerns all cost that arise from an investing decision. It can be used to evaluate Complete buildings Elements parts Systems Components and materials

INTRODUCTION User of LCC Building surveyors Architects Engineers Contractors Material manufacturers Investment analyst Developer & owner

INTRODUCTION LCC of an asset is defined as Present value of the Total Cost of that asset over its operating life including Initial cost + capital outlay, Occupational Cost, Operating cost and Disposal cost

Transport / Lorry / Taxi / Bus Theory Practical Y6 Y10 Y20 Initial cost + capital outlay, Deposit Purchase $ Occupational Cost, COE Operating cost Fuel, Maint, Finance cost, parking, summon Disposal cost OMV Scrap

Building / Factories Theory Practical Y15 Y30 Y60 Initial cost + capital outlay Design Construction Occupational Cost, Develop Charge Land Tax, Operating cost Marketing Maintenance Upgrading Disposal cost Sell Redevelop

Life Cycle Cost Application evaluation technique to choose between competing option basis in predicting future running cost basis for budgeting for future expenditure etc

Life Cycle Cost _Investment Investment Life Outcome of a LCC study is dependent upon the life required of the project the residual value the degree of flexibility (econ & tech) can be built into the design to cope with future changes Building / Assets life is influenced by Obsolescence

LCC- Obsolescence Physical Factors: structure integrity Economic factors Functional factors Technological Factors Special and legal factors

LCC- Priority Priorities dependent on client Building / Assets objectives Time scales Capital sources Revenue sources Tax position

LCC- Alternatives Selection must involve budgeting team and revenue budgeting team to avoid Opportunity cost analyze capital investment against running cost & reduced maintenance cost

LCC- Alternatives Selection must involve budgeting team and revenue budgeting team to avoid Opportunity cost analyze capital investment against running cost & reduced maintenance cost analyze both tangible and intangible cost & benefits

LCC- Alternatives Selection Example of Bicycle Procurement by NParks Expensive ? Your thoughts Price yes! Cost of maintenance & repair? Cost of breakdown? Ergonomics of design? Employees health benefits?

LCC- Cost and Value Cost and Values Cost includes : Capital cost, Financing cost, Operating Cost, Annual and intermittent maintenance cost, Replacement & Alteration cost, Occupancy cost and Residual value and disposal cost Values : The time value of money is the value of money figuring in a given amount of interest earned or inflation accrued over a given amount of time. Suggests that a certain amount of money today has different buying power than the same amount of money in the future.

LCC- Cost and Value Cost and Values Cost includes : Capital cost, Financing cost, Operating Cost, Annual and intermittent maintenance cost, Replacement & Alteration cost, Occupancy cost and Residual value and disposal cost

LCC- Cost & Value Cost and Values Values : The time value of money is the value of money figuring in a given amount of interest earned or inflation accrued over a given amount of time. Suggests that a certain amount of money today has different buying power than the same amount of money in the future.

LCC- Cost & Value Value of Money For example, $100 of today's money invested for one year and earning 5% interest will be worth $105 after one year. Therefore, $100 paid now or $105 paid exactly one year from now both have the same value to the recipient who assumes 5% interest; using time value of money terminology, $100 invested for one year at 5% interest has a future value of $105.[1] This notion dates at least to Martín de Azpilcueta (1491–1586) of the School of Salamanca http://www.investopedia.com/terms/t/timevalueofmoney.asp#axzz2IfHAPjQy http://teachmefinance.com/timevalueofmoney.html

LCC- Cost & Value Value of Money Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.[2]

LCC- Cost & Value Value of Money Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.[5] Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.

LCC- Implementation Implementation Establish biz objectives Choose method Formulate assumptions Identify all the cost and the LC period Compare cost, Rank alternatives Perform sensitivity analysis Investigate capital cost constrain

LCC- In Practice Advantages Encourage long term strategic planning Supports downstream strategic budgeting Influences overall cost viability of the project or procurement Influences early stage of decision making

LCC- In Practice Dis-Advantages Assumptions of a known deterministic LC High cost of performance High sensitivity to changing requirements

LCC- In Practice for Maintenance Increased used due to legislation such as Green FM increased in disposal & decomissioning cost maintenance cost ..\..\MFM\RP ROI_calculation_tool_projectV2_24.07.11(1).xls

LCC- In Practice for Maintenance Maintenance cost such as Programmed maint Responsive maint Cyclic maint Disposal cost Running cost / cost in use Modification of use cost Expansion / Extension of life cost ..\..\..\Documents\Cyclical maintenance budgetting proposal - Buildings & Hardscape(1).xlsx