Unplanned and unexpected maintenance and refurbishment costs can amount to half of all expenditure on existing buildings. In the UK, such unplanned spending ranges from £8 billion to £20 billion a year. Life-cycle costing can drastically reduce unplanned expenditure and is one of the practices promoted by the Building Services Best Practice Programme. Ron Jeeves explains how it works.
At its most basic, life-cycle costing evaluates the total cost of ownership of a facility or plant for a variety of options against a common baseline so that the best choice can be made at the time of procurement.
Best choice
The best choice is the one that not only meets the output specification, but also has the lowest total predicted costs for procurement, installation, replacement, maintenance and consumables, including energy consumption.
An assessment of life-cycle costs should, if carried out properly, influence the selection of the best design based on the most appropriate solution for the lifetime of an installation.
All too often, there has been a discontinuity between design and build on the one hand and operate and maintain on the other. Life-cycle costing encourages seamless continuity between the two.
The problem has come about through the contractual separation of the procurement and operational phases of a facility, where the drive has been to minimise the cost of each independent of the other. The result has been vigorous cost cutting during the shorter procurement stage, often under the misplaced use of value engineering. This has led to higher operating and maintenance costs and, often, the need for premature replacement of plant and equipment.
“Private finance initiatives offer continuity of responsibility from design and build to operate and maintain”
The result has been to both transfer and defer some of the real cost of procurement onto the operating costs at a greater overall cost of ownership. On top of these issues are the hidden costs of disruption to the smooth running of the business when building services have to be repaired or replaced.
Real value
Life-cycle costing looks at the real value of these costs, using well-known investment appraisal techniques. These relate all costs to a common cost baseline. The real effect of design decisions on the total cost of procurement and life-cycle plant operation are clearly seen.
The greatest concentration of engineering knowledge on building services is at the time of design, installation and commissioning. Once the project teams have dispersed, access to this knowledge is much more difficult. Resolving problems can be spread out over months and years, rather than days or weeks during construction — and access to funds is much more tortuous once the final account has been settled.
When all the costs of designing, building, operating and maintaining a facility are taken into account, there is no longer any sense in treating them financially as two entirely autonomous parts — separated by ‘the handover’.
Change of thinking
Exploiting this philosophy requires a change of thinking that will allow building operators, facilities managers, designers, builders and equipment manufacturers to work much more closely together in developing the overall specification. The outcome should be to justify and deliver the most cost-effective solution. It requires that each member of the procurement and operating teams take responsibility for understanding how a building is designed, built and operated over a complete life cycle.
Private finance initiatives offer this continuity of responsibility from design and build to operate and maintain. A notable result has been the focus on designing out operating and maintenance costs as part of the procurement process by evaluating competing designs on a life-cycle-cost basis. There is also a greater incentive to thoroughly commission new plant and to analyse commissioning data for inherent design faults.
Incentive
One of the biggest benefits is the incentive to provide for continuous monitoring of plant performance and trends, and to use that information to develop condition-based maintenance strategies to provide cost-effective maintenance — often in partnership with the equipment manufacturer.
This in turn has led to a much closer liaison with manufacturers through the setting up of back-to-back contracts. This arrangement retains the design knowledge for the life cycle of the plant, with greater opportunity for the manufacturer to collect performance data for continuous improvement — especially in the area of reliability. The long-term advantages for improving life-cycle costing and profitability are therefore enormous. Retaining the manufacturer’s commercial interest should also mitigate against obsolescence of components.
Option study
Ideally only components that meet the design life and performance should be included in the option study, and there should be rigorous audit of the design to include for this. Where this is not possible, the full cost of replacement and the risk of obsolescence must be taken into account. If the component is unlikely to be obtainable when it needs replacing, it is better to design it out of the specification at the beginning, rather than having to face a re-engineering of the function during the lifetime of the facility.
Life-cycle costing should lead to more standardisation and the development of common platforms for installations of mechanical and electrical plant. With repeatability comes the possibility of more off-site fabrication, leading again to better installation and commissioning, greater reliability and lower costs. This is the virtuous circle of continuous improvement that the industry seeks to emulate from other industries — notably car manufacturing and assembly.
Tailor the installation
Further advantages follow in supply-chain management, particularly at engineering and management interfaces. Why not matched interchangeable components on the model of the audio industry? We should be able to mirror mechanically what we can do electronically by the development of matched component packages, with manufacturers working together to develop compatibility at the engineering interfaces. The benefits of freeing project design resources from one-off plant-interface designs would be enormous.
Matched components would allow a wider choice of add-ons to meet the exact specification, and to tailor the installation to the individual project. When the basic design is sound, the availability of matched components offers a much better way of designing to an individual client’s budget than downgrading the whole installation.
One criticism of life-cycle costing is that it cannot possibly include for all the risks during a typical 30- or 40-year life cycle. This objection misses the point that taking into account all known risks and options now produces a more robust solution more capable of withstanding future uncertainties. It starts from a much stronger position.
Knowing the total cost of ownership reduces uncertainty and should make the initial investment decision easier.
The environmental characteristics and legal requirements are well understood, forming the standards that all buildings must comply with. As the boundaries of these standards spread out to include the broader concepts of durability, sustainability, and performance, so new ways must be developed for achieving delivery and assessing compliance. All have an impact on the life-cycle cost within a regulatory framework.
Life-cycle costing offers the benefits of predicting future costs now. It does this through a comparative review of design options based on both procurement and operating costs. Looking at lifetime costs converted to a common cost baseline offers one of the best tools for encouraging good design.
Life-cycle costing is one of the good-practice themes covered by the Building Services Best Practice Programme. BSBPP’s focus is the transformation of outmoded business practices and cultures. The programme can help you understand good management practices and their importance to your business.
BSBPP operates in partnership with the Building Services research & Information Association, Chartered Institution of Building Services Engineers, Electrical Contractors’ Association, Federation of Environmental Trade Associations, Heating & Ventilating Contractors’ Association and the Construction Best Practice Programme. Find out how BSBPP can help you by telephoning 0845 606 5704 or visiting the website at the address below.
