This approach is closely aligned to the theory of opportunity costs, i.e. the amount of interest lost by choosing option A or B as opposed to investing the sum at a given rate percentage, is used as a basis for comparison between alternatives. This approach can also in- clude the provision of a sinking fund in the calculation in order that the costs of replacement are also taken into account.
In using the annual equivalent approach the following equation applies: 1 ᎏ (1.035)n 1 ᎏ (1⫹i)n 1 ᎏ (1⫹i)n
Present value of £1 per annum (sometimes referred to by actu- aries as the annuity that £1 will purchase)
This multiplier/factor is used to evaluate the present value of sums, such as running and maintenance costs that are paid on a regular annual basis
Present value of £1 per annum ⫽
where i is the rate of interest expected or discount rate and n is the number of years.
Previously calculated figures for both multipliers are readily available for use from publications such as Parry’s Valuation
Tables, etc.
Sinking funds should also be considered; a fund created for the future cost of dilapidations and renewals. Given that systems are going to wear out and/or need partial replacement it is thought to be prudent to ‘save for the rainy day’ by investing capital in a sink- ing fund to meet the cost of repairs, etc. The sinking fund al- lowance therefore becomes a further cost to be taken into account during the evaluation process. Whether this approach is adopted will depend on a number of features including corporate policy, in- terest rates, etc.
Whole-life costing is not an exact science, as, in addition to the difficulties inherent in future cost planning, there are larger issues at stake. It is not just a case of asking ‘how much will this building cost me for the next 50 years’, rather it is more difficult to know whether a particular building will be required in 50 years time at all – especially as the current business horizon for many organisa- tions is much closer to 3 years. Also, whole life costing requires a different way of thinking about cash, assets and cash flow. The tra- ditional capital cost focus has to be altered, and costs be thought of in terms of capital and revenue costs coming from the same ‘pot’. Many organisations are simply not geared up for this adjustment. The common misconception that a whole-life costed project will al- ways be a project with higher capital costs does not assist this state of affairs. As building services carries a high proportion of the cap- ital cost of most construction projects, this is of particular impor- tance. Just as capital and revenue costs are intrinsically linked so are all the variables in the financial assessment process. Concentrate on one to the detriment of the others and you are likely to fail.
(1⫹i)n
⫺1 ᎏi(1⫹i)n
Perhaps, the most crucial reason is the difficulty in obtaining the appropriate level of information and data.
The lack of available data to make the calculations reliable. Clift & Bourke 1999 found that despite substantial amounts of research into the development of database structures to take account of per- formance and WLC there remains significant absence of standardi- sation across the construction industry in terms of scope and data available. Ashworth also points out that the forecasting of building life expectancies is a fundamental prerequisite for whole-life cost calculations, an operation that is fraught with problems. While to some extent building life relies on the lives of the individual build- ing components, this may be less critical than at first imagined, since the major structural elements, such as the substructure and the frame, usually have a life far beyond those of the replaceable el- ements. Clients and users will have theoretical norms of total life spans but these have often proved to be widely inaccurate in the past. Building Maintenance Information of the Royal Institution of Chartered Surveyors was established in the 1970s. BMI have devel- oped a standard form of property occupancy cost analysis, which it is claimed allows comparisons between the cost of achieving various defined functions or maintaining defined elements. The BMI define an element for occupancy cost as: expenditure on an item which ful- fils a specific function irrespective of the use of the form of the build- ing. The system is dependent on practitioners submitting relevant data for the benefit of others. The increased complexity of con- struction means that it is far more difficult to predict the whole-life cost of built assets. Moreover if the malfunction of components re- sults in decreased yield or underperformance of the building then this is of concern to the end user/owner. There is no comprehensive risk analysis of building components available for practitioners, only a wide range of predictions of estimated life spans and notes on preventive maintenance – this is too simplistic. There is a need for costs to be tied to risk including the consequences of component fail- ure. After all the performance of a material or component can be af- fected by such diverse factors as:
● Quality of initial workmanship when installed on site and sub-
sequent maintenance.
● Maintenance regime/wear and tear. Buildings that are allowed
to fall into disrepair prior to any routine maintenance being car- ried out will have a different life cycle profile to buildings that are regularly maintained from the outset.
● Intelligence of the design and the suitability of the material/
component for its usage. There is no guarantee that the selec- tion of so-called high quality materials will result in low life cycle costs.
Other commonly voiced criticisms of whole-life costs (WLC) are:
● Expenditure on running costs is 100 per cent allowable revenue
expense against liability for tax and as such is very valuable. There is also a lack of taxation incentive, in the form of tax breaks, etc., for owners to install energy efficient systems.
● In the short term and taking into account the effects of dis-
counting, the impact on future expenditure is much less signif- icant in the development appraisal.
Another difficulty is the need to be able to forecast, a long way ahead in time, many factors such as life cycles, future operating and maintenance costs, and discount and inflation rates. WLC, by definition, deals with the future and the future is unknown. Increasingly obsolescence is being taken into account during procurement – a factor that it is impossible to control since it is influenced by such things as fashion, technological advances and innovation. An increasing challenge is to procure built assets with the flexibility to cope with changes. Thus, the treatment of uncer- tainty in information and data is crucial as uncertainty is endemic to WLC (Flanagan et al., 1989; Bull, 1993). Another major difficulty is that the WLC technique is expensive in terms of the time required. This difficulty becomes even clearer when it is required to undertake a WLC exercise within an integrated real-time envi- ronment at the design stage of projects.
Nevertheless, changes in the nature of development mean that other factors have emerged to convince the industry that whole-life costs are important.
Whole-life cost procurement – critical success factors:
● Effective risk assessment – what if this alternative form of
construction is used?
● Timing – begin to assess WLC as early as possible in the
procurement process
● Disposal strategy – is the asset to be owner occupied, sold or let? ● Opportunity cost – downtime
● Suitability – matching a client’s corporate or individual strategy
to procurement.
In 2001, the Whole-Life Cost Forum was launched as a source of reference on whole-life cost data and can be accessed at www.wlcf.org.uk.
Conclusion
Although sustainability/green development may still for many seem to lie in the field ‘crankiness’, there are undoubtedly strong moves to increase the awareness of the impact that pollution and high energy consumption are having on the world and as, for example, concerns for climate change increase there will be increased pressure on quantity surveyors to provide data on the costs of going green.
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