What is whole life cost analysis?May 2006
BSRIA runs whole life costing training courses, publishes a whole life costing analysis guide and provides consultancy to help companies apply whole life costing to their projects.
The capital cost of a building or the services within a building is only part - and a small part - of the total economic pie. The operating and maintenance costs associated with that capital cost can outweigh the initial investment several times over.
For example, the operating costs of a hospital consume the equivalent of the capital cost every two to three years. This can continue for 40 years or more. The operating costs of a school can consume the equivalent of the capital cost every four to five years - and can remain in service for a century. To consider only the initial cost and accept whatever on-going costs are incurred are akin to buying a car that you cannot afford to insure or fill with petrol.
The UK government has taken a decision to make all construction procurement choices on the basis of whole life costs - HM Treasury guidance stipulates this specifically. This general ruling has been crystallized in Private Finance Initiative (PFI) and Public Private Partnerships (PPP) contracting.
The focus of PFI and PPP on long-term risk management and long-term operation and maintenance makes comprehensive whole life costing a necessity. Government procurement outside of PFI and PPP has an emphasis on whole life costs at all levels - including local authority and housing association procurement.
The use of whole life costs in the private sector makes good sense if all parties are to achieve long-term economic systems and buildings. The lowest cost now culture is incompatible with long-term profitability; long-term energy efficiency; and systems which are to satisfy end-user requirements.
There is a great deal of confusion surrounding whole life costing - what it is, what it does, what it contains, and what it can be used for. There are many standard texts on the subject of whole life costing and whole life cost analysis (WLCA). There are also Standards such as BS ISO 15686, together with Government and other guidance in publications such as the H M Treasury Green Book, Office of Government Commerce (OGC) Procurement Guide 07, and BS EN 60300. Unfortunately there seems to be no consensus regarding the nomenclature to be used.
To some, whole life costing includes service life planning; to others it means the equivalent annual cost of the project. To yet others the definition of the maintenance regime is primary. Although all of these issues are important and provide input to, or are an output from whole life cost analysis, none of them actually are WLCA.
The use of life cycle costing also causes a high degree of confusion. Our American colleagues use life cycle costing to mean whole life costing, but there are many different interpretations in the UK. In at least one case, life cycle costing is shown as the simple addition of the costs incurred in each year with no discounting.
Even the OGC uses whole life costing and life cycle costing interchangeably - in the Successful Delivery Toolkit series the title of the document is Life Cycle Costing, yet its document Achieving Excellence Guide No. 7 is entitled Whole Life Costing. The two mean the same thing as far as OGC is concerned.
So, what is whole life costing?
Whole life costing is an integral part of the overall process of turning a client's business related functional requirements into a physical asset which provides whole life value for that client. The basis of whole life costing is that the investment of a certain amount of money today will, with the addition of interest, pay a bill of higher value in the future.
The actual description of WLCA is: "a method of project economic evaluation in which all costs arising, and benefits accrued from installing, owning, operating, maintaining, and ultimately disposing of a project are considered to be potentially important to that decision."
There is only one evaluation criterion in whole life cost analysis - that the scheme with the lowest whole life cost is the preferred choice. This does not mean that the scheme with the lowest whole life cost MUST be implemented.
WLCA is not a stand-alone activity. As described in BS ISO 15686, WLCA is a part of the overall process between the client's business case and the commencement of the project to satisfy the requirements of that case.
The result of the WLCA is only one of the criteria imposed on the final selection of a design option (see figure 1). The technical and environmental assessments, together with WLCA and client business input will provide a single solution which, although perhaps not optimum in any single assessment area, will be the best compromise between all of them.
The objective of WLCA, together with the technical, environmental, social and other evaluations is to provide the decision maker with sufficient information on which to base a reasoned judgement - none of the evaluations are designed to make the decision.
It is often assumed that the solution with the lowest whole life cost is automatically the one with the highest initial cost. This is not always the case. Carrying out the analysis is the only way to find out.
Barriers to whole life costing
Commercial developers leasing property feel that they have no need to compare whole life costs as they are only interested in initial capital costs. Immediately after these costs are incurred they hope to sell the asset (and, hence, incur no recurring costs).
With the introduction of Building Regulations Part L2 and the growing awareness of clients of the need to minimise on-going operation and maintenance costs, there is a need for even commercial developers to understand and provide whole life cost information.
- Use of WLCA within the construction industry is being restricted by two main reasons:
- Major client institutions separate and fund capital costs and running costs into separate budgets.
Manufacturers of capital equipment are unable to provide cost and longevity data in sufficient detail and with sufficient contextual information to enable the recurring operation and maintenance costs and periodicity to be accurately estimated.
WLCA has not been generally implemented within the UK due to:
- Ignorance by client.
- WLCA analyses do not separate capital and running costs in the final adjudication. This does not align with the typical OpEx (Operational Expenditure) and CapEx (Capital Expenditure) split in most companies
- Lack of framework for collecting relevant data, together with standard techniques for modifying rule of thumb data to specific projects
- Buildings are often non-standard and complex. To evaluate the relationships between the many different services and structural elements involved requires a close-knit partnership between all parties which, traditionally, does not exist.
Clients are seeking buildings that have lowest possible whole life cost, together with the longest serviceable life attainable within other parameters, the highest possible quality, the best appearance and the least taxes.
To achieve whole life value from a project, clients must be involved early on in the strategic decision making, especially within the decisions involving compromise between the client's functional requirements, the technical viability, the economic performance and the environmental impact.
The difference between the scheme with the lowest whole life cost and any other alternative comes straight from the profit bottom line - profit that is not made.