APC trainer: Punch your weight

This week, we’re looking at Life-cycle costing. This is a topic that assessment of professional competence (APC) candidates often aren’t too familiar with because whole-life costing tends to be hived off in a separate department from the rest of the firm. If this is the case at your company, it’s vital you do a stint of experience in the whole-life costing department.

The topic comes up in the APC under two competences: design economics and cost planning (T022) and sustainability (M009). To achieve competence levels two and three, you must be able to show actual experience. And at level three, you need to be able to give reasoned advice to clients and/or provide responses to more complex questions. The questions and answers will depend on your own experience and the pathway you have followed. So the examples below should be seen as guidance only.

Level 1

Question: What are the main types of cost to consider in assessing the whole-life cost of a building or asset?

The main cost headings to be considered are as follows:

• Capital costs – including the cost of the building, associated site works, infrastructure costs and project on-costs such as fees, move costs, equipment, etc
• Life-cycle costs – including asset replacement for the building and associated preliminaries and management costs
• Operational costs – including utilities, cleaning, administration, security, support services and business costs such as rent, salaries and income
• Maintenance costs – including planned service maintenance and building fabric maintenance
• Disposal costs – including the cost of decommissioning the building at the end of its useful life.

Level 2

Question: What approach did you take to reparing the Life-cycle cost plan on your project X?

This question tests your actual experience and level of competence. The assessor will be looking for a logical approach and may well grill you in detail about your experience. Here’s how you might tackle this question:

• 1 What assets are to be replaced? This is  worked out from a detailed review of the building specification and from the capital cost plan, which is broken down to component level.
• 2 How will the asset be replaced? Show you understand the type of service required – that is, full/partial replacement, or an overhaul of the component. Assess the quantity of the component needed to be serviced over the life term.
• 3 When will the asset be replaced? Identify the engineering performance of each component relating to a component’s service life, taking into account the manufacturer’s recommendations. Assess the required service life interval for the type of service required for each component.
• 4 What is the cost of replacing the asset? You work this out from the capital cost plan and from studying what similar projects cost.
• 5 Calculate the cost per m2 per year for each element and the building as a whole over its life term. This is done by dividing the total Life-cycle cost of each element by the gross internal floor area for the building, and then by the length of concession period. The sum of the elemental rates provides the overall cost per m2 per year for the building over its life term.
• 6 Benchmark Life-cycle rates at elemental level and for the total building, with relevant
• in-house historic project data to provide a sense check and to assess efficiency.
• 7 Calculate the net present value (NPV), taking into account a discount factor, to give a realistic cost of the future value.
• 8 Carry out sensitivity analysis by adjusting the different variables used.

Level 3

Question: A client would like to consider alternative energy technology (AET) solutions to provide 20% renewable energy for a commercial development in central London. He has asked you to suggest the best value solution with respect to life-cycle cost and payback periods. How would you approach this?

The first thing you need to do is outline which AET solutions would suit the development, including wind turbines, solar power, biomass and ground source heating and cooling. Show that you understand the impact on the building and site, and that some options may be technically unfeasible.

A report would be prepared to consider the whole-life cost and NPV for each AET solution specific to the development. Capital costs would include the cost of the installation and associated on-costs. Maintenance costs would include monitoring, maintaining and cleaning components. Operating costs would include the delivery of fuel and energy costs for the total building usage, entailing base cost of primary energy and renewable energy used.

The whole-life cost assessment will need to take into account project-specific factors, such as local environmental issues, ground conditions, supply chain and distance to energy source.

A summary of the AET solutions would be prepared outlining which option, or combination of options, offers best value based on lowest NPV. This would be in relation to whole-life cost over the concession period and assessing the lowest renewable energy cost when comparing the technologies.

The NPVs for each alternative energy option would be compared against the base case, using solely 100% primary energy source. The base case may have the lowest capital cost but have much higher energy costs, resulting in a high total NPV. Although the AET solutions may have higher initial capital cost, the lower energy costs through renewables will result in a year-on-year saving contributing to a lower overall NPV. Through the whole-life cost model, you can also calculate payback periods for each option.

Question: Can you give some examples of variable cost drivers to be considered when carrying out life cycle costing for alternative energy solutions?

You can use a number of examples here, including fluctuating costs associated with the following:

• Cost of capital increasing – for example, worse than anticipated ground conditions leading to higher excavation costs, increased length of piles and pipe work relating to ground source heat pumps.

Operational and maintenance costs may increase rapidly. For example, biomass prices may rise due to supply chain issues, such as:

• A lack of biomass fuel supply arising from a low number of suppliers to meet future high demands. Increased competition will be likely to lead to increases in the biomass fuel price.
• A higher moisture content within the woodchip supply will reduce the amount of kW output significantly, resulting in the woodchip burning in a quicker period of time and giving off a lower calorific value. This would require more woodchip supply and therefore increased costs to attain the same level of output.