We've detected you are coming from a location inside the Americas.

Please choose one of the following:

Close
Global sites: BSRIA Inc BSRIA SARL BSRIA Business Consulting (Beijing) Co., Ltd.
Phone+44 (0) 1344 465600 Contact BSRIA

Elements needed for a Whole Life Cost AnalysisSeptember 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.

 

In this article we will look at some of the cost elements needed for a Whole Life Cost Analysis.

Determining Element life

An essential input to WLCA is the definition of the life, in years, of the equipment or construction elements to be used.

Unfortunately, the data supplied by manufacturers and the industry in general is completely unsuitable for use in a WLC analysis.

To answer the question "how long will it last" is as easy as it is to answer as "how long is a piece of string".

That manufacturers are reluctant to provide information regarding how long their particular equipment or construction element will last beyond whatever warranty they provide is understandable, given that they will have no idea of the external and internal factors to which that equipment will be subjected.

What is disappointing is that few, if any, are able to provide the context within which they developed whatever life expectancy information is available.

The acquisition of accurate data concerning the expected "life" of equipment, materials and other components will be the most difficult activity within an analysis.

This "life" can be described by different members of the project team in different ways. Amongst these are:

  • Design Life
  • Service Life
  • Economic life
  • Useful life
  • Technological life

Kirk and Dell'Isola (1) define three of these as follows:

Economic life is the estimated number of years until that item no longer represents the least expensive method of performing the functions required of it.
Technological life is the estimated number of years until technology causes an item to become obsolete.
Useful life is the estimated number of years during which an item will perform the functions required of it in accordance with some pre-established standard.

These headline statements are meaningless without some form of context.


For example, does "design life" mean that the business requirements which are served by the equipment disappear at the end of the design life?

Or that the equipment fails to meet the minimum service level at that time? But what happens to the business requirement?

Manufacturers and standard texts (e.g. CIBSE "Guide to ownership, operation and maintenance of building services") often quote a range for the life of certain types of equipment.

For example, calorifier and heat exchanger life is quoted as 20-25 years. Such ranges are of no use in WLCA.

If we look at the Whole Life capital cost of a calorifier and heat exchanger costing £10,000.00 and with 15, 20 and 25 year life respectively to replacement, its Net Present Value (2) over a 45 year costing period is:

  • £23,182.00 for a life of 15 years
  • £18,602.00 for a life of 20 years, and
  • £14,776.00 for a life of 25 years

Not a good start to an economic evaluation.

Even where a single value is given, it can be difficult, if not impossible, to understand the context and environmental conditions in and under which that value is given - for example, a water pump is unlikely to have as long a life when used in a hard water area as the same pump, used and maintained in exactly the same way, in a soft water area.

There are mechanisms, such as deterioration modelling, which can throw light on this.

Maintenance and Energy

Costs of the maintenance of building engineering services and the cost of energy are components part of a building's life cycle costs.

The long term nature of the impact of good and bad maintenance does not assist in proper analysis of benefits, and the variety of maintenance providers and policies do not make the collection and analysis of this management information easy.

The reason for lack of emphasis on maintenance costs is that they can be varied by management without immediately obvious affect whereas utility costs can only be varied by positive action which has a tangible effect - such as reducing or increasing lighting levels.

It is also usual for the maintenance and operations budget (OpEx) to be dealt with separately from the capital budget (CapEx).

As CapEx has an immediate effect on the balance sheet whereas OpEx is spread over many years, much less attention is paid to the long term cost of OpEx expenditure.

Over the life of the analysis the combined revenue cost of utilities and maintenance can easily exceed the original capital expenditure. For example, it has been estimated that a highly serviced healthcare facility could spend the OpEx equivalent of the capital cost every 3-5 years.
 

The table given in Figure 1 shows quite clearly the difficulty that will be experienced in undertaking a Whole Life Cost analysis relying on rule of thumb data. The difference between the lower and upper costs for "office" is in the order of 1:400 - a range providing a high degree of inaccuracy.

Another example of the distance between CapEx and OpEx in the electrical industry is the installation of power and lighting cable.

The [link= http://www.copper.org caption=The Copper Development Association] has produced several examples where it is proven economic to increase the conductor size of cable above the IEE minimum recommendations. The reduced energy loss thus achieved, over the Study Period, more than compensates for additional capital expenditure.

The same proposition applies to high efficiency motors, transformers, and lighting systems.

Occupation patterns

The occupation pattern expected in the facility has some considerable influence upon the utility costs.

Some buildings operating 24 hours a day; the most obvious types were hospitals,
data processing centres and residential buildings (hotels, university campus halls and aged persons homes) and also included were a number of offices operating 24 hours.

Some offices have significantly extended hours (06:00 -22:00 brs) but it must be ascertained whether all or part of the buildings were being operated for these periods.

Utility Costs

It is certain that utility costs, especially energy, will generally continue to increase over the years.

In its publication "Fuel Poverty in England - the Governments Action Plan" DEFRA quotes in a Base-case scenario, a 13% increase in the price of electricity and a 4% rise in the price of gas between 2001 and 2010 in real terms. This is broken down into a 2% rise in electricity prices between 2001 and 2005 and a 10% rise between 2005 and 2010. For gas there is a 15% rise between 2001 and 2005 and a 10% fall between 2005 and 2010.

Prediction of energy costs is essential to a reasonably accurate analysis and is an area which should be subjected to sensitivity analysis and regular review.

Taxation and Tax Credits

Taxation and Tax Credits/ Allowances are dealt with in the same way as any other cost.
Depreciation is an artificial expense that allows a company to spread the capital cost of an asset over a period of years for tax purpose.

These annual costs will result in a lesser tax burden of diminishing value over the allowable period.

In WLCA the "tax credit" can be used as a series of Lump Sum incomes.
Enhanced Capital Allowances (ECAs) enable a business to claim 100% first-year capital allowances on their spending on qualifying plant and machinery. Businesses can write off the whole of the capital cost of their investment in these technologies against their taxable profits of the period during which they make the investment.
 

This can deliver a helpful cash flow boost and a shortened payback period.
There are three schemes for ECAs:

  • Energy-saving plant and machinery
  • Low carbon dioxide emission cars and natural gas and hydrogen refuelling infrastructure
  • Water conservation plant and machinery

In Whole Life Cost terms, capital income now has a higher net present value than the same income in future years. Under the ECA scheme the income can be accrued immediately (see Figure 2).

Using the percentages given in Figure 2, a Discount Rate of 3.5% (Treasury rate) and a Study Period of 25 years, the comparison of Whole Life Costs is shown in Figure 3.

As can be seen, the Alternative - the full reclaim is allowed - has a lower Whole Life Cost than the Base Case - where a diminishing percentage is allowed. This means that the equipment against which the ECA allowance is claimed would be have close to a 13% lower Net Present Value.

This allowance can be claimed against the price paid for a new product and the costs directly associated with the installation of the kit.

(1) Kirk S J and Dell'Isola A J Life cycle costing for design professionals (New York: McGraw Hill, 1995)
(2) These figures assume a 3% Discount Rate




 

Visa, Visa Debit, Mastercard, Maestro cards accepted BSI ISO 9001 Cyber Essentials Investors in People