1. Assistant Professor Antti Peltokorpi antti.peltokorpi@aalto.fi
Rak Management of Lifecycles of Buildings LIFE CYCLE COST ANALYSIS (LCCA) OF BUILDINGS
Assistant Professor Antti Peltokorpi

2. Learning outcomes
Understand the purpose of life cycle cost analysis methods
Identify main steps and methods to calculate life cycle cost for a building
Can apply the method after home work

3. Life cycle cost analysis (LCCA)
Life cycle costing (LCC) is the process of economic analysis to assess the total cost of ownership of a product, including its cost of production, installation, operations, maintenance, conversion, and/or decommission.

4. Life cycle cost analysis (LCCA)
By using LCCA, total cost of the product can be calculated over the total span of product life cycle
LCCA balances initial monetary investment with the long-term expense of owning and operating the building

5. Life cycle cost analysis (LCCA)
LCCA is an economic tool which combines both engineering art and science to make logical business decision
LCCA provides important inputs in the decision making process in the product design, development, and use

6. LCCA for customer
By using LCCA, customers can evaluate and compare alternative products
By using LCCA, customers can assess economic viability of projects and products

7. LCCA for product supplier
By using LCCA, product suppliers can optimize their design by evaluation of alternatives and by performing trade-off studies
By using LCCA, product suppliers can evaluate various operating and maintenance cost strategies (to assist product users)

8. Why to use LCCA? Typical conflict in most of the companies:
Project Engineering wants to minimize capital costs as the only criteria,
Maintenance Engineering wants to minimize repair hours as the only criteria,
Production wants to maximize operation hours as the only criteria,
Quality Engineering wants to nullify failures as the only criteria,
Accounting wants to maximize project net present value as the only criteria,
Shareholders want to increase stockholder wealth as the only criteria

9. Why to use LCCA?
LCCA can used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time
It is important for engineers to think like managers and act like engineers for a profit maximizing organization

10. Where are the biggest conflicts between stakeholders’ incentives concerning buildings?
Owner
Material supplier
User
General contractor
Maintenance
Sub-contractor
Developer
HVAC supplier
Investor
Architect
Design engineer

11. Cost elements in LCCA For a building, there are several cost elements:
Initial Cost
Energy & Water Costs
Operation, Maintenance & Repair Cost
Replacement Cost
Other Costs (e.g. taxes)
Residual Value
The identification of cost elements and their sub-divisions are based on the purpose and scope of the LCCA

12. Cost elements Initial costs Energy and water cost
Includes all possible initial investment costs
For example land acquisition, construction, renovation, equipment
Estimated by historical data from similar facilities or by using different databases
Energy and water cost
Based on consumption, current rates and price projections
Hard to predict at early state of project - can be calculated during design phase
Energy suppliers provide information about prices and price projections

13. Cost elements Non fuel operation, maintenance and repair costs
Depends on operating schedules and maintenance standards
Estimating requires engineering judgement
Published guidebooks and suppliers provide information
Replacement costs
Timing and amount lifetime of a system and owning period
Same sources of information for costs as when estimating the initial costs
LCCA will discount the costs to occurrence date’s value

14. Cost elements Other costs Residual value (RV) Non-monetary benefits
Investments that improve the productivity but the benefits are hard to quantify
Financial charges and taxes
Residual value (RV)
Monetary value of the building at the end of the analysis period
Can be determined in many ways depending on the condition of the building

15. LCCA in different process phases
Source:

16. Sample LCCA decision matrix
Simple analysis
Complex analysis
High
Energy systems
Siting / massing I
Building envelope II
Mechanical systems
Potential cost impact
Electrical systems
III
Structural systems IV
Low
Source:

17. Integrating LCC into the Design Process

18. Steps for computating LCC
Identify alternatives
Define cost element categories
Determine time for each cost element
Estimate value of each cost element
Calculate net present value of each cost element, for every year (over its time period)
Calculate LCC by adding all cost elements, at every year
Analyze the results

19. Net Present Value (NPV)
NPV analysis takes into account the time value of money
Future cash flows are discounted to a base date to enable better decision making
Discount rate (r) represents the rate by which ‘future money’ becomes less valuable
Investor’s opportunity cost
Inflation

20. How to select discount rate?
Estimated cost inflation should be considered when evaluating future cash flows
C(t=1) = C(t=0) x inflation
Discount rate reflects investor’s opportunity cost =
“the rate of return the investor could earn in the marketplace on an investment of comparable size and risk”
“average cost of capital”

21. Example: Life-cycle costs of wooden windows (40 years)
Initial / Construction costs
Cost per unit (390€/m2)
Proportion for operating and joint costs (15%)
Reserve of rise of the costs (2%)
Profit and contractor's costs (10%)
Maintenance costs
Painting every 8 years (137 €/m2)
Reconditioning every 16 years (350 €/m2)
Renovating every 40 years
Current value with 40-year time period and 10% rate of interest:

22. Example: Life-cycle costs of wooden windows (40 years)
Operation costs
Heat transfer through the windows (U-value 1,4 W/m2K):
Cost of heating energy (0,077€/kWh):
Current value with 40-year time period and 10% rate of interest:
Total costs
Life-cycle costs of wooden windows are:

23. Example – LCC of Competing Heating / Cooling Systems
System A: Electric baseboard and window air conditioner
System B: Heat Pump

24. Example – LCC of Competing Heating / Cooling Systems
System A: Electric baseboard and window air conditioner
System B: Heat Pump
Financial Criteria:
Discount Rate d = 8% Energy Cost Inflation Ie = 6%
Maintenance Cost Inflation Im = 5% Study Period N = 15 years

25. System A: Electric Baseboard and Window Air Conditioner
Investment Related Costs
Initial Cost $1,500
Replacement Cost Year 8 (Base Yr $) $400
Residual Value (Year 15 $) $150
Operation Related Costs
Base Year Electric Energy Cost $1,200
Base Year OM&R Cost $50

26. + LCC of System A PV Investment Costs PV Operational Costs
= $1,772 + $16,156 = $17,927

27. LCC of System B – Heat pump
PV Investment Costs
PV Operational Costs +
=$3,384 + $12,798 = $16,182
LCC System B $1,745 less or 10% less

28. Initial Cost – Office Building - $100 / SF
% of Total Building Cost
Source: Means Life Cycle Costing For Facilities

29. Life Cycle Cost – Office Building - $200 / SF
Initial Cost
Operational Cost
Life Cycle Cost – Present Value $ / ft2
Source: Means Life Cycle Costing For Facilities

30. Example – Existing buildings
In the table, Life Cycle Costs are correct. However, what is confusing/interesting/missing in other numbers?
Interest cost pitää sisällään P:n
Positive resale value / negative disposal cost  tontti arvokas, talo kustannus

31. Four Supplementary Evaluation Measures
Net Savings - (NS)
Savings-to-Investment Ratio - (SIR)
Adjusted Internal Rate of Return - (AIRR)
Discounted Payback - (DPB)

32. Example – Attic roof insulation
Additional Investment Cost – I $1500 Annual Energy Savings – A0 $260 Financial Criteria: d = 8% Ie = 6% N = 30 yrs

33. Supplementary Evaluation Measures – Attic roof insulation
Net Savings (NS) $4,420
Savings-to-Investment Ratio (SIR) 3.9
Adjusted Internal Rate of Return (AIRR) 13%
Discounted Payback (DPB) 6.2 years

34. Outcomes of LCCA analysis
Data for every alternative are analyzed, and the lowest LCC option become preferred
But the lowest LCC option may not necessarily be implemented when other considerations, such as risk, available budgets, non-monetary preferences, political and environmental concerns are taken into account
LCCA provides critical information to the overall decision-making process, but not the final answer

35. Home work

36. Individual Home work
Calculate Life Cycle Costs of two alternative apartments with similar size and location
Select e.g. for sale apartments from websites
One built in 2000s, other in 1980s or earlier
Evaluation period is 40 years
Take into account several cost elements:
Investment cost
Energy & Water Costs
Operation, Maintenance & Repair Cost
Other Costs?
Ignore resale value / disposal cost
Calculate and compare net present values of the apartments

37. Individual Home work
Use apartment-specific data as much as possible, such as maintenance charges
If some data is not directly available, try to estimate using different sources (websites, catalogues)
e.g. costs and typical renovation and repair periods of drains and sewers and exteriors
Write a short report of the analysis and results (max 2 pages);
What was interesting in results?
What data was not available?
What was hard to estimate?
Return report in My Courses
Deadline is

38. Further readings
Fuller, S. (2010) Life-Cycle Cost Analysis (LCCA), National Institute of Standards and Technology (NIST). Hyartt, J. (2009) Kiinteistöjen ylläpidon kustannustieto Teknillinen korkeakoulu. Multiprint Oy, Espoo.