Lifecycle costs: New standard for whole-life costing for buildings

01 / introduction

Over the past 50 years or so, lifecycle costing in construction has had its own cycle of life. Every 10 years or so it has been trumpeted as the next big thing, but never quite made it.

This time, however, lifecycle costing is here to stay, for two reasons – PFI and global warming. PFI has made it the basis of the commercial agreement between the client and the provider and global warming has made everybody think about the future impact of decisions to build.

One of the problems that clients have encountered in commissioning lifecycle cost studies has been the industry’s inability to report the results in a consistent way, which makes it impossible to directly compare costing analyses. This led the Office of Government Commerce and other public and private sector organisations to take a keen interest in the international standard that was being prepared with UK input from the British Standards Institution.

This is called BS ISO 15686-5:2008: Buildings and Constructed Assets. Service Life Planning. Lifecycle Costing.

It was felt that although this provided a set of principles to enable practitioners to produce consistent lifecycle costing analysis, it did not provide the UK practice guidance that was needed.

So, a working group was set up to produce guidance to the standard. This is called the standardised method of lifecycle costing (SMLCC) for construction procurement. Both the ISO standard and the SMLCC were published in July this year.

02 / what is lifecycle costing?

The International Standards Organisation (ISO) defines lifecycle costs as “the cost of an asset throughout its lifecycle while fulfilling the performance requirements”.

Lifecycle costing is basically a simple concept – it answers the question: “If I build this building, what future costs will I be letting myself in for?” So it is only a projection of the costs that result from commissioning a building, and which will be the responsibility of the client.

It is not difficult, but it is complex because potentially there are a huge number of costs to consider. It is also complicated by the introduction of time into the equation and therefore the ways of how to treat the effects of inflation, and lost investment opportunities or money.

03 / why carry out lifecycle costing?

• As part of a business case evaluation, to work out if you can afford to build the structure
• To work out if you can afford to run it. It was the failure to address the second question that led to the decline in the public estate in the seventies and eighties
• As part of an option appraisal exercise to decide on the most economically advantageous solution over the life of a building.
• To control the design development within the running cost and the capital cost budgets.
• To provide a set of instructions and a budget for the facilities manager.

One of the key decisions is the period of analysis, that is, the period over which a lifecycle cost exercise is carried out.

This is usually determined by the investment horizon of the client. In some retail schemes, this can be a relatively short period, whereas for social housing the Housing Corporation asks for a 100-year projection.

04 / what is the smlcc for?

The overall objective of the working party was to create a more effective and robust basis for lifecycle cost planning, benchmarking and analysis.

The SMLCC sets out to provide:

• A cost data structure for lifecycle costing, which aligns with the ISO and the established RICS elements for buildings in the BCIS standard form of cost analysis
• A standard method of applying lifecycle costing applicable to the key stages of procurement
• A process map of the lifecycle costing stages to define what should be done at each stage of the design process
• Instructions on defining the client’s specific requirements
• Guidance on choosing the method of economic evaluation
• Practical guidance, instructions, definitions and worked examples
• An industry-accepted methodology to facilitate more consistent application of lifecycle costing.

05 / who is it for?

The SMLCC will help clients to brief their consultants by defining the options and the range of costs that might be included in a lifecycle cost exercise. It will also help clients to understand the future cost ramifications of building decisions and this is a key to delivering sustainable buildings.

It will help consultants to deliver to the agreed brief. It will help the client and the design team to understand the lifecycle ramifications of design decisions by presenting the costs in a standard fashion. And it will help facilities managers by clearly defining the running cost assumptions in the design of the building that they inherit.

The working party intends to produce similar guidance on lifecycle costs in use.

It will help the industry as a whole by providing a consistent basis for comparing and benchmarking lifecycle costs.

06 / what is in it?

The SMLCC contains:

• Guiding principles setting out the process of lifecycle costing and how to agree the brief, undertake a costing exercise and analyse the results. It sets out the process of:
• l Predicting future works, predicting their timing and predicting their cost
• Analysing the results
• Applying factoring and sensitivity analysis
• Reporting
• Structure and definition. Setting out and defining what would normally be included in a lifecycle cost plan. This is not intended to be restrictive but to offer a standard against which a specific costing exercise can be defined
• Guidance on how to define the purpose and level of a costing exercise including a process map showing the key stages when an exercise might be carried out
• Instructions for undertaking lifecycle cost planning and choosing and presenting various methods of adjusting for the current value of future costs.
• Guidance on how to present the costs, for example:
• Net present value of total lifecycle costs for a stated period at a prescribed base date
• Cost-in-use over a stated period as a percentage of construction cost
• Guidance on the need to consider risks, carry out sensitivity analysis and “factor” the replacement cycles. This is a technique for testing the assumptions about the lifecycle of components in the specific environment of a project.
• A checklist of information and data requirements that lists what you need to know, or assume, and report to put a cost plan in context.
• Worked examples of a budget cost plan, a building level option appraisal, a component level option appraisal and a risk log.
• Example form of cost analysis.
• Mapping of the SMLCC data structure to the ISO and facilities managers and occupiers’ cost formats.

07 / SMLCC cost structure

The cost structure is based on the outline structure of construction, maintenance, operation and end of life. However, UK practice, particularly in the private sector, is often to include some occupancy costs.

The difference between operation costs and occupancy costs is that operating costs relate to work that results from the building whereas occupancy costs relate to work that results from the occupants.

It is not quite the difference between “soft” and “hard” facilities management. For example, cleaning is included in operation costs because the choice of a finish dictates its cleaning regime, although the needs of the

occupier will also be an influence. Switchboard costs, post room services and catering costs, however, relate solely to the requirements of the occupiers.

All the cost categories are defined within the SMLCC. The cost structure is as follows:

1 Construction costs

1.1 Construction works’ costs presented in SFCA elements

1.2 Other construction-related costs

1.3 Client definable costs

2 Maintenance costs

2.1 Major replacement costs

2.2 Subsequent refurbishment and adaptation costs

2.3 Redecorations

2.4 Minor replacement, repair and maintenance costs

2.5 Unscheduled replacement, repair and maintenance costs

2.6 Grounds maintenance costs

2.7 Client-definable costs

3 Operation costs

3.1 Cleaning

3.1.1 Windows and external services

3.1.2 Internal cleaning

3.1.3 Specialist cleaning

3.1.4 External works cleaning

3.2 Utilities costs

3.2.1 Fuel

3.2.2 Water and drainage

3.3 Administrative costs

3.3.1 Property management

3.3.2 Staff engaged in servicing the building

3.3.3 Waste management/disposal

3.4 Overheads costs

3.5 Taxes

3.6 Client definable costs

4 Occupation costs

4.1 Internal moves (churn)

4.2 Reception and customer hosting

4.3 Security

4.4 Helpdesk

4.5 Switchboard/telephones

4.6 Post room – mail services/courier and external distribution services

4.7 ICT and IT services

4.8 Library services

4.9 Catering and hospitality

4.10 Laundry

4.11 Vending

4.12 Occupier’s furniture and fittings (FF&E)

4.13 Internal plants and landscaping

4.14 Stationery and reprographics

4.15 Porters

4.16 Car parking charges

4.17 Client definable costs

5 End of life costs

5.1 Disposal inspections

5.2 Demolition

5.3 Reinstatement to meet contractual requirements

5.4 Client-definable costs

08 / case study

Budget: lifecycle cost plan based on the SMLCC guidance for a 1,000-capacity secondary school

Purpose:  Establishing a budget lifecycle cost for a 1,000 place secondary school. (Note: lifecycle costing is part of a wider whole-life costing exercise for a local authority’s project funding).

Scope of costs: The estimate is for secondary school building only. Construction, maintenance and operation costs are included. External construction works costs, other construction costs, unscheduled replacement, repairs and maintenance costs, occupancy costs and end of life costs are excluded.

Period of analysis: 30 years

Method of evaluation: Estimate adjusted to base date prices (that is, net present value, not discounted)

Study input and rules: Base date for costs, fourth quarter of 2008; construction completed date, fourth quarter of 2010; discount rate, not required. No sensitivity analysis has been applied to the estimate at this stage. Assume building will continue in current use beyond this period. Therefore, no allowance for change in maintenance cycles at the end of period or for end of life costs

Basis of estimate: Lifecycle costing estimate (based on industry benchmarks available from BCIS)

Information sources: Capital cost, BCIS online analyses; maintenance costs, BCIS building running cost online benchmarks; running costs, BCIS building running cost online benchmarks; budget lifecycle cost plan at briefing stage one.