Life Cycle Cost Analysis
It considers all the expenses incurred during the buying, owning, and selling of a building or building system.
What is Life Cycle Cost Analysis?
When calculating the overall cost of owning a facility, the method known as life-cycle cost analysis (LCCA) is typically utilized. It considers all the expenses incurred while buying, owning, and selling a building or building system.
LCCA is particularly helpful when comparing project alternatives that meet the exact performance requirements but differ in terms of initial and operating costs to select the option that maximizes net savings.
For instance, life cycle cost analysis (LCCA) can be used to determine whether or not it is cost-effective to include high-performance HVAC or glazing systems in a building.
These systems may have higher initial costs, but they have significantly lower costs of operation and maintenance over their lifetime. When it comes to resource distribution, the LCCA method is inefficient.
The metric of economic evaluation that is the least complicated and most straightforward is the lowest life-cycle cost (LCC).
Other frequently used metrics include the internal rate of return, the payback period, the savings-to-investment ratio (also known as the savings benefit-to-cost ratio), net savings (also known as net benefits), and savings.
They are consistent with the Lowest LCC evaluation measure if the same parameters and study period are used.
Building economists, certified value specialists, cost engineers, architects, quantity surveyors, operations researchers, and others may employ one or more evaluation techniques.
Whether it is called cost estimating, value engineering, or economic analysis, the approach to making cost-effective choices for building-related projects can be pretty similar.
Understanding Life Cycle Cost Analysis
An LCCA's purpose is to estimate the overall costs of project alternatives and select the design that ensures the facility has the lowest overall cost of ownership consistent with its quality and function.
To reduce life-cycle costs, the LCCA should be performed early in the design process while there is still time to refine the design (LCC).
The first and most challenging task of an LCCA, or any economic evaluation method, is to determine the economic effects of alternative building and building system designs and to quantify and express these effects in dollar amounts.
Costs
A building or building system has considerable costs associated with its acquisition, operation, maintenance, and disposal. Building-related expenses are typically classified as follows:
- Purchase, investment, and construction costs include initial costs.
- Costs of operation, upkeep, and repairs
- Fuel costs
- cost of replacement
- Resale, salvage, or disposal costs are considered residual values.
- Finance Fees is an Interest payments on loans
- Non-financial advantages or expenses
Only those costs within each category relevant to the decision and significant in amount are required to make a sound investment decision.
Costs are relevant when they differ between project alternatives; they are significant when they are large enough to make a credible difference in the LCC of a project alternative.
All costs are entered in today's dollars as base-year amounts; the LCCA method escalates all parts to their future year of occurrence and discounts them back to the base date to convert them to present values.
Life Cycle Cost Analysis for Infrastructure
Life cycle cost analysis can be used to assess different infrastructural sectors such as:
Initial costs
Capital investment costs for land acquisition, construction, or renovation, as well as the equipment required to operate a facility, may be included in the initial prices.
If land acquisition costs differ between design alternatives, they must be included in the initial cost estimate. This would be the case, for example, if renovating an existing facility were compared to the cost of new construction on purchased land.
Construction costs: For preliminary economic analyses of alternative building designs or systems, detailed estimates of construction costs are not required.
Typically, such estimates are unavailable until the design is advanced and the opportunity for cost-cutting design changes has passed. However, LCCA can be repeated throughout the design process if more detailed cost information becomes available.
Construction costs are initially estimated using historical data from similar facilities. They can also be obtained from government or private-sector cost estimating guides and databases.
The Tri-Services Parametric Estimating System (TPES) created models of various facility types by determining critical cost parameters (such as the number of floors, area and volume, and perimeter length) and relating these values through algebraic formulas to predict costs of a variety of building systems, subsystems, and assemblies.
Energy and water costs
Energy, water, and other utility operational expenses are determined by consumption, current rates, and price projections.
Energy consumption and, to a lesser extent, water consumption are interdependent with the building configuration and the building envelope.
Because of this interdependence, energy and water costs are typically assessed for the building rather than individual building systems or components.
Energy costs are frequently difficult to predict accurately during the design phase of a project. This is because there must be assumptions about use profiles, occupancy rates, and schedules, all of which influence energy consumption.
When selecting a program, you should consider whether you need annual, monthly, or hourly energy consumption figures. In addition, it would help if you also thought about whether the program adequately tracks energy consumption savings when simulated design changes or at different efficiency levels.
If you require annual, monthly, or hourly energy consumption figures, your program choice should reflect that.
- Energy prices: To obtain an estimate that is as close to the actual cost of energy as possible, current energy price quotes from local suppliers should consider the rate type, rate structure, summer and winter differentials, block rates, and demand charges.
- Energy price projections: Energy prices are assumed to rise or fall at a different rate than general price inflation. This differential energy price escalation must be considered when estimating future energy costs.
Energy price projections can be obtained from the supplier or the DOE in Discount Factors for Life-Cycle Cost Analysis, Annual Supplement to NIST Handbook 135, published annually on April 1st.
Water costs should be treated similarly to energy costs. Water costs are typically divided into two categories: water usage costs and water disposal costs. The DOE does not publish water price projections.
The operation, maintenance, and repair costs
Estimating the costs of operating the building without using fuel, as well as the costs of maintenance and repair (OM&R), is frequently more challenging than estimating the prices of other building expenses.
The operating schedules and maintenance standards of each building are unique, and even when comparing structures of the same age and type, there is a significant difference in the costs.
When attempting to estimate these costs, using engineering judgment is one of the most important things you can do.
It is not uncommon for estimates provided by suppliers and published estimating guides to incorporate the costs of maintenance and repairs. Some of the guidelines for data estimation derive cost information from statistical correlations of historical data (Means, BOMA), reports, and data.
For example, average owning and operating costs per square foot, building age, geographic location, number of stories, and square footage.
The Whitestone Research Facility Maintenance and Repair Cost Reference lists annualized prices for building systems and components and service life predictions for certain building parts.
A specialized OM&R database for military construction is accessible through the Huntsville Division of the US Army Corps of Engineers.
1. Replacement costs
The number and timing of capital replacements of building systems are determined by the system's estimated life and the length of the study period. Estimate replacement costs and expected useful lives using the same sources that provide cost estimates for initial investments.
Using their cost as the base date is a good starting point for estimating future replacement costs. The LCCA method will raise base-year amounts to the time of occurrence in the future.
2. Residual values
The value of a system (or component) after the study period, or at the time it is replaced during the study period, is known as the system's or component's residual value.
After deducting the costs associated with selling, converting, or disposing of the asset, the residual value can be determined by using the value that remains in place, the resale value, the salvage value, or the scrap value.
The residual value of a system with a remaining useful life can be calculated by linearly prorating its initial costs. For example, if a system with a 20-year expected useful life were installed eight years before the end of the study period, the residual value would be 0.6 (=(20-8)/20) of its initial cost.
Other costs
Other costs such as:
1. Finance charges and taxes: Finance charges are usually irrelevant for federal projects.
However, finance charges and other payments apply if a project is funded by an Energy Savings Performance Contract (ESPC) or Utility Energy Services Contract (UESC) (UESC).
Finance charges are typically incorporated into contract payments negotiated with the Energy Service Company (ESCO) or utility.
2. Non-monetary benefits or costs: Non-monetary benefits or costs are project-related effects that cannot be objectively quantified. Non-monetary products include the benefit of a tranquil HVAC system or an expected but difficult-to-quantify productivity gain due to improved lighting.
These effects are, by definition, external to the LCCA, but if they are significant, they should be factored into the final investment decision and documented. Consider Non-Monetary Benefits Like Aesthetics, Historic Preservation, Security, and Safety.
You can use the analytical hierarchy process (AHP) to formalize the inclusion of non-monetary costs or benefits in your decision-making.
The AHP is one of several multi-attribute decision analysis (MADA) techniques that evaluate project options by considering non-financial aspects (qualitative and quantitative) in addition to conventional economic assessment metrics.
When making building capital investment decisions, ASTM International's ASTM E 1765 Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes outlines a method for calculating and interpreting AHP scores of a project's total overall desirability.
The WBDG Productive Branch, for example, is a source of information for estimating productivity costs.
Life cycle cost calculation
The total life-cycle costs for each option are determined by listing all prices by year and quantity and discounting them to present value:
I + Reply — Res + E + W + OM&R + O = LCC
Where
- LCC = Total LCC of a particular alternative in present-value (PV) dollars
- I = the price of the PV investment (if incurred at the base date, they need not be discounted)
- Repl = capital replacement costs for PV.
- Res = PV residual value (resale value, salvage value) less disposal cost
- E = cost of energy in PV
- W = cost of water in PV
- OM&R = PV of operating, maintenance, and repair expenses not related to fuel
- O = PV for additional costs (e.g., contract costs for ESPCs or UESCs)
Additional economic evaluation metrics include
- Net Savings (NS) refers to the money saved after deducting the amount spent on fixed assets.
- Savings-to-Investment Ratio (SIR) is calculated by dividing the projected savings in energy costs over the financing agreement by the total installed cost of the project, which takes into account the cost of the equipment and the installation and financing.
- Adjusted Internal Rate of Return (AIRR) and adjusts for differences in the assumed reinvestment rates of initial cash outlays and subsequent cash inflows, which results in an improved value for the internal rate of return.
- Simple Payback (SPB) is calculated as the years required for the amount of money saved due to the renovation to equal the amount invested.
- Discounted Payback (DPB) is a method of calculating a project's potential return on investment that falls under the purview of the capital budgeting process.
On occasion, they must adhere to special legal requirements.
Some government programs need a Payback Period as a project evaluation screening criterion.
Net Saving, Saving-to-Investment Ratio, and Adjusted Internal Rate of Return are consistent with the lowest Life cycle cost of an option when calculated and applied correctly, using the same time-adjusted input values and assumptions.
Payback measures, whether simple payback or discounted payback, can only be calculated across the whole study period and not just the years of the payback period and still be consistent with LCCA.
Uncertainty Assessment In Life-Cycle Cost Analysis
Building-related investment decisions are frequently fraught with uncertainty about costs and potential savings. An LCCA dramatically increases the likelihood of selecting a project that will save money in the long run.
However, there may still be some uncertainty surrounding the LCC results. This is because LCCAs are typically performed early in the design process, when only estimates of costs and savings, rather than specific dollar amounts, are available. Because input values are uncertain, actual results may differ from estimated results.
The price of choosing the "wrong" project alternative can be calculated. Deterministic methods can be carried out efficiently and don't require extra materials or knowledge, like sensitivity analysis or break-even analysis.
They produce a single-point estimate of the impact of the analytic result on the uncertain input data.
On the other hand, probabilistic approaches assess risk exposure by determining probabilities of reaching various economic worth values using ambiguous probability distributions.
However, they have more informational and technical requirements than deterministic techniques. Whether one or the other method is used is determined by factors such as the size of the project, its importance, and the available resources.
Because sensitivity analysis and break-even analysis are both simple to perform, they should be included in every LCCA.
Researched and authored by Ruxue Bai | LinkedIn
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