1. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks Economic Evaluation of IT Impacts

2. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 2 Introduction Cost-benefit analysis principles Methods used to evaluate economic benefits and costs in the research literature Problems with application in construction Scale of engineering value-added Capitalization Benefits across a supply chain

3. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 3 Resources 1.A FRAMEWORK FOR MEASURING IT INNOVATION BENEFITS, ITCON, Andresen et al. 2000A FRAMEWORK FOR MEASURING IT INNOVATION BENEFITS 2.Cost and Schedule Impacts of Information Management on EPC Process, ASCE Journal of Management in Engineering, Back & Moreau, 2000Cost and Schedule Impacts of Information Management on EPC Process 3.Evaluation of IT costs in construction, Automation in Construction, Love and Irani 2001Evaluation of IT costs in construction

4. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 4 Resources 1.Benefits and Cost of Research: A Case Study of Construction Systems Integration and Automation technologies in Commercial Buildings NISTIR 6763, Chapman 2001 2.Impacts of Design/Information technology on Building and Industrial Projects NIST GCR 01-828 Thomas et al. 2001

5. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 5 The problem “The inability to quantify process improvements resulting from information management strategies is a key barrier to their full implementation.” (Back and Moreau 2000)

6. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 6 The problem, continued “The lack of a perceived business case for IT investments is a major obstacle to effective adoption and application of the technology in the sector.” (Andresen et al. 2000)

7. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 7 What are the formal economic measures for evaluating investment benefits? Present Value of Net Benefits and/or Net Savings Benefit-to-Cost Ratio ; Savings-to- Investment Ratio Adjusted Internal Rate of Return (ROR)

8. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 8 What are the terms ? t = a unit of time, usually a year T = the length of the study period B t = Benefits in year t (income) S t = Savings in year t C t = Costs in year t (indirect costs) I t = Investments in year t (direct costs) d = discount rate (%)

9. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 9 Net Present Values Useful for Planning Investments Useful for Accept/Reject Decisions Not useful for ranking alternatives

10. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 10 Benefit to Cost Ratio Useful for Accept/Reject Decisions Useful for ranking alternatives

11. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 11 Internal Rate of Return Useful for Accept/Reject Decisions Useful for ranking alternatives

12. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 12 Why are they rarely used for evaluating IT benefits in construction? Evaluating savings is difficult, and there are “intangible” and “strategic” benefits. Evaluating indirect costs is difficult. Credibility of estimations is an issue. No assessment of risk. Construction is project based – projects differ. Benefits (and costs) cross organizational boundaries.

13. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 13 What alternatives have been used? Post-fact measurement in specific cases. Statistical comparison using surveys (e.g. Thomas et al. 2001). Process modeling and simulation (e.g. Back and Moreau 2000) Non-numeric evaluation (Andresen et al. 2000).

14. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 14 Focus on short-term impacts Easily identifiable investments Estimate short-term costs Estimate savings based on process model comparisons within the organization Calculate IRR. Test IRR > d ?

15. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 15 Sensitivity to Uncertainty Identify uncertain inputs Estimate their uncertainty (PDF) Perform sensitivity analysis, OR Perform simulation to compute CDF

16. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 16 CDF Result Example

17. Strategies for IT Adoption in the Building Industry © 2002 Prof. C.M. Eastman & Dr. R. Sacks 17 Relevant Results Is there a positive IRR? Scale of investment required – can the industry or any company support it? What are the risks?