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Life-Cycle Cost Analysis

Essay by   •  November 4, 2010  •  Case Study  •  3,635 Words (15 Pages)  •  2,495 Views

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Life-cycle cost analysis (LCCA) is a method for assessing the total cost of facility ownership. It takes into account all costs of acquiring, owning, and disposing of a building or building system. LCCA is especially useful when project alternatives that fulfill the same performance requirements, but differ with respect to initial costs and operating costs, have to be compared in order to select the one that maximizes net savings. For example, LCCA will help determine whether the incorporation of a high-performance HVAC or glazing system, which may increase initial cost but result in dramatically reduced operating and maintenance costs, is cost-effective or not. LCCA is not useful for budget allocation.

Lowest life-cycle cost (LCC) is the most straightforward and easy-to-interpret measure of economic evaluation. Some other commonly used measures are Net Savings (or Net Benefits), Savings-to-Investment Ratio (or Savings Benefit-to-Cost Ratio), Internal Rate of Return, and Payback Period. They are consistent with the Lowest LCC measure of evaluation if they use the same parameters and length of study period. Building economists, certified value specialists, cost engineers, architects, quantity surveyors, operations researchers, and others might use any or several of these techniques to evaluate a project. The approach to making cost-effective choices for building-related projects can be quite similar whether it is called cost estimating, value engineering, or economic analysis.

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A. Life-Cycle Cost Analysis (LCCA) Method

The purpose of an LCCA is to estimate the overall costs of project alternatives and to select the design that ensures the facility will provide the lowest overall cost of ownership consistent with its quality and function. The LCCA should be performed early in the design process while there is still a chance to refine the design to ensure a reduction in life-cycle costs (LCC).

The first and most challenging task of an LCCA, or any economic evaluation method, is to determine the economic effects of alternative designs of buildings and building systems and to quantify these effects and express them in dollar amounts.

Viewed over a 30 year period, initial building costs account for approximately just 2% of the total, while operations and maintenance costs equal 6%, and personnel costs equal 92%.

Source: Sustainable Building Technical Manual

B. Costs

There are numerous costs associated with acquiring, operating, maintaining, and disposing of a building or building system. Building-related costs usually fall into the following categories:

Initial Costs--Purchase, Acquisition, Construction Costs

Fuel Costs

Operation, Maintenance, and Repair Costs

Replacement Costs

Residual Values--Resale or Salvage Values or Disposal Costs

Finance Charges--Loan Interest Payments

Non-Monetary Benefits or Costs

Only those costs within each category that are relevant to the decision and significant in amount are needed to make a valid investment decision. Costs are relevant when they are different for one alternative compared with another; costs are significant when they are large enough to make a credible difference in the LCC of a project alternative. All costs are entered as base-year amounts in today's dollars; the LCCA method escalates all amounts to their future year of occurrence and discounts them back to the base date to convert them to present values.

Initial costs

Initial costs may include capital investment costs for land acquisition, construction, or renovation and for the equipment needed to operate a facility.

Land acquisition costs need to be included in the initial cost estimate if they differ among design alternatives. This would be the case, for example, when comparing the cost of renovating an existing facility with new construction on purchased land.

Construction costs: Detailed estimates of construction costs are not necessary for preliminary economic analyses of alternative building designs or systems. Such estimates are usually not available until the design is quite advanced and the opportunity for cost-reducing design changes has been missed. LCCA can be repeated throughout the design process if more detailed cost information becomes available. Initially, construction costs are estimated by reference to historical data from similar facilities. Alternately, they can be determined from government or private-sector cost estimating guides and databases. The Tri-Services Parametric Estimating System (TPES) contained in the National Institute of Building Sciences (NIBS) Construction Criteria Base (CCB) developed models of different facility types by determining the critical cost parameters (i.e., number of floors, area and volume, perimeter length) and relating these values through algebraic formulas to predict costs of a wide range of building systems, subsystems, and assemblies. The TPES models can be adapted to facilities beyond those included in the base modeling system by using SuccessEstimator, a software package available from U.S. Cost.

Detailed cost estimates are prepared at the submittal stages of design (typically at 30%, 60%, and 90%) based on quantity take-off calculations. These estimates rely on cost databases such as the Commercial Unit Price Book (C-UPB) or the R. S. Means Building Construction Cost Database.

Testing organizations such as ASTM International and trade organizations have reference data for materials and products they test or represent.

Energy and Water Costs

Operational expenses for energy, water, and other utilities are based on consumption, current rates, and price projections. Because energy, and to some extent water consumption, and building configuration and building envelope are interdependent, energy and water costs are usually assessed for the building as a whole rather than for individual building systems or components.

Energy usage: Energy costs are often difficult to predict accurately in the design phase of a project. Assumptions must be made about use profiles, occupancy rates, and schedules, all of which impact energy consumption. At the initial design stage, data on the amount of energy consumption for a building can come from engineering analysis or from computer programs

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