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Life Cycle Costing

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Life Cycle Costing

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Life Cycle Costing

  1. 1. LIFE CYCLE COST PLAN (LCP) PERANCANGAN KOS PUSINGAN HAYAT QUANTITY SURVEYING & COST CONSULTING SERVICES QS operate in all areas of construction including private consulting firms, contractors, architectural firms, government departments at municipal, provincial and federal levels and educational facilities.
  2. 2. ***COST CONSULTING •Feasibility Studies and Conceptual Estimating; •Project Budgeting; •Cost Planning / Cost Control Estimates •Assembly of Tender Packages; •Tender Review and Contractor Selection; •Functional Cost Analysis; •Review and recommendation of Project Progress Payments; •Review and Negotiation of Change Orders and Contractual Claims ***COST MONITORING •Review and Verification that Project Budget is adequate to complete Project; • Progress Draw Review and •Monitoring of Costs incurred; . ***VALUE MANAGEMENT •Review of Project Program, •Design and Cost Studies; •Service Provider for Value Management Workshops; •Evaluating Processes and Components; •Preparation of Recommendations. ***LIFE CYCLE COSTING •Life Cycle Cost Plans; •Discounted Cash Flows; •Sensitivity Analysis. ***OTHER SERVICES: •Reserve Fund Studies and Cost to Complete Reports; •Property Condition Reports; •Risk Analysis; •Insurance •Replacement Cost Assessment; •Project Management; •Project Scheduling; •Construction Management; •Construction and Project Cash Flow Measurement/ Technology Professional Practice Elective BUILDING ECONOMICS
  3. 3. Introduction to LIFE CYCLE COSTING Definitions and basic concepts What is life cycle costing? Why is it considered important? Different uses of life cycle costing How to do life cycle costing? What to take into account? Basis of calculations: Net Present Values, Factors which influence life cycle costings: discount rates, time, costs, service life, quantities, components, maintenance BUILDING LIFE CYCLE
  4. 4. Typical Problems Observed In Most Companies 1 PROJECT ENGINEERING WANTS TO Minimize Capital Costs BUILT ASSETS BUILDINGS Roads Bridges Dams 2 Maintenance Engineering wants to minimize repair hours Building Systems Lift Air Conditioning 3 Production wants to maximize uptime hours Manufacturing Plants Bricks Pre cast Concrete Car Assembly 4 Reliability Engineering wants to avoid failures Engines Jet Engines Car Engines 5 Accounting wants to maximize project net present value Financial Assets Profits 6 Shareholders want to increase stockholder wealth Investment Share value
  5. 5. LIFE CYCLE COSTING The definitions of life cycle costing: International Standard BS ISO 15686-5: Life cycle Costing. Life Cycle Cost (LCC) Is ‘Cost of An Asset, or Its Parts Throughout Its Life Cycle, While Fulfilling The Performance Requirements’. (BS ISO 15686-5) Life cycle costing is ‘METHODOLOGY for the systematic economic evaluation of life cycle costs over a period of analysis’. Whole Life Costing, which has a broader scope than life cycle costing Whole life costing is ‘methodology for the systematic economic consideration of all whole life costs and benefits over a period of analysis’. Note: life cycle costing can address a period of analysis which covers the entire life cycle, or selected stage(s) or periods of interest therein. (BS ISO 15686-5)
  6. 6. Sustainable Construction Design Residual Value Operation & Maintenance Construction LIFE CYCLE COSTING (LCC) BUILDING LIFE CYCLE LIFE CYCLE COSTS 1. Construction 2. Maintenance 3. Operation 4. Occupancy 5. End of Life
  7. 7. Why use Life Cycle Costing? The determination of costs is an integral part of the asset management process and is a common element of many of the asset manager’s tools, particularly •Economic Appraisal, •Financial Appraisal, •Value Management, •Risk Management and •Demand Management. In the past, comparisons of asset alternatives, whether at the concept or detailed design level, have been based mainly on initial capital costs. Growing pressure to achieve better outcomes from assets means that ongoing operating and maintenance costs must be considered as they consume more resources over the asset’s service life. Both the capital and the ongoing operating and maintenance costs must be considered wherever asset management decisions involving costs are made. This is the Life Cycle Cost approach. For example, The operating costs of a hospital consume an equivalent of the capital cost every two to three years and can continue to do so for forty years or more. The operating costs of a school can consume the equivalent of its capital cost every 4-5 years and remain in service for a century.
  8. 8. LIFE CYCLE COST THE CONCERN THE REQUIREMENTS CLIENT’S EXPECTATION The architecture and construction industries have focused on two primary concerns in the creation of buildings. 1st Of utmost importance to architects, is the design of a building. Is the building enjoyable to view and occupy? Does the organization of spaces enhance the user’s program? The client expects an architect to be able to design a building that satisfies their aesthetic and functional goals. 2nd The primary focus of contractors, is the construction of a building. How will the building be built? How much will the building cost? The client expects a contractor to be able to construct a sound building for the estimated construction cost. 3rd A THIRD concern that is receiving more attention as building owners investigate the economics of facility management. How much is the cost to operate the building? How much does it cost to maintain the building? What is the building Life Span? Instead of merely looking at the facility in terms of cost to design and build, owners can broaden their perspective to include operations, maintenance, repair, replacement, and disposal costs. *The sum of initial and future costs associated with the construction and operation of a building over a period of time is called the life cycle cost of a facility.
  9. 9. LIFE CYCLE COST Viewed over a 30 year period, initial building costs account for approximately just 10% of the total, while operations and maintenance, and personnel costs equal 90%. Source: Sustainable Building Technical Manual Life Cycle Costs for a House 60 Years @ 3% discount rate Frame Substructure Wall Finishes Energy Fixtures & Fittings Electrical Installation
  10. 10. TYPICAL LIFE CYCLE COST Operating Cost
  11. 11. 1 COSTS-IN-USE Associated with a building while project is being commission by the owner or occupier Recurring Costs either annual or periodic in nature 2 LIFE-CYCLE COST Incorporates the total costs associated from inception through eventual demolition. Includes all costs associated with initial construction and the costs of final clearance of the site. INCLUDES ALL COSTS ARISING FROM THE PROJECT. LIFE CYCLE COST Life Cycle Costing a process to determine the sum of all the costs associated with an asset or part thereof, including acquisition, installation, operation, maintenance, refurbishment and disposal costs.
  12. 12. Design Residual Value Operation & Maintenance Construction Cost Planning Cost-in-UseLife Cycle Costing
  13. 13. LIFE CYCLE COSTING IMPLICATIONS No ADVANTAGES 1 Emphasis on a Whole or Total Cost Approach of a Capital Cost Project (Asset) 2 More effective choice between competing proposals of a stated objective.(Take into account capital, repairs, running & replacement costs) 3 An Asset Management Tool 4 Enable costs to be correlated with Changes (working practices and maintenance analysis)
  14. 14. 1 Life Cycle Cost A sum of all costs of creation and operation of a facility over a period of time. 2 Initial Investment Cost Any cost of creation(Design & Construction) of a facility prior to its occupation. 3 Discount Rate The rate of interest that balances an investor’s time value of money 4 Study Period The time period over which a Life Cycle Cost Analysis is performed. 5 Maintenance Cost Any cost of scheduled upkeep of building, building system, or building component. 6 Operating Cost Any cost of the daily function of a facility. 7 Present Value The current value of a past or future sum of money as a function of an investor’s time value of money 8 Repair Cost Any cost of unscheduled upkeep of a building system that does not require replacement of the entire system 9 Replacement Cost Any cost of scheduled replacement of a building system or component that has reached the end of its design life 10 Life Cycle Cost Analysis A technique used to evaluate the economic consequences over a period of time of mutually exclusive project alternatives. 11 Residual Value The value of a building or building system at the end of the study period. LCC TERMINOLOGY
  15. 15. Govern by a number of factors (methods of construction, initial design & maintenance) 1 Physical Life • Wearing of building due to materials & construction • Different components has different lifespan • Physical life can be extended by careful maintenance • Building absolescence 2 Functional Life • Function of the building. • May change due to social or technological development. • Change of function involve redesign and modification 3 Economic Life • Compare Cost of maintaining a building and replacement • Value of the site of the building • Life cycle costing primarily concerned with the building’s economic life. BUILDING LIFE
  16. 16. LIFE-CYCLE PHASE DESCRIPTIONS ASSOCIATED COSTS 1 Specification Formulating Client’s requirements Initial Costs; •Land •Professional Fees •Construction 2 Design Translating requirements into design 3 Installation Construction process up to completion 4 Commissioning Handing Over of project 5 Maintenance The Use of the project for its intended purpose Recurring Costs Energy Repairs Improvements Cleaning, Insurances, etc 6 Modification Alteration to keep standard or improved to current day standards 7 Replacement Evaluation of Project For Major Refurbishment of the site for Redevelopment Costs for major changes to building and redevelopment LIFE CYCLE PHASE
  17. 17. LIFE CYCLE COST PLAN Life Cycle Cost Analysis can be performed on large and small buildings or on isolated building systems. Building owners apply the principles of life cycle cost analysis in decisions they make regarding construction or improvements to a facility. The Federal highway Authority that chooses concrete paving over asphalt, taking into consideration the future maintenance and replacement costs in their selections. While initial cost is a factor in their decisions, it is not the only factor. Life Cycle Cost (LCC) “the Total Discounted Ringgit cost of owning, operating, maintaining, and disposing of a building or a building system” over a period of time. Life Cycle Cost Analysis (LCCA) An Economic Evaluation Technique that determines the total cost of owning and operating a facility over period of time.
  18. 18. 2. MAINTENANCE COSTS 2.1 Major replacement 2.2 Subsequent refurb and adaptation 2.3 Redecorations 2.4 Minor replacement, repairs and maintenance 2.5 Unscheduled replacement, repairs and maintenance 2.6 Grounds maintenance 1. CONSTRUCTION 1.1 Construction Works Costs (In SFCA elements) 1.2 Other construction related costs Design Fees, Planning Costs, Planning Contributions etc 3. OPERATION/OCCUPANCY 3.1 Cleaning 3.2 Utilities 3.3 Administrative costs 3.4 Overheads costs 3.5 Car parking charges 3.6 Security 3.7 Taxes 4. END OF LIFE COSTS 4.1 Disposal Inspection 4.2 Demolition 4.3 Reinstatement to meet contractual requirements LIFE CYCLE COST PLAN ITEMS
  19. 19. LIFE CYCLE COST PLAN A PLAN OF THE PROPOSED EXPENDITURE OF A CONSTRUCTION PROJECT OVER ITS ENTIRE LIFE-SPAN No Description Period 1-3 4 5 6 7 8 9 10 15 20 25 30 35 40 1 Capital Cost (Design &Construction Present x 2 Maintenance Cost Annual x x x x x x x x x x x x x 3 Minor Works Annual 4 Redecorations Intervals x x x x x x x 5 Energy Annual x x x x x x x x x x x x 6 Cleaning Annual x x x x x x x x x x x x 7 Insurance Annual x x x x x x x x x x x x 8 Estate Management Annual x x x x x x x x x x x x 9 Tax Allowances Annual x x x x x x x x x x x x
  20. 20. No. Description Estimated Cost Discount Factor Present Value 1 Capital Cost 2 Maintenance Cost (Per Annum) 3 Minor Works (per annum) 4 Redecorations (intervals) 5 Energy (per annum) 6 Cleaning (per annum) 7 Insurance (per annum) 8 Estate Management (annual 9 Tax Allowances (per annum Total Net Present Value LIFE CYCLE COST PLAN SIMPLIFIED LIFE CYCLE COST PLAN PROJECT DATE DISCOUNT RATE 6& Discount Rate 6% Years 1 2 3 4 5 6 7 8 Present value of RM1.00 Ada Belajar Buat Life-Cycle Costing?
  21. 21. NET PRESENT VALUE
  22. 22. • Takes into account the fact that money values change with time • How much would you need to invest today to earn x amount in x years time? • Value of money is affected by interest rates • NPV helps to take these factors into consideration • Shows you what your investment would have earned in an alternative investment. NET PRESENT VALUE
  23. 23.  Cash flow x discount factor = present value  e.g. PV of RM500 in 10 years time at a rate of interest of 4.25% = 500 x .6595373 = RM329.77  RM329.77 is what you would have to invest today at a rate of interest of 4.25% to earn RM500 in 10 years time  PVs can be found through valuation tables (e.g. Parry’s Valuation Tables) NET PRESENT VALUE Net Present Value
  24. 24. Net Present Value Future Value PV = ----------------- (1 + i)n Where i = interest rate n = number of years • The PV of £1 @ 10% in 1 years time is 0.9090 • If you invested 0.9090sen today and the interest rate was 10% you would have RM1.00 in a year’s time Process referred to as: ‘DISCOUNTING CASH FLOW’ NET PRESENT VALUE
  25. 25. Parry's Valuation and Investment Tables Author: A W Davidson 12th Edition Aimed at every property professional, this 12th edition provides a comprehensive set of 30 different valuation and investment tables in one volume. Although the tables are mainly used by practising surveyors, this text will also be useful to accountants and others concerned with various types of investments and financial calculations. Both growth and non-growth scenarios can be analysed, for a more detailed appraisal of specific freehold property investments and to also provide a basis for more in-depth advice. Valuation tables by Richard Parry Estates Gazette, Ltd, 1958 PARRY’S VALUATION AND INVESTMENT TABLES
  26. 26. PRESENT VALUE “the time equivalent value of past, present or future cash flows as of the beginning of the base year.” -To accurately combine initial expenses with future expenses, the present value of all expenses must first be determined. -calculation uses the discount rate and the time a cost was or will be incurred to establish the present value of the cost in the base year of the study period. Since most initial expenses occur at about the same time, initial expenses are considered to occur during the base year of the study period. Thus, there is no need to calculate the present value of these initial expenses because their present value is equal to their actual cost. The determination-time dependent. The time period is the difference between the time of initial costs and the time of future costs. Initial costs are incurred at the beginning of the study period at Year 0, the base year. The present value calculation is the equalizer that allows the summation of initial and future costs. Along with time, the discount rate also dictates the present value of future costs. Because the current discount rate is a positive value, future expenses will have a present value less than their cost at the time they are incurred. Future costs can be broken down into two categories: one-time costs and recurring costs. Recurring costs-costs that occur ever year over the span of the study period. Most operating and maintenance costs are recurring costs. One-time costs are costs that do not occur ever year over the span of the study period. Most replacement costs are one-time costs. To determine the Present Value Of Future Recurring Costs t PV = A x 0 t (1+d) -1 D x (1+d) Where: PV = Present Value A t = Amount of one-time cost at a time t d = Real Discount Rate t = Time (expressed as number of years) Where: PV = Present Value A0 = Amount of recurring cost d = Real Discount Rate t = Time (expressed as number of years) To determine the Present Value Of Future One-time Costs PV = A x t t 1 (1+d)
  27. 27. DISCOUNT RATE •This is not to say that real discount rates ignore inflation, their use simply eliminates the complexity of accounting for inflation within the present value equation. •The use of either discount rate in its corresponding present value calculation derives the same result. •Obviously, as the economics of the world around us change, so to does the discount rate. Discount Rate (%) “The Rate of Interest Reflecting The Investor’s Time Value of Money.” (as defined by Life Cycle Costing for Design Professionals) Real Discount Rate excludes the rate of inflation The Nominal Discount Rate includes the rate of inflation.
  28. 28. LIFE CYCLE COSTING COST PLAN Alternate #1 (RM) Alternate #2 (RM) Alternate #3 (RM) Initial Investment Cost Operations Cost Maintenance & Repair Cost Replacement Cost Replacement Cost Total Life Cycle Cost GSA of Project Initial Cost/ GFA LCC/ GFA PROJECT STUDY PERIOD 30 Years DISCOUNT RATE 3.1%
  29. 29. LCC COST STRUCTURE ACQUSITION COSTS FUTURE COSTS LIFE CYCLE COSTS Initial & Future Expenses The first component in a LCC equation is cost. There are two major cost categories by which projects are to be evaluated in a LCCA. Initial Expenses are all costs incurred prior to occupation of the facility. Future Expenses are all costs incurred after occupation of the facility. STUDY PERIOD The second component of the LCC equation is time. The study period is the period of time over which ownership and operations expenses are to be evaluated. Typically, the study period can range from 20-40 years, depending on owner’s preferences, the stability of the user’s program, and the intended overall life of the facility. While the length of the study period is often a reflection of the intended life of a facility, the study period is usually shorter than the intended life of the facility. Phases of Study Period: 1)the planning/construction period -time period from the start of the study to the date the building becomes operational (the service date) 2)The service period - the time period from date the building becomes operational to the end of the study.
  30. 30. LCC COST STRUCTURE Land ACQUSITION COSTS Initial Expenses are all costs incurred prior to occupation of the facility. ConstructionProcurementDesign
  31. 31. LCC COST STRUCTURE FUTURE COSTS Future Expenses are all costs incurred after occupation of the facility. Maintenance Cost Cleaning Cost Redecoration Cost Energy Cost Minor Works Cost Operations Cost Insurance & Taxation Cost Management Cost
  32. 32. LCC COST STRUCTURE FUTURE COSTS ACQUSITION COSTS Land Construction Procurement Design RESIDUAL VALUE Maintenance Cost Cleaning Cost Redecoration Cost Energy Cost Minor Works Cost Operations Cost Insurance & Taxation Cost Management Cost LIFE CYCLE COSTS Capital Cost Cost-in-Use RM (Net Present Value) Discount Factor (Time value For Money) 2010 2050
  33. 33. LCC COST STRUCTURE FUTURE COSTS ACQUSITION COSTS RESIDUAL VALUE Residual value is the net worth of a building at the end of the LCCA study period.
  34. 34. EXAMPLE (Selected Items only) No. Amount Cost Discount Factor Present Value 1 Cleaning & Repair 13,000 (Every Year) 16.1614 (PV RM 1.00 FOR 60 YRS @6% RM 210,098.20 2 External Painting 20,000 (Every 5 yrs) 2.83661 (PV RM 1.00 at 5 yrs interval @6% RM 56,732.20 3 Roof Replacement 200,000 (Every 30 yrs) 0.17411 (PV RM 1.00 in 30 yrs @6% RM 34,822.20 Present Value of Running Cost RM 301,652.40 PROJECT Building DATE 2010 DISCOUNT RATE 6% Economic Life 60 Years From Parry’s Valuation Table P.V. RM1.00 in 5 Years @ 6% 0.74725 P.V. RM1.00 in 10 Years @ 6% 0.55839 P.V. RM1.00 in 15 Years @ 6% 0.41726 P.V. RM1.00 in 20 Years @ 6% 0.31180 P.V. RM1.00 in 25 Years @ 6% 0.23299 P.V. RM1.00 in 30 Years @ 6% 0.17411 P.V. RM1.00 in 35 Years @ 6% 0.13010 P.V. RM1.00 in 540Years @ 6% 0.09722 P.V. RM1.00 in 45 Years @ 6% 0.7265 P.V. RM1.00 in 50 Years @ 6% 0.05428 P.V. RM1.00 in 55 Years @ 6% 0.4056 Total discount factor every 5 Yrs till 60 yrs 2.83661 From Parry’s Valuation Table P.V RM1.00 in 1 Yr @ 6% P.V RM1.00 in 2 Yr @ 6% P.V RM1.00 in 3 Yr @ 6% P.V RM1.00 in 4 Yr @ 6% ……………………… ………………. ………………. P.V RM1.00 in 60 Yr @ 6% Total discount factor Every Year till 60 yrs 16.1614
  35. 35. CONCLUSION LCC helps change perspectives for business issues with emphasis on enhancing economic competitiveness by working for the lowest long term cost of ownership. SUMMARY 1 Life cycle costs (LCC) are cradle to grave costs summarized as an economics model of evaluating alternatives for projects. 2 Design details drive LCC cost numbers for the economic calculations. 3 The economics of proposals drives the scenario selection process. 4 Good design proposals without economic justification are often uneconomical. 5 Good design with good economics provide business successes 6 The LCC economic model provides better assessment of long- term cost effectiveness of projects
  36. 36. Life cycle costing is RELEVANT throughout THE BUILDING or CONSTRUCTED asset’s Life Cycle, in particular during the project planning, design and construction and also during the in-use phases. CONCLUSION Building Manager Asset Manager Facilities Manager

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