The Complete Picture
Mike Packham
The first article in this series examined the theory behind whole-life/life-cycle costing and concluded that the wholelife/ life-cycle cost of an asset is best represented by the sum of its capital, life-cycle replacement and operational/occupational cost components.
In considering this proposition it is important to recognise that these various cost components are incurred at different times throughout the asset’s lifespan. Thus in order to carry out a whole-life/life-cycle costing exercise two types of information are required:
- costs: capital, life-cycle replacement and operational/ occupational
- life-span: of assets, components, systems etc With regard to construction costs, we are fortunate in the UK to have access to the Building Cost Information Service (BCIS) which provides both a standard classification for building types and a protocol for recording the associated construction costs. We therefore have an available source of robust construction cost information that can help us to ensure that evaluations are carried out on a like-for-like basis
Calculating costs
The BCIS also provides a useful starting point for life-cycle replacement cost calculations. This on the premise that the initial capital cost of an asset, system or component will usually provide a sound basis for building up from first principles an assessment of its overall life-cycle replacement cost. Thus if we take the example of a lift replacement then our starting point should be its supply and installation cost; not forgetting of course any associated costs in terms of constructing the lift shaft, plant room and so on. Thereafter we need to make adjustment for:
- any parts of the original installation that will not be ISTOCK affected by the proposed works. It is actually quite rare for something to require 100 per cent replacement and there are usually ‘bits’ of the installation that can be re-used; in the case in point this might include the lift guide rails
- any temporary works required such as scaffolding to the lift shaft, temporary barriers while the lift doors are replaced
- out of normal hours working — most life-cycle replacement works take place in occupied buildings, therefore at least some of the works will need to be undertaken at weekends or in the evenings, increasing the cost through overtime payments/li>
- business disruption — with our lift replacement example, we may be involved with a high rise building with a lot of inter-communication between floors. In this instance, the cost to the business through loss of productivity due to increased travel times resulting from the lift being out of action will be several orders of magnitude greater than for an organisation where the lift is only used for goods distribution/li>
Operational costs
Moving on to consider operational and occupational costs, Building Maintenance Information (BMI) provides information on the hard FM cost centres such as maintenance, cleaning, utilities and administration. Again this is supported by a strict classification and cost allocation protocol which facilitates like-for-like comparison. Unfortunately we do not have the equivalent for the occupational side of things. Otherwise referred to as soft FM, this category incorporates both business and staff support services and thus encompasses activities such as reprographics, catering, travel and archiving. Clearly these represent major areas of spend for most organisations and it is regrettable that better information is not available about them for whole-life/life-cycle cost modelling purposes. Nevertheless, some organisations do publish occupancy cost information albeit it in grossed-up cost per capita form, which can make inter-dataset comparison difficult.
While there are gaps in the cost information available, with some forethought these can be closed to provide a reliable end result. The situation with regard to ‘life’ is less clear cut. As a recent Bsria report puts it: “to answer the question ‘how long will it last?’ is as easy as to answer ‘how long is a piece of string?'” One of the problems is the way we choose to define ‘life’. There are a number of descriptors in common (and often) inter-changeable use. A few examples are given below:
- Design life
- Warranted life
- Service life
- Economic life
- Useful life
- Technological life
This list is by no means exhaustive and you will doubtless be able to add to it from your own experience. To expand on the implications of this a little further, we sometimes get asked by manufacturers to model the lifecycle costs of their products. Some of the first information we ask for is the ‘expected life’ and the ‘warranted life,’ and which of the two they want us to use in the calculations. The answer is usually ‘warranted life.’ This despite the fact that it is invariably shorter than ‘expected life’ and will therefore show their product to be more expensive in lifecycle terms. Clearly the potential legal implications of the warranty period are seen as outweighing any marketing advantages arising from a lower life-cycle cost.
Available sources of life-cycle information include the HAPM Component Life Manual and BCIS’s Life Expectancy of Building Components. Unfortunately the ranges provided for the life-spans of components are very wide. This forces the whole-life/life-cycle cost modeller to confront the dilemma of where within this range the asset they are costing will lie. If you consider that one particular publication gives the life expectancy of air-conditioning induction units as anything between 13 and 27 years and then multiply this by the vast number of different components that go to make up a typical building, then you start to get a flavour of the full extent of the difficulties of accurate whole-life/life-cycle cost prediction.
Present value factors
Having assembled the required cost and life-span information the final part of the process is to apply the appropriate present value factor(s). As mentioned in the previous article, the present value factor is a mechanism that is used to bring the different costs incurred at various intervals during an asset’s lifetime back to a common dateline. The formula (see box below), essentially involves calculating the inverse of one plus the rate of interest/ investment compounded over the period until the cost is incurred. The calculation is actually easier to do than it is to explain. By way of example, a cost incurred at year two of an asset’s life-span at a rate of investment of 5 per cent attracts a present value factor of 0.907; thus if the cost to be incurred is £10,000 then at today’s date its present value would be £9,070.
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Clearly the rate of interest/investment used can have a marked effect on the end result. If we redo the above calculation using a rate of 10 per cent then the present value factor is 0.826 meaning that our £10,000 becomes £8,260 at today’s date. The choice of rate, therefore, is something that requires careful consideration and in this context it is worth noting that the Treasury’s Green Book currently uses a rate of 3.5 per cent for the first 30 years of an asset’s life, dropping thereafter to 3 per cent.
Mike Packham is a partner at FM consultancy Bernard Williams Associates