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National initiative on whole life costing
National initiative on whole life costing
Keywords: Construction costs, Performance, Operational costs
The Whole Life Cost Forum was launched by a group of major construction industry and client companies, including BAA, Amey, Kvaerner, Gardiner and Theobald, Oscar Faber, Sarnafil and Taywoods.
The Forum aims to promote the use of whole life costs when making construction decisions, rather than capital costs alone, and to provide the means of predicting, managing and reducing (without loss of quality) these costs.
This approach can bring important benefits to construction industry clients – and so to the industry itself – in terms of the service life costs, efficiency of use and environmental impacts of built assets.
Organizations from the whole spectrum of construction interests are now being invited to apply to join the Forum. But full membership will initially be limited to 80, spread across eight categories: funder, owner or occupier, developer, consultant (construction), consultant (other), contractor, facilities manager and supplier/manufacturer.
Members will share data and expertise, and will have exclusive access to structured and filtered information on construction costs, durability and performance. The initiative will begin with a pilot programme (involving a representative group of Forum members) to establish what whole life cost work has been done, and what data are available in which formats. This will be used to create a structure for gaining information from each member, from which whole life cost benchmarks will be developed.
BRE's Centre for Whole Life Performance will host the Forum and will contribute data and expertise. It will take the role, as an independent, non-sector specific body, of making information available to members in an anonymous and user-friendly format. The Centre will also provide a single point of contact with:
representatives of non-member organizations and initiatives, other experts in BRE and the Construction Best Practice Programme;
publishers of agreed outputs;
ISO/BSI on developing codes and standards.
Membership of the Forum will cost £3,000 per annum – it is anticipated that members will join for at least three years.
Further information on joining the Forum is available from Lisa Morris, Centre for Whole Life Performance, BRE, Garston, Watford WD2 7JR. Tel: 01923 664348; E-mail: email@example.com
What is whole life costing?
There are a number of definitions for whole life (or life cycle) costing. In the emerging ISO Standard 15686 on service life planning it is described as:
A tool to assist in assessing the cost performance of construction works, aimed at facilitating choices where there are alternative means of achieving the client's objectives, and where those alternatives differ not only in their initial costs but also in their subsequent operational costs.
Essentially, whole life costing is a means of comparing options and their associated cost and income streams over a period of time. Costs to be taken into account include initial capital or procurement costs, opportunity costs and future costs. Only options that meet the performance requirements for the built asset should be considered – those with lower costs over the period will be preferred.
Initial costs include design, construction and installation, purchase or leasing, fees and charges.
Future costs include all operating costs, such as rent, rates, cleaning, inspection, maintenance, repair, replacements/renewals, energy and utilities use, dismantling, disposal, security and management over the life of the built asset. Loss of revenue may also need to be taken into account – for example, to reflect the non-availability of the revenue-generating building during maintenance and refurbishment work.
The timing of future costs must be taken into account in the comparison of options. Future cost flows are discounted by a rate that relates present and future money values – which may include an allowance for inflationary changes.
Opportunity costs represent the cost of not having the money available for alternative investments (which would earn money) or the interest payable on loans to finance work.
In order to calculate operating and maintenance costs through the life of a constructed asset, the required life of the whole asset for new build, or residual life for refurbishment, must be agreed with the client. It is then possible to understand how many times shorter life elements and components may need to be replaced during that life, and the required maintenance to retain acceptable performance and its timing. Replacements should be considered as part of the business case for the initial investment appraisal, not dealt with separately when they arise. Where loss of functional performance will result in significant costs, these will need to be included.
If the proposed maintenance/replacement or refurbishment plan requires the facility to be shut down or to operate at reduced capacity, the impact of this on the cash flow and subsequent profitability of the business may drive the client to decide not to proceed with further considerations of these options. Disposal or demolition should be considered.
Costs and receipts, throughout the defined lives of different options, will occur at different times. Discounting costs and receipts incurred at different times to their Net Present Value (NPV) provides a true comparison of the whole life value of different options. In theory, the NPV of the costs and receipts incurred over the whole life of the asset could be invested, to provide a sinking fund to pay for the operating costs over its defined life.
Undertaking appraisals of the whole life costs of different options on the basis of NPVs permits clients to consider "what if?" questions to ensure that the impact of changes in key parts of the project appraisal are understood. Consideration of the need for major refurbishment or replacement will require a fresh whole life costing exercise, starting from an initial appraisal of the available options.
The decision to undertake refurbishment should include assessments of:
residual service lives of elements of the construction to be retained;
revised remaining service life of the constructed asset;
whether the original design life assumptions remain valid when set against achieved observed service lives;
the impact that new work may have on service life of existing asset – detriment or improvement;
loss of income and productivity of owner of the asset and loss of income and productivity of occupier's business during works;
the impact of current legislation on costs.