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The whole life cost processJuly 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.

 

WLCA (Whole Life Cost Analysis) is not a standalone process.  It relies on a number of pre-selected options being delivered by the design process which are technically feasible, which meet the clients functional and other business related requirements, and which are environmentally acceptable.

The output from the analysis will, undoubtedly, need to go through a number of iterations of technical and environmental assessment together with a review against the client's functional requirements before a final selection is made.

The Design Phase should identify several ways in which the client's business requirements can be technically achieved.

Whilst it is not the purpose or intention of this article to include details of the other assessment processes, it is worthwhile to recognise the basics of those activities as they affect WLCA.

Functionality

It is essential that the alternatives costed with WLCA address the same client functional requirement set.

The value obtainable from WLCA depends largely on the imagination of the designer in identifying viable alternatives which address the full range of client functional requirements without introducing unwanted functions.

There may be additional technical functionality that cannot be removed through the Value Engineering process (possibly because the "standard" equipment comes with that functionality) but comparisons cannot be made between solutions which do not at least meet the client functional requirements.

If natural gas is not available in the location of the project, the provision of natural gas boilers is not an alternative to any other form of heating - unless the costs incurred in the provision of a new gas supply are included in the analysis.

Naturally, all alternatives must be technically feasible and be able to be implemented. Costing the provision of roof mounted air handling units is not valid if there is a ridged roof on the structure - unless the costs incurred in roof replacement and reinforcement are included. Costing such an alternative would also be wasted if planning permission is likely to be refused for the additional roof work.

The alternatives to be subjected to analysis are supplied via the Design Option evaluation as described in BS ISO 15686.

The "do nothing" alternative should always be considered unless there is an overwhelming reason not to. This alternative includes the "do it the way we've always done it" situation - which may or may not be the most cost effective means of achieving the client's requirements.

It can, sometimes, be difficult to decide where to stop when undertaking an analysis. For example, one boiler system may take up less space than another. This may, in turn, result in a smaller boiler room resulting in more letable space. But this extra space will need heating, cooling and lighting. Will these additional loads offset the savings made? Will it even be necessary to increase the boiler size to accommodate the heating load? The questions are almost endless.

Only through experience will it be possible to determine where to stop.

The Study Period

The Study Period is that period of time over which the client has an interest in the project. Each client is likely to have a different perspective of this period depending on factors such as the type of business; the location; the business plan; and the type of project. A retail client may, because of the transient nature of many areas within the retail sector, require only a five year Study Period for mechanical services, 10 years for electrical services and 20 years for structure, whilst a financial headquarters building may be costed for 30 or more years for all services and longer for the structure (these values are for illustration only).

The Client's business plan will be the primary driver for the decision regarding the length of the Study Period.

The length of the Study Period can have a dramatic effect on the results of the analysis.

However, if the analysis were extended to 25 years, it would be seen that, in Year 22 a major expenditure was expected (see figure 2).

This additional expenditure changes the result of the analysis, and makes the Whole Life Cost of the Base Case lower than that of the Alternative.

As noted above, the Study Period should be dictated by the Client's business plan.
One example of this is where the plan indicates that in, for example, 10 years the business will outgrow its present premises, there is little point in costing equipment and energy use in those premises for 25 years. In effect what that client would be doing is passing on 15 years worth of cost efficiencies to someone else - possibly a competitor

Discount Rate

The Discount Rate is NOT the inflation rate - it is the minimum acceptable rate of return on the money invested. In Constant £ terms, the Discount Rate is over-and-above inflation. It will have a significant effect on the outcome of the analysis and is one of the most important variables requiring attention.

Costs in a WLCA can be in Constant or Current £'s.

Constant £'s have a uniform purchasing power and are exclusive of inflation whilst Current £'s include general inflation. It is usual for Constant £'s to be used as this removes the need for inflation-effects to be calculated and has little overall effect on the result.

The H M Treasury Discount Rate, to be used in all Public sector analyses, is 3.5% (as from April 2004 to the publication date).

The private sector client may, however, require a different rate to be used. It is essential that this rate is agreed before any analyses are undertaken.

Where an analysis extends beyond 30 years different rates should be applied.

Great care must be taken in the choice of both Study Period and Discount Rate if a truly effective analysis is to be carried out.

 

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