The scope of cost planning should not be confined just to the construction of buildings, as is common in practice, but should include matters that are expected to arise during the life of the project. The process is aimed at improving value for money for the
investor and/or future users through comparison of alternatives that meet stated objectives and qualities at reduced expense.
Life-cost planning is similar in concept to capital cost planning except for the types of costs that are taken into account and the need to express all costs in common dollars, i.e., costs that are adjusted to reflect the effects of escalation over time. The aim is to prepare a document that describes the composition of the building in a manner that is of use to the investor or owner. A cost plan in this format can be used to demonstrate the relationship between initial, replacement and running costs and to assist in the choice of specification and design details.
The primary objective of a comprehensive methodology of life-cost planning is to create and maintain an up-to-date picture of options available to the project client and subsequent users. The objective of life-cost planning is not necessarily to reduce running costs, or even total costs, but rather to enable investors and building users to know how to obtain value for money in their own terms by knowing what these costs are likely to be and whether the performance obtained warrants particular levels of expenditure. A project is cost effective if its life-costs are lower than those of alternative courses of action that would achieve the same objectives.
Expenditure commonly associated with commercial type buildings includes acquisition, cleaning, energy, rates and charges, maintenance and replacement. These costs can apply to the building structure, its finishes, fitments, services and external works. Establishing realistic costs for items of plant and equipment, in particular, requires technical data such as performance statistics and energy demands. The establishment of such life-costs may be difficult without historical data or expert knowledge.
The life-cost plan should be prepared on at least an elemental basis showing all quantities and unit rates. It should be set out in a fashion that enables extraction of totals for each type of cost category, including capital cost, along with costs per square metre and percentages of total cost. The method of presentation needs to be designed to bring out the underlying cost relationships, so that the analyst can see how to develop the design and make value for money improvements. Life-cost planning, like any other form of cost planning, is most effective in the early stages of design.
The two main objectives of applying life-cost studies to the construction of buildings and their subsequent usage are:
䊉 to facilitate the effective choice between various design solutions for the purpose of arriving at the best value for money – this is a comparison activity
䊉 to identify the total costs of acquisition and subsequent usage of a given design solution for the purpose of budgeting, planning and controlling actual performance – this is a measurement activity.
As the investigation of cost, and subsequent action, is more effective when undertaken at an early stage in the design process, it is not surprising that life-cost studies have concentrated on the first objective, to the virtual exclusion of the second. Discounting methodology is routinely used for comparison and selection of alternatives, however, if value for money over the life of a project is to be vigorously pursued, then life-cost studies must additionally become concerned with the measurement of costs. This requires the presentation of costs as real values rather than comparative (discounted) values.
The measurement of real value involves collection of the total expenditure arising from a project over the study period. Obviously future costs cannot be merely added without
some form of adjustment taking place. Inflation is the appropriate ‘exchange rate’ for this purpose. Present value (as opposed to discounted present value) translates future cost into real terms, enabling both capital and operating costs to be properly interpreted. Present value (defined as today’s value) thus forms a suitable basis for the measurement and control of life-costs.
The life-cost plan is used to record the present value of both initial and recurrent costs for the chosen design. Determination of the present value of goods and services over the life of a project can enable quantification of the potential cost liability to the owner or investor, which is of great use in the management of financial resources.
Comparative life-cost studies should be undertaken systematically on significant areas of expenditure using a discounting approach. The results of these studies lead to selection of materials and systems and are ultimately reflected in the life-cost plan. Although discounting is a suitable means of assessing the impact of timing on expenditure, the results obtained do not represent real values and there appears little need to present information in this form in the life-cost plan.
Investment appraisal often must include the consideration of aspects other than cost.
Form, function, aesthetics and environmental interaction are some of the more common issues that will contribute to the selection of optimal designs. For this reason comparative life-cost studies are best undertaken as part of a value management process.
5.7.1 Value management
Value management involves the identification of function and the selection of solutions that can maximize this function at minimum life-cost. Ultimately an effective balance is struck between function and cost and it is this balance that is known as value for money.
Commonly life-cost is considered, along with other design criteria, as a percentage of the final decision. Each design criterion is weighted as to its importance and the various alternatives being appraised are rated against each criterion using a numeric score. The multiplication of design criterion weight and performance score when totalled for each alternative provides the basis for identification of optimal value. An example of the manner in which subjective and objective issues are collectively analysed and judged is illustrated in Figure 5.2.
Value for money can be determined through division of the value score by the calculated comparative life-cost. The value score represents functional performance issues and is exclusive of matters that can be measured in monetary terms. Life-cost is judged as representing 40% of the decision in the presented example, but this can be altered to reflect various client motives. The higher the value for money index (or benefit ratio) the better is the balance between function and cost. Some form of risk analysis would be undertaken to indicate the probability of the identified value for money being realized.
5.8 Conclusion
Cost planning is operating in a new era. The focus has changed from the analysis of construction costs to embrace not only future commitments over the life of the project, but also non-monetary considerations such as function, aesthetics, performance and
Figure 5.2 Value management study evaluation technique.
environmental impact. The increased role of computer simulation to assist in the comparison and evaluation of options is evident. Cost management is now a broader discipline that recognizes the need to balance often opposing objectives. Value for money is the key criterion and is inclusive of a wide range of issues that ultimately combine to represent a successful project.
Endnote
1 The example shown in Table 5.1 is based on a standard format used in Australia; other countries may use systems that are different in their detail but perform a similar function in general. In the UK, for instance, the SFCA (standard form of cost analysis) provides a uniform basis for apportioning building costs in a standard elemental format.
References and bibliography
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Dell’Isola, A.J. and Kirk, S.J. (1995a) Life Cycle Costing for Design Professionals. Second edition (McGraw-Hill).
Dell’Isola, A.J. and Kirk, S.J. (1995b) Life Cycle Cost Data. Second edition (McGraw-Hill).
Ferry, D.J., Brandon, P.S. and Ferry, J.D. (1999) Cost Planning of Buildings. Seventh edition (Blackwell Science).
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Flanagan, R., Norman, G., Meadows, J. and Robinson, G. (1989) Life Cycle Costing: Theory and Practice (BSP Professional Books).
Langston, C. (1991a) The Measurement of Life-Costs (Sydney: NSW Department of Public Works).
Langston, C. (1991b) Guidelines for Life-Cost Planning and Analysis of Buildings (Sydney: NSW Department of Public Works).
Langston, C. (1994) The determination of equivalent value in life-cost studies: an intergenerational approach, University of Technology, Sydney, PhD dissertation.
Mooney, J. (1983) Cost Effective Building Design (Sydney: New South Wales University Press).
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Smith, J. (1998) Building Cost Planning for the Design Team (Deakin University Press).