Introduction

 

Park (1998) stated that Life Cycle Costing is all about preplanning to anticipate replacement, applying it at the point that it is most beneficial to the organization and ensuring that there are no consequential financial shocks.

This paper is to discuss the above statement and the applicability of life cycle costing within Asset Maintenance Management, discovering the concept of LCC and its importance to meet the recent government initiatives and growing demand from the private sector for greater predictability in the running costs of buildings, which increased the need to analyze life cycle costs from the earliest stage of a project. Also the partnering approaches (PFI/PPP), the Best Value test and the Rethinking Construction report all require some examination of the whole life cost of a building.

 

 

LCC Concept

The Life Cycle Costing (LCC) of an asset is defined as the present value of the total cost of the asset over its operating life, including initial capital cost, occupation costs, operating costs and, the cost or benefit deriving from disposal of the asset at the end of its life (Chanter and Suallow, 1996). And it is defined as an obvious common sense idea, in that all the costs arising from an investment decision are relevant to the decision (Flanagan, 1989).

S. L. Dale (1993) defined life cycle costing as a mathematical method used to form or support a decision and is usually employed when deliberating on a selection of options. It is an auditable financial ranking system for mutually exclusive alternatives, which can be used to promote the desirable and eliminate the undesirable in a financial environment.

Association of Project Management APM (1993) described LCC as a sequence of phases through which a project must pass, and the Project Management Institute Body of Knowledge PMBOK (1996) described it as a collection of generally sequential project phases whose name and number are determined by the control needs of the organization involves in the project.

 As stated by Chanter and Suallow (1996), the broad objectives of life cycle costing exercise may be:

• To enable investment decisions to be made more effectively, taking into account all costs that may arise from it

• To consider the impact of all costs, rather than just capital costs

• To provide information that can contribute to the more effective management of the completed building

• In the context of building procurement, to assist in the evaluation of alternative solutions to specific design problems

 

 

LCC Components

Buildings cycle can be described in the following stages:

-         Brief

-         Design

-         Procurement

-         Construction

-         Operation and Maintenance

-         De-commissioning, Demolition and recycling

Between the initial desire for space, and its first occupation and continuing operation, a number of activities have to be successfully undertaken by a diverse range of people who may only have an indirect relationship to the primary objective of the organization, and an imperfect understanding of them (Chanter and Suallow, 1996).

In construction industry, the project duration is long, and the life of the building is much longer, and any decision in the design or the

construction stages is going to affect the cost in these stages and in the stage of operation and maintenance, such as decisions related to quality, material selection, and construction methods.

The visible costs of any purchase present only a small proportion of the total cost of the ownership. The figure below gives a graphic representation using the “Iceberg Analogy” and highlights the dangers of poor financial management if only the apparent costs are considered (HM, 35).

	Source:  HM Treasury No. 35, Life Cycle Costing

 

 

 

Dell ‘Losola (1997), stated that Life Cycle Costing and total building cost is consist of:

• Initial costs

              • Fee costs

              • Construction costs

              • Other costs

• Financing costs

• Operating costs

• Maintenance costs

• Tax elements

• Associated costs

• Salvage costs

 

 

Asset Maintenance Management (AMM)

As adduced by Chanter and Swallow (1996), the Committee of Building Maintenance recommended the adoption of the following definition of maintenance:

“ … Work undertaken in order to keep, restore or improve every facility, i.e. every part of the building, its services and surrounds to a currently acceptable standard and to sustain the utility and value of the facility”

Maintenance is important to our built environment primarily because of the need to preserve a building/facility in its original state and hence an acceptable standard. Maintenance may also be required to take account of the client’s emerging requirement, like conversions and extensions. In the same time, there is an appreciation that a stock of land and buildings is a capital in its own right and the maintenance is required to preserve the value of that asset. Therefore, effective management of maintenance is of prime importance to the property owners and maintenance managers as well (Mushumbusi, 1999).

The National Audit Office NAO (2001) stated that in the year of 1999, the UK construction market total output value was £65 billion, in which 48% for repairs and maintenance work (£31.2 billion) , and 52% for new work (£33.8 billion), this may show the importance of the Asset Maintenance Management for assuring the right expenditure and how to increase the Value for money for customers and built environment.

 

 

 

 

LCC Process

 

Kerzner (1998) stated that Life-cycle cost analysis is the systematic analytical process of evaluating various alternative courses of action early on a project, with the objective of choosing the best way to employ scarce resources. Life-cycle cost is employed in the evaluation of alternative design configurations, alternative manufacturing methods, alternative support schemes, and so on. This process includes:

-         Defining the problem (what information is needed)

-         Defining the requirements of the cost model being used

-         Collecting historical data-cost relationships

-         Developing estimate and test results

 

The use of LCC in the Asset need a quantitative techniques where LCC can be based, and for investment appraisal methods there are variety of suggested criteria on which to base decisions, but the most basic requirement to be satisfied is that the method must be capable of ranking the various options according to some defined measure. In this respect, a decision-making method based on minimum capital cost is certainly a candidate as a means of investment appraisal. By the same token, however, so is one based on minimizing running and other recurrent costs. Since the installation of finishes will involve the owner in both capital and recurrent costs, what is needed is a technique of investment appraisal that takes both sets of costs into account (Flanagan, Norman, Meadows, and Robinson, 1989).

 

Kerzner (1998) mentioned that, the process of identifying the financial benefits is called capital budgeting, which may be defined as the decision-making process by which organization evaluate projects that include the purchase of major fixed assets such as buildings, machinery, and equipment. From these techniques:

 

• Payback Period

• Discounted Cash Flow (DCF)

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

 

To produce a life cycle cost calculation it is necessary to establish:

• the life of the building

• the discount rate (which, expressed simply, is the difference between the interest and inflation rate and is used to convert future payments to present value)

• the cost and frequency of future payments (at the component, elemental or total building level as appropriate)

• any tax implications.

 

 

 

 

LCC Use  & Benefits

 

The main stand in the way of LCC is the confidence of forecasting for the future of the asset for long period of time, more than 25 years in some cases, but this a fact we have to think about and try to make the appropriate planning and management to get the maximum value of it, and to spend the minimum expenditure on it by applying the LCC techniques from the early stages of the asset supply.

 

Flanagan, Norman, Meadows, and Robinson (1989) answered the question: when are life cycle techniques useful?

 

• As an evaluation technique helping to choose between competing options, whether these relate to a complete building, a system, or a material.

• As a basis for predicting future running costs.

• As a management tool to ensure that the facility is being used effectively and that maximum value for money is being obtained. For example, has a particular element been unduly expensive? Should a different type of material, system or structure have been used? What types should be avoided and which should be used by the organization when a similar type of building is to be constructed under similar circumstances?

• As a basis for budgeting for future expenditure. All clients must manage their assets within an annual rolling budget, even the householder has to ensure that the annual fuel bill for heating and hot water is within his budget. Clients will therefore have a shot and a long-term strategy. Life cycle costing helps to identify and assist in balancing future expenditure on the asset.

• As a means of considering total cost rather than merely initial capital cost.

 

 

 

Construction & Maintenance

 

The greatest savings potential for a life cycle analysis occurs in the earliest stages of a project. Not only are the potential savings more significant, but also the costs of making changes in the plans and specification are much less. As the project gets into the construction and the owning and operation phases, the LCC value tends to become the feedback data for use in other projects. The major impact of LCC should occur in three phases: the concept, the preliminary design, and design development. Its influence during later phases should be more or less as a review and a validation of the assumptions made during these earlier phases (Dell ‘lsola and Kirk, 1981).

 

If the total discounted cost of an elderly person’s home is considered over 40-years time horizon, studies have shown that about 70 per cent of the cost is in the operation and maintenance cost phase, while 30 per cent of the cost is in the initial capital cost. Schools are used less intensively than hospitals or airports and when these are considered over a 40-years time horizon, the initial capital cost can be nearer 50 per cent. Similarly, in the hospital building essential maintenance budget, because safety and reliability will always be the prerequisite (Flanagan & Marsh, 1994). Furthermore, in  a recent study done by the Royal Academy of Edinburgh in its report “The long term costs of owning and using buildings (1998)” states that the typical costs of owning a building are in the ratio of 1 (for construction costs): 5 ( for maintenance costs): 200 (for building operating costs) (NAO, 2001).

 

Chen and Rusk (1995) listed the most economical ages of different assets used in the estimation of the Life Cycle Cost of each asset in Iawa Department of Natural Resources (Appendix 1 & 2). And it is clear that the impact of decisions in the early stages (before occupation and operation) of an asset on the occupation and operation stage cost. Also benefits of applying LCC in the early stage are considerably high.

 

 

 

 

 

 

 

The relation between the cost saved and the time when LCTC studies taken

 

 

A purchasing decision normally commits the user to over 95 per cent of the through-life costs. There is very little scope to change the cost of ownership after the item has been delivered. The figure bellow gives an example of a spend profile showing how the costs vary with time. In many instances the disposal cost will be negative because the item will have a resale value. However, for nuclear reactors the disposal cost is extremely high and should be taken into account at the planning stage (HM, 35).

 

 

 

There is a strong relationship in the LCC of built assets between design and construction decisions and the cost of operation and maintenance. Therefore, attention should be directed to the early stages of providing the asset by applying the LCC and TQ techniques in order to gain sustainability and more life span with less operation and failure costs.

 

The involvement of the owner, contractor, and Facility Manager in the initiation and design stages has many advantages in reducing the overall cost and increasing the end user (customer) satisfaction, and the asset steady operation.

 

Badly designed buildings can fail to meet the needs of end users, cause operational problems have high maintenance or running costs and can be inefficient and costly to build as well as dangerous. It is at the design stage that most can be done to optimize the value of a building to its end users. Private sector experience shows that involvement of a facilities manager at this stage has many benefits, as they can contribute their experience of operating in and maintaining the building. Capital costs are an important in good quality design and construction can result in a more efficient operating environment and lower running costs. NHS Estates, for example, has found that good hospital design resulting in a pleasant working environment aids patients’ recovery and helps hospital staff do their job more effectively, there is also evidence that good quality office buildings results in less sickness absence (NAO, 2001), which means increasing of the building output value.

 

 

 

 

 

 

AMM and LCC

 

Needs:

 

Do we need LCC in the Asset Maintenance Management? The answer is absolutely positive; it is the way for planning to keep maintenance works as required from the point of quality and cost.

 

Buildings are durable assets and while new buildings are continually being added to the existing stock, the majority of building users will be making decisions regarding existing buildings. At the same time, the durability of buildings implies that design decisions made during their initial construction, while perhaps correct at the time, may well need to be altered to adjust for unforeseen changes in economic conditions. In an era of low energy costs it would have been difficult to justify double or triple glazing solely on cost ground, whereas it might mow be sensible to change existing glazing systems. The move towards materials that are easy to clean and maintain is driven at least in part by labor costs relative to other costs. A whole LCC appraisal will identify the potential for such changes (Flanagan and Marsh, 1994).

 

 

Budget Planning

 

The common practice in budgeting for projects is to treat the initial capital cost as the important part of it. There is also a separation between the initial and running cost, with the implication of LCC in the projects, the whole life cycle of the Asset will take in consideration all aspects affecting the cost and quality up to the disposal of the asset.

 

The starting point of a whole LCC appraisal approach is that capital and operating costs are intimately linked and should not be treated separately. It follows that if management decisions and control systems are to compatible with LCC output and recommendations, there must be at least some, if not complete, integration of capital and operating budget procedures (Flanagan and Marsh, 1994).

 

Applicability

 

The applicability of life cycle costing within Asset Maintenance Management is fact now, especially, with the introduction of facilities management and the Facilities Managers to participate in the design, procurement, construction, delivery, installation, and lead the operation and maintenance by applying the LCC within FM in all stages of the project, in order to provide and sustain suitable space at economic cost and, to provide an acceptable return over time for the cost of investment (Speeding and Holmes, 1994).

 

 

Technology

 

The use of information technology has greatly enhanced the planning and organization of maintenance, and make the applicability of LCC more easy and practical. There are a lot of software packages developed to support planning, monitoring, budgeting, and controlling the process of asset maintenance, and to apply LCC in these process. In appendix (3) a description of life cycle cost software as an example of the impact of technology on the development and implementation of LCC.

 

In built asset management, software packages have been developed for most activities. There are three main areas, which require IT support; the first for handling work recording and monitoring, the second for condition assessment analysis, and the third for cost predictions. Within these areas a range of linked programmers can be used to supplement the process; for example, an asset register will greatly help with work ordering. (Holmes, 1994).

 

 

Owner’s Motivation

 

There is a link between the owners and the application of LCC technique in AMM; it depends on the owner’s motivation. Certain costs may be of much greater concern to some owners than others, because owners are very different in their expectations. And they will differ in whether they are looking for short-term profit, or long-term returns, or satisfying public need. The time-scale for the facility will also have an impact on how long a time horizon the owner sees for the use of the facility. Furthermore, whether the capital is borrowed or retained profits are used will influence the method of funding work being undertaken. However, if the client is only looking at an occupancy period of 4 years, it is unlikely that on a simple pay-back basis the investment will be warranted. Few clients are likely to praise their advisers or managers for spending more money today that “might” show a saving in 10 or 15 years’ time (Flanagan and Marsh, 1994).

 

The incentive for the owner-occupier, whether public or private sector, to use life cycle costing is obvious. This type of client should treat a building and individual building elements precisely as he would treat any other factor of production in his main activity (Flanagan, Norman, and Furbur, 1983).

 

 

 

Conclusion

 

-         It is true that LCC is often seen as exercise only applicable to new construction at the design planning stage. This is because major components already incorporated in the construction are unlikely to be replaced, either because the high cost involved renders this uneconomic of because a fundamental design changes would be required (Park, 1998).

-         LCC, whether for new buildings proposal or refurbishment can assist facility managers and the design team to make comparison of the likely long-term cost consequences of alternative design choices (Flanagan and Marsh, 1994).

-         Information technology and software as a great deal in making LCC more applicable within Asset Maintenance Management.

-         Facilities Management and the new construction procurement approaches (PFI/PPP), increase the importance of LCC and call for its use within the construction industry.

-         There is probably general acceptance now that LCC techniques will lead to better decisions on design – both of complete buildings and individual buildings components – on refurbishment, on maintenance planning and on management of the building portfolio. It has been shown in recent analyses of project planning discussions that life cycle costs do occupy an important part in the clients’ initial thinking. Unfortunately, it also appears that, as the design process continues, the design team becomes increasingly preoccupied with initial capital costs, much of these preoccupations being client driven. The central message to be drawn from this kind of analysis is that considerable efforts are still required to convince clients and members of design team of the increased efficiency that will come from striking a proper balance between initial capital costs and future operating costs. There is no doubt that effective use of life cycle costing will confer considerable benefits on the clients of the industry, and so on the industry itself, but much remains to be done to remove the remaining barriers to such practical implementation (Flanagan, Norman, Meadows, and Robinson, 1989).

 

References:

 

1-           APM (1993) Association of Project Management Body of Knowledge.

2-           Chanter Barrie and Swallow Peter (1996) Building Maintenance Management, Blackwell Science.

3-           Chen Angrla and Rusk Richard (1995) Iowa Life Cycle Cost Analysis Guidelines, Iowa Department of natural Resources, Des Moines.

4-           Dale S. L. (1993) Introduction to Life Cycle Costing, Life Cycle Costing for Construction, Edited by: John W. Bull, Blackie Academic & Professional.

5-           Dell ‘lsola Alphonse and Kirk Stephen (1981) Life Cycle Costing for Design Professionals, McGraw-Hill Book Company.

6-           Holmes Roy (1994) Built Asset Management Practice, CIOB Handbook of Facilities Management, Edited by: Alan Spedding, Longman Scientific & Technical, Essex, England.

7-           HM Treasury (NO. 35) Life Cycle Costing, Public Competition and Purchasing Unit Guidance.

8-           Kerzner Harold (1998) Project management: a system Approach to planning, scheduling, and controlling, John Wiley & Sons, Inc.

9-           Mushumbusi M. Z. (1999) Maintenance Management for the built Environment in developing countries, Volume 3 Managing Construction, a preceding of a joint triennial symposium, Edited by: P A Bowen and RD Hindle, CIB.

10-      NAO (2001) Modernizing Construction, National Audit Office, London.

11-      Flanagan Roger and Marsh Laurence (1994) Life Cycle Appraisal, CIOB Handbook of Facilities Management, Edited by: Alan Spedding, Longman Scientific & Technical, Essex, England.

12-      Flanagan Roger, Norman George, Meadows Justin, and Robinson Graham (1989) Life Cycle Costing: Theory and Practice, BSP Professional Books.

13-      Flanagan Roger, Norman George and Furbur David (1983) Life Cycle Costing for Construction, RICS.

14-      Park Alan (1998) Facilities Management: An Explanation, Second edition, Macmillan Press Led.

15-      PMBOK (1996) A Guide to the Project Management Body of Knowledge, Project Management institute. USA

16-      Spedding Alan and Holmes Roy (1994) Facilities Management, CIOB Handbook of Facilities Management, Edited by: Alan Spedding, Longman Scientific & Technical, Essex, England.