1. Life Cycle Costing (Principles & theories)

2. Session Aims
To understand the purpose, principles and theories of Life cycle costing
To identify the benefits and limitations of LCC

3. Life Cycle Costing
A systematic consideration of all costs associated with the acquisition and ownership of an asset that are anticipated over a period of analysis expressed in monetary value (BS ISO 15686, 2008).

4. Life Cycle Costing – Why?
UK Government procurement strategy
committed to reduce the costs of public sector construction by 15-20% by 2016 (greater cost certainty).
33% of lifecycle cost reduction is expected in all forms of construction projects by 2025.
Global warming

5. Synonymous for LCC

6. How does it work?
LCC considers all expenditures related to capital, operating and finance that may occur during the period of financial interest of the owner.
It is applied to buildings and building components, but the technique is equally applicable to any asset.

7. Standards and guidelines
NRM 3 - Order of cost estimating and cost planning for building maintenance works (2014)
BS Guide for life cycle costing of maintenance during the in-use phases of buildings (2013)
ISO Part V - Buildings and constructed assets; Service life planning (Part 5) Life cycle costing (2008)

8. Purposes of LCC
LCC identifies the total cost commitment for the acquisition of any asset (cash flow prediction)
Evaluates the better solution among alternative choices of achieving the stated objective (Option appraisal)

9. Purposes of LCC cont..
It’s a management or planning tool that details current operating commitments
It identifies the areas in which operating costs may be reduced, either by usage or system design

10. Criteria Product lifecycle Customer / client Capital cost
Product lifecycle
Short (eg. 10yrs)
Long (eg. 50yrs)
Customer / client
Multiple
One off
Capital cost
Market price
Client’s cost
Maintenance cost
Spare parts
Repairs and refurbishments
Operational cost
Fuel, insurance
Energy – lighting, heating etc.
End of life cost
Scrap or resale
Scrap or reuse

11. WLC asks.. What do I need now and how much will it cost me (CAPEX)?
What will I need to do in the future because I have done it and how much will that cost me (OPEX)?
How long is the ‘future’ (Period of analysis)?
How do I evaluate future costs vs current costs?

12. Important facts
80% of the future cost is fixed in the first 20% of the design process.
It is worth undertaking Value Management studies in order to remove all unnecessary costs from functional specifications.

13. Why LCC is important? Government procurement strategy
Optimises the total cost of ownership
Enables early assessment of risk
Promote realistic budgeting
Decision support tool / design alternatives
Enables best value to be attained
Provide actual figures for future benchmarking

14. Procedural steps Establish the purpose
Determine the choice of alternatives
Formulate assumptions
Establish the period of analysis (Economic or physical lifespan)
Estimate all the costs over the lifespan in present value
Compare costs and rank the alternatives
Undertake sensitivity analysis

15. Data requirements
cost data  (Capital, renewal, operational, maintenance and other costs)
Timing of them  (when they are likely to be occurred)
Present value of them
Sensitivity analysis

16. Data requirements
cost data
BS ISO

17. BCIS online cost breakdown structure
Construction costs (year zero costs)
Construction, professional fees, etc.
Maintenance costs
Decoration, fabric, services
Operational costs
Cleaning, utilities, administrative etc.
Occupancy costs (do not consider within formal calculations)
Non construction cost eg. Staff salaries, reception, ICT, security etc.
End of life costs
Disposal, reinstatement, etc.

18. 2. Time of occurrence of each cost

19. 3. Present value  (use discounted cash flow method)
PV of a lump sum to be paid in the future (a)
PV of a regular annual payment for a number of years (b)
Annual Equivalents (AE) of a lump sum paid to be in the future (if comparing alternatives) ©

20. Discounting philosophy
Discounting is a means by which an equivalent (abstract) value is determined
Costs which arise in different time periods must be brought to a common base so that a proper comparison can be made

21. a) Present value of a lump sum paid to be in the future
PV = Present Value
FV = Future Value
i = Discount rate (borrowing rate)
n = Year number
{ 𝑭𝑽 𝟏+𝒊 𝒏 }
PV =

22. i { 𝟏 𝟏+𝒊 𝒏 }] [1 - PV of £1 per annum =
b) Present value of a regular annual payment for a number of years (Year’s purchase)
{ 𝟏 𝟏+𝒊 𝒏 }]
[1 -
PV of £1 per annum = i

23. Long term discount rates
(Cabinet office, 2015)

24. c) Annual equivalents value (compare alternatives)
AE = Total Present Value
PV of £1 per annum

25. Eg: Selection of a Window
WLC criteria
Softwood
Hardwood
Aluminium
Life expectancy
15 yrs
30 yrs
60 yrs
Renewal
30 yrs
Redecoration
5 yrs
Cleaning
annually PV X Y Z AE
X/PV of £1 per annum
Y/PV of £1 per annum
Z/PV of £1 per annum

26. Data requirements cont…
4. Sensitivity Analysis of the variables 
Building lifespan
Component lifespan
Discount rate
Estimated initial cost

27. Benefits of LCC
The final decision derived from LCC represents the total cost commitment of a facility
Identifies alternative ways to reduce unnecessary costs
The provision of a framework within which to compare options at all stages of development.

28. Limitations Ignorance by the client
lack of awareness of the importance of future costs
Confusion over scoping and terminology (WLC, LCC, WLA…)
Lack of tangible evidences and know-how (skills) to make it happen

29. Limitations cont.. Lack of framework for collecting relevant data
Low reliability of available data
Complex calculations
Number of unpredictable variables
Taxation changes and implications

30. Additional reading

31. Questions?