LIFE CYCLE COST CALCULATION MODELS FOR

BUILDINGS
Jutta Schade
1
Department of Civil, Mining and Environmental Engineering
Lule University of echnology, Lule, S!eden
ABSTRACT
Most commonly, production cost is the main cost factor in
construction and is often set to the minimum, !hich does not
necessarily improve the lifetime performance of "uildings# $o!ever,
a higher production cost might decrease total life cycle cost %LCC&# 't
is important, therefore, to sho! the construction client in the early
design phase the relationship "et!een design choices and the
resulting lifetime cost# oday, LCC calculation is used e(tensively for
industrial products to minimise production
cost and increase profit# Clearly, there are significant differences
"et!een an industrial product and a "uilding from the life cycle
perspective# he main differences
are the life of a "uilding and the lac) of industrialisation in the
"uilding process, especially during construction# hese factors ma)e
calculating LCC for a "uilding difficult early in the design process#
his paper presents a state of the art analysis in the area of LCC for
construction# 't offers a structural overvie! of theoretical economic
methods for LCC analyses and their restrictions as descri"ed in the
literature# he paper also reveals the primary data !hich are
re*uired to carry out a LCC analysis and discusses limitations in the
application of life cycle costing from the client+s perspective#
1. INTRODUCTION
,ccording to -.sariyildi. and olman %1//0&, the construction
industry is facing increased demands from society# Construction
clients as) for high *uality "uilding, lo!er cost and shorter lead1
time# he clients, !ho have to pay the "ill, have actually very little
influence over time, cost and *uality %-.sariyildi. and olman,
1//0&# 2uildings represent a large and long1lasting investment in
financial terms as !ell as in other resources %3"erg, 4556&#
1
'n cold climate regions !e spend a large amount of our time in
"uildings# he indoor environment of a "uilding is therefore very
important to us as it affects our !ell1 "eing and health#
'mprovements of lifetime *uality and cost effectiveness of "uildings
is conse*uently of common interest for the o!ner, the user and
society# Life cycle cost %LCC& for "uildings is therefore an important
tool for involving the construction client "etter in early stage design
decisions# $o!ever, regardless of its
importance, life cycle costing has found limited application so far %2a)is et al#, 4557&#
,n office "uilding !ill consume a"out three times its initial capital
cost over a 46 year period, "ut still far more attention is paid to the
initial capital cost %8lanagan and
1
9utta#schade:ltu#se
2
Je!ell, 4556&# 't should "e considered that higher production costs
can decrease the total LCC for a "uilding# ,s stated "y ;ota9i et al#
%4557& it is particularly important to sho! the relation "et!een the
design choices and the resulting lifetime cost %i#e# energy,
maintenance, and operation cleaning& %;ota9i et al#, 4557&#
his paper presents a state of the art revie! in the area of LCC in
construction# he aim is to descri"e the different advantages and
disadvantages of the main theoretical economic evaluation methods
for LCC calculation and sho! !hat relevant data and main sources
are needed# 8urthermore, the limited application of life cycle costing
in the construction sector from the clients+ perspective is discussed#
he paper is structured as follo!s# 8irst, the different definitions for
LCC are discussed# 'n section
4#4 the different economic evaluation methods for LCC are presented
and their different advantages and disadvantages are descri"ed#
Section 4#7 presents the main data and data groups for life cycle
costing# 'n Section 4#< the main data sources are discussed# Section
4#6 refers to clients+ limited re*uest for life cycle costing so far# he
research method is descri"ed in section 7# =esults, implementation
and e(ploitation are discussed in section <# 'n section 6, the
conclusions are presented#
2. LIFE CYCLE COSTING IN PERSPECTIVE
2.1. Definition of WLC, WLA n! LCC
here are different terms used in the literature today li)e, >cost in
use?, >life cycle costs? %LCC&, >!hole life costing? %@LC& and
>!hole life appraisal? %@L,&# @here %8lanagan and Je!ell, 4556&
defined that the terminology has changed over the years from
>cost in use? to >life cycle costing? and further to >!hole life
costing?# hey defined the ne! term >!hole life appraisal? !hich is
glo"ally used today and !hich contains consideration of the cost
"enefits and performance of the facilityA asset over its lifetime#
he draft of the 'S- Standard 16B0B16 %'S-, 4556& instead ma)es a
difference "et!een the e(pressions @LC and LCC# heir contention
is that @LC is e*uivalent to LCC plus e(ternal cost# Even there it is
admitted that sometimes all terms are used interchangea"ly, "ut the
'S- Standard does try to interpret those terms more narro!ly# he
Standard states that LCC should "e used to descri"e a limited
analysis of a fe! components !here instead >life cycle costing?
3
should "e understand as the cost calculations themselves and @LC
should seen as a "roader term, !hich covers a !ide range of
analysis# he Cor!egian Standard 7<6< %Cs, 4555& defined LCC as
including "oth original costs and cost incurred throughout the !hole
functional lifetime including demolition#
Discussions a"out !ording "ring a lot of confusion in this field# 'n
this article, LCC is used e*uivalent to @LC# LCC analysis is, in this
conte(t, to "e understood as an analysis over the !hole life cycle of
a "uilding# he term LCC is chosen as it is still the "etter )no!n
term today in practice#
2.2 E"#$tion of LCC %et&o!'
he literature sho!s a "road variation of economic evaluation
methods for LCC analysis# hey all have their advantages and
disadvantages# he methods have "een formed for different
purposes and the user should "e a!are of their limitations# he
4
revie!ed literature is structured in ta"le 1# he ta"le illustrates the
si( main economic evaluation methods for LCC, their advantages
and disadvantages and for !hat purposes they can "e used# he
literature sho!s that the most suita"le approach for LCC in the
construction industry is the net present value %CDE& method#
E(isting mathematical LCC models, !hich are "ased on CDE, have
various
advantages and disadvantages, as they differ in the "rea)do!n costs elements# he
model from the ,merican Society for esting Materials %e*n# 1&
for e(ample, distinguishes "et!een energy and other running
cost, !hich is useful in adopting different discount rates for
different cost items#
NPV = C + R S + A + M + E
### %1&
C = investment costs
R = replacement costs
S = the resale value at the end of study period
A = annually recurrin operatin! maintenance and repair costs
"e#cept enery costs$
M = non%annually recurrin operatin! maintenance and
repair cost "e#cept enery costs$ E = enery costs
2.( Dt )e*$i)e! fo) #ife +,+#e +o't +#+$#tion
he data re*uirements according to the revie!ed literature for
carrying out LCC analysis are categorised in figure 1# hese
different data influence the LCC in different stages of the life
cycle#
5
8igure 1# he re*uired data categories for a life cycle cost analysis
6
a"le 1# he advantages and disadvantages of economic evaluation methods for LCC
Met&o! W&t !oe' it +#+$#te A!"nt-e Di'!"nt-e U'.#e
fo)
Si%/#e /,.+0 Calculate the time re*uired to return the initial investment#
he investment !ith the shortest pay1"ac) time is the
most profita"le one %8lanagan et al#, 1/0/&#
Fuic) and easy
calculation# =esult easy
to interpret %8lanagan et
al#, 1/0/&#
Does not ta)e
inflation, interest or
cash flo! into account
%3"erg, 4556,
8lanagan et al#, 1/0/&#
=ough estimation if
the investment is
profita"le %8lanagan
et al#, 1/0/&#
Di'+o$nt
/,.+0
%et&o! 1DPP2
2asically the same as the simple pay"ac) method, it 9ust
ta)es the time value into account %8lanagan et al#,
1/0/&#
a)es the time value
of money into
account %8lanagan et
al#, 1/0/&#
'gnores all cash flo!
outside the pay"ac)
period %8lanagan et al#,
1/0/&
Should "e only used as
a screening devise not
as a decision advice
%8lanagan et al#,
1/0/&# Net
/)e'ent
"#$e
1NPV2
CDE is the result of the application of discount factors,
"ased on a re*uired rate of return to each years pro9ected
cash flo!, "oth in and out, so that the cash flo!s are
discounted to present value# 'n general if the CDE is
positive it is !orth !hile investing %Smullen and $and,
4556&# 2ut as in LCC the focuses is one cost rather than on
income the usual practice is to treat cost as positive and
income as negative# Conse*uently the "est choice "et!een
to! competing alternatives is the one !ith minimum CDE
%;ish) et al#, 4557&#
a)es the time value of
money into account#
Generates the return
e*ual to the mar)et rate
of interest# 't use all
availa"le data
%8lanagan et al#, 1/0/&#
Cot usa"le !hen the
comparing alternatives
have different life length#
Cot easy to interpret %;ish) et
al#, 4557&#
Most LCC models utili.e the CDE
method %;ish) et al#,
4557&# Cot usa"le if the
alternatives have different
life length %8lanagan et al#,
1/0/&#
E*$i"#ent
nn$#
+o't 1ECA2
his method e(press the one time CDE of an alternative
as a uniform e*uivalent annual cost, for that it ta)e the
factor present !orth of annuity into account %;ish) et al#,
4557&#
Different alternatives
!ith different lifes length
can "e compared %'S-,
455<&#
Just gives an average
num"er# 't does not
indicate the actual coast
during each year of the
LCC %'S-, 455<&#
Comparing different
alternatives !ith different life+s
length %'S-,
455<&#
Inte)n# )te
of )et$)n
1IRR2
he '== is a discounted cash flo! criterion !hich
determines an average rate of return "y reference to the
condition that the values "e reduced to .ero at the initial
point of time %Moles and erry, 1//H&# 't is possi"le to
calculate the test discount rate that !ill generate an CDE
of .ero# he alternative !ith the highest '== is the "est
alternative %'S-, 455<&
=esult get presented
in percent !hich
gives an o"vious
interpretation
%8lanagan et al#,
1/0/&#
Calculations need a trail
and error procedure# '==
can "e 9ust calculated if
the investments !ill
generate an income
%8lanagan et al#,
1/0/&#
Can "e only use if the
investments !ill generate an
income !hich is not al!ays
the case in the construction
industry%;ish) et al#, 4557&#
Net '"in- 1NS2 he CS is calculated as the difference "et!een the
present !orth of the income generated "y an investment
and the amounted invested# he alternative !ith the
highest net saving is the "est %;ish) et al#, 4557&#
Easily understood
investment appraisal
techni*ue %;ish) et
al#,
4557&#
CS can "e only use if the
investment generates an
income %;ish) et al#,
4557&#
Can "e used to compare
investment options %'S-,
455<&# 2ut 9ust if the
investment generates an
income %;ish) et al#, 4557&#
<
he occupancy and physical data could "e seen as the )ey factors in the early design stage# LCC estimation in this stage depends on data such as
floor area and the re*uirements for the "uilding# 8lanagan et al %1/0/& stressed the importance of occupancy data as other )ey factors, especially for
pu"lic "uildings# Derformance and *uality data are rather influenced "y policy decisions such as ho! !ell it should "e maintained and the degree of
cleanliness demanded %;ish) et al#, 4557&# Fuality
data are highly su"9ective and less readily accounta"le than cost data %8lanagan et
al#, 1/0/&# 'n the more detailed design stage, life cycle cost estimation is "ased more on performance and cost data of
a "uilding %2a)is et al#, 4557&# Cost data are most essential for LCC research# $o!ever, cost data that are not
complemented "y other data types !ould "e almost meaningless %8lanagan et al#, 1/0/&# hese data need to "e seen
in the conte(t of other data categories to o"tain a correct interpretation of them %;ish) et al#, 4557&#
't should "e considered that LCC is a decision ma)ing tool in the sense that it could "e used to select among
alternative pro9ects, designs or "uilding components# Conse*uently LCC data should "e presented in a !ay that
ena"les such comparison# 8or that reason the cost "rea)do!n structure is an important concept for LCC %2a)is et al#,
4557&#
here are several different standards %'S- 16B0B16A CS7<6<A ,SMA ,ustralianA Ce! Iealand1Standard& availa"le
to guide a LCC analysis# ,ll have different cost categories and slightly different cost "rea)do!n structures#
2.3 Min 'o$)+e' of !t
here are three main sources for data for LCC purposes#
x from the manufacturers, suppliers, contractors and testing specialistsJ
x historical dataJ and
x data from modelling techni*ues#
Data from manufacturers, suppliers, contractors and testing specialists can often "e seen as a "est guess# hey may
have a detailed )no!ledge of the performance and characteristics of their material and components, "ut do not have
)no!ledge of the !ays in !hich facilities are used %8lanagan and Je!ell, 4556&# $o!ever, e(tensive )no!ledge and
8
e(perience of specialist manufacturers and suppliers are a valua"le source for life cycle information# 'f the re*uired
data are not availa"le, modelling techni*ues can "e used# Mathematical models can "e developed for analysing costs#
Statistical techni*ues can "e incorporated to address the uncertainties %8lanagan and Je!ell, 4556&# Data from e(isting
"uildings are used as historical data# Some of them are pu"lished as the 2M' %2uilding Maintenance 'nformation&
occupancy cost# -ther sources include clients+ and surveyors+ records, and 9ournal papers %8lanagan et al#,
1/0/&#
hus, data collection "rings difficultiesJ ho!ever, LCC analysis is only accurate if the collected data are relia"le
%Em"lemsvg, 4557&# E(isting data"ases have their limitation, they do not record all necessary conte(t information
a"out the data "eing fed into them %;ish) et al#, 4557&# he data are usually e(pressed as units of cost !hich limits
them to local use#
9
2.4 Con't)$+tion +#ient
,n office "uilding !ill consume a"out three times its initial cost over a 461year period %8lanagan and Je!ell, 4556&#
herefore, it can "e essential for the construction client to use LCC as a decision ma)ing tool among alternative
pro9ects, designs or "uilding components to reduce "uilding running costs over the long term# Despite its importance,
LCC has found limited application so far in the construction sector %2a)is et al#, 4557&#
LCC needs time and effort# 8or that reason, there has to "e a clear output motive to use LCC techni*ues if it !ould a
!orth!hile effort for the construction client %=aymond and Sterner, 4555&# he availa"ility of LCC data are today
rather limited# -ne reason is the lac) of any frame!or) for collecting and storing data %2a)is et al#,
4557&# Construction clients often give a lo! priority to LCC as they are not a!are of the "enefits from it %=aymond
and Sterner, 4555&#
=aymond and Stern %4555& point out that for the construction client the initial cost can "e determined easily and
relia"ly "ut maintenance and operational costs are less predicta"le as they e(tend in the future# 8or that reason, initial
cost is used as the main "ase for decision ma)ing today#
(. RESEARC5 PRO6ECT
(.1 P)o7e+t !e'+)i/tion n! o.7e+ti"e'
his pro9ect is part of the research pro9ect 'nDro %'nformation and Drocesses& !hich lin)s the name to the main focus
of the research !or)# he 'nDro research pro9ect includes 45 European partners representing "oth industry and
research# he idea of the 'nDro Dro9ect is to introduce 7D design and 2uilding 'nformation Models in the European
construction sectorJ moreover, to develop strategies and "usiness models for ne! "uilding design processes !hich
consider the "uilding+s !hole life cycle# he main idea is to improve the involvement of the end1user in the early
design phase to have more satisfied customers in the construction sector#
10
his research pro9ect aims to e(plore and indicate the different parameters !hich are needed to optimise LCC for
"uildings and to provide the construction client !ith a "etter tool for decision in the early designAplanning process# he
o"9ective of this research pro9ect is to provide the construction client !ith a more holistic picture of the lifetime cost for
the planned "uilding, specificallyK
x to provide a "etter understanding of the long term conse*uences of the decisions in the early design phase to
the construction clientAend1user and to the planning teamJ
x to investigate the e(tent to !hich LCC estimation is used in the construction industry today#
x to e(amine !ays of improving e(isting models to form "etter holistic LCC
models that can influence planning in the early stage of design#
his paper aims at e(ploring the different data that are needed to analyse life cycle costs for "uildings# he first
o"9ective aims at a structural overvie! of e(isting theoretical economic methods for LCC analyses and their
advantages and
11
disadvantages# he second o"9ective is to point out the main data !hich are re*uired to carry out a LCC analysis#
he last o"9ective is to move a!ay from the limited application of LCC to a position !here LCC can properly inform
the early stage of design decision ma)ing#
(.2 Re'e)+& %et&o!o#o-,
he literature revie! started !ith the focus on life cycle cost models and re*uired data for an LCC analysis# he
)ey !ords have "een life cycle cost %LCC& and life cycle costing# he field of life cycle cost is !ide and to "e a"le
to )eep focus on the construction sector all !ords have "een com"ined !ith construction or "uilding# his has
narro!ed the field# @hile reading the first literature it came clear that often
terms li)e !hole life cost %@LC& and !hole life costing "een used in the literature,
even !hole life appraisal %@L,&# hese !ords "een added to the list of )ey !ords# he main sources for the
literature research !ere data"ases, such as Environmental sciences, Emerald, Elsevier Science Direct,
Compendi(, !e" of science and Google Scholar# he search for articles !as complemented !ith systematic
search !ithin li"raries in S!eden through Li"ris#
3. RESEARC5 RESULTS
3.1 Initi# )e'$#t'
Several cost1"ased LCC calculation methods are availa"le for the construction sector# hey all have their different
advantages and disadvantages# ,ccording to the revie!ed literature, the most suita"le approach for life cycle cost
in the construction industries are the CDE method or, in the case of comparing alternative schemes !ith different
lifetimes, the EC,# he CDE method is mainly used in e(isting LCC tools today# he user should "ear in mind that
different methods have "een formed for different purposes# 8or e(ample, in the case of a rough estimate, to
distinguish if the investment is profita"le, or not, the pay"ac) method !ould "e most suita"le# Conse*uently,
other measures sho!n in ta"le 1 can "e used if the proper purposes are considered#
12
he data can "e divided into five main groupsK occupancy data, physical data, performance data, *uality data
and cost data# ,ll of them have to "e ta)en into account for a LCC calculation# he importance of the different
data depends upon on the stage of planning in !hich the calculation is underta)en# LCC is a decision ma)ing tool
to select among alternative pro9ects, design, or "uilding components# Conse*uently, the LCC data should "e
presented in a !ay that ena"les such a comparison# he cost "rea)do!n structure is in this case an important
aspect#
Sources of data are manufacturers, suppliers, contractors and testing specialist+s data, historical data and data
from modelling techni*ues# $o!ever, all of them have limited use today according to the literature#
he revie!ed literature indicates that LCC calculations need to "e considered !orth!hile for the construction
client# herefore, data access needs to "e facilitated and, conse*uently, less time and money consuming#
13
3.2 I%/#e%enttion n! e8/#oittion
he collection of the data according to the revie!ed literature is the main difficulty for calculating the LCC for a
"uilding# his process can involve much time and
money# o "uild data"ases seems to "e a good alternative, and !ould save time and
offer easier access to data# he limitations of data"ases have, ho!ever, to "e recognised# 8irst, there is the local
limitation and, second, there is often a need to normali.e the data "efore adding to the data"ase# Even so,
"uilding local data"ases !ould "e a solution so long as there is regularly updating#
4. CONCLUSIONS
he choice of the right calculation method for LCC is easy and o"vious if the advantages and disadvantages are
appreciated# he calculation of LCC is not difficult and for structuring the main data, !hich need to "e collected,
help is availa"le in the form of different standards such as 'S- or the Cor!egian standard# Conetheless, data
collection causes difficulties# Data need to "e predicta"le if the LCC analysis is
to "e relia"le# =egional data"ases are seldom availa"le or usa"le# o collect data "y hand, ta)es much time and
money# his is !orth!hile if the pro9ect is "ig enough#
@hen historical data are collected and updated over time, their use can "ecome more relia"le and the LCC
analysis more trust!orthy#
Data should "e shared to avoid the duplicated effort of collecting them# 'f more clients demand LCC information
and a proper chec) of the information against performance is done in the future, improvement in accuracy and
relia"ility could "e e(pected# @hen LCC is used more fre*uently, the construction client could 9udge LCC in the
same manner as they do !ith estimated capital costs today# he construction client, and the end1user, could save
much money in the long run, if LCC is adopted
as a decision ma)ing tool# he lifetime *uality and the cost effectiveness of "uildings !ould improve "y using LCC
in the early stage design#
14
9. AC:NOWLEDGEMENT
he result presented in this paper is part of 'nDro %httpKAA!!!#inpro1pro9ect#eu &, an integrated pro9ect co1
funded "y the European Commission !ithin the Si(th 8rame!or) Drogramme#
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16