Assistant Professor Antti Peltokorpi antti.peltokorpi@aalto.fi Rak-63.3214 Management of Lifecycles of Buildings LIFE CYCLE COST ANALYSIS (LCCA) OF BUILDINGS 6.10.2016 Assistant Professor Antti Peltokorpi antti.peltokorpi@aalto.fi

Learning outcomes Understand the purpose of life cycle cost analysis methods Identify main steps and methods to calculate life cycle cost for a building Can apply the method after home work

Life cycle cost analysis (LCCA) Life cycle costing (LCC) is the process of economic analysis to assess the total cost of ownership of a product, including its cost of production, installation, operations, maintenance, conversion, and/or decommission.

Life cycle cost analysis (LCCA) By using LCCA, total cost of the product can be calculated over the total span of product life cycle LCCA balances initial monetary investment with the long-term expense of owning and operating the building

Life cycle cost analysis (LCCA) LCCA is an economic tool which combines both engineering art and science to make logical business decision LCCA provides important inputs in the decision making process in the product design, development, and use

LCCA for customer By using LCCA, customers can evaluate and compare alternative products By using LCCA, customers can assess economic viability of projects and products

LCCA for product supplier By using LCCA, product suppliers can optimize their design by evaluation of alternatives and by performing trade-off studies By using LCCA, product suppliers can evaluate various operating and maintenance cost strategies (to assist product users)

Why to use LCCA? Typical conflict in most of the companies: Project Engineering wants to minimize capital costs as the only criteria, Maintenance Engineering wants to minimize repair hours as the only criteria, Production wants to maximize operation hours as the only criteria, Quality Engineering wants to nullify failures as the only criteria, Accounting wants to maximize project net present value as the only criteria, Shareholders want to increase stockholder wealth as the only criteria

Why to use LCCA? LCCA can used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time It is important for engineers to think like managers and act like engineers for a profit maximizing organization

Where are the biggest conflicts between stakeholders’ incentives concerning buildings? Owner Material supplier User General contractor Maintenance Sub-contractor Developer HVAC supplier Investor Architect Design engineer

Cost elements in LCCA For a building, there are several cost elements: Initial Cost Energy & Water Costs Operation, Maintenance & Repair Cost Replacement Cost Other Costs (e.g. taxes) Residual Value The identification of cost elements and their sub-divisions are based on the purpose and scope of the LCCA

Cost elements Initial costs Energy and water cost Includes all possible initial investment costs For example land acquisition, construction, renovation, equipment Estimated by historical data from similar facilities or by using different databases Energy and water cost Based on consumption, current rates and price projections Hard to predict at early state of project - can be calculated during design phase Energy suppliers provide information about prices and price projections

Cost elements Non fuel operation, maintenance and repair costs Depends on operating schedules and maintenance standards Estimating requires engineering judgement Published guidebooks and suppliers provide information Replacement costs Timing and amount lifetime of a system and owning period Same sources of information for costs as when estimating the initial costs LCCA will discount the costs to occurrence date’s value

Cost elements Other costs Residual value (RV) Non-monetary benefits Investments that improve the productivity but the benefits are hard to quantify Financial charges and taxes Residual value (RV) Monetary value of the building at the end of the analysis period Can be determined in many ways depending on the condition of the building

LCCA in different process phases Source: https://lbre.stanford.edu/sites/all/lbre-shared/files/docs_public/LCCA121405.pdf

Sample LCCA decision matrix Simple analysis Complex analysis High Energy systems Siting / massing I Building envelope II Mechanical systems Potential cost impact Electrical systems III Structural systems IV Low Source: https://lbre.stanford.edu/sites/all/lbre-shared/files/docs_public/LCCA121405.pdf

Integrating LCC into the Design Process

Steps for computating LCC Identify alternatives Define cost element categories Determine time for each cost element Estimate value of each cost element Calculate net present value of each cost element, for every year (over its time period) Calculate LCC by adding all cost elements, at every year Analyze the results

Net Present Value (NPV) NPV analysis takes into account the time value of money Future cash flows are discounted to a base date to enable better decision making Discount rate (r) represents the rate by which ‘future money’ becomes less valuable Investor’s opportunity cost Inflation

How to select discount rate? Estimated cost inflation should be considered when evaluating future cash flows C(t=1) = C(t=0) x inflation Discount rate reflects investor’s opportunity cost = “the rate of return the investor could earn in the marketplace on an investment of comparable size and risk” “average cost of capital”

Example: Life-cycle costs of wooden windows (40 years) Initial / Construction costs Cost per unit (390€/m2) Proportion for operating and joint costs (15%) Reserve of rise of the costs (2%) Profit and contractor's costs (10%) Maintenance costs Painting every 8 years (137 €/m2) Reconditioning every 16 years (350 €/m2) Renovating every 40 years Current value with 40-year time period and 10% rate of interest:

Example: Life-cycle costs of wooden windows (40 years) Operation costs Heat transfer through the windows (U-value 1,4 W/m2K): Cost of heating energy (0,077€/kWh): Current value with 40-year time period and 10% rate of interest: Total costs Life-cycle costs of wooden windows are:

Example – LCC of Competing Heating / Cooling Systems System A: Electric baseboard and window air conditioner System B: Heat Pump

Example – LCC of Competing Heating / Cooling Systems System A: Electric baseboard and window air conditioner System B: Heat Pump Financial Criteria: Discount Rate d = 8% Energy Cost Inflation Ie = 6% Maintenance Cost Inflation Im = 5% Study Period N = 15 years

System A: Electric Baseboard and Window Air Conditioner Investment Related Costs Initial Cost $1,500 Replacement Cost Year 8 (Base Yr $) $400 Residual Value (Year 15 $) $150 Operation Related Costs Base Year Electric Energy Cost $1,200 Base Year OM&R Cost $50

+ LCC of System A PV Investment Costs PV Operational Costs = $1,772 + $16,156 = $17,927

LCC of System B – Heat pump PV Investment Costs PV Operational Costs + =$3,384 + $12,798 = $16,182 LCC System B $1,745 less or 10% less

Initial Cost – Office Building - $100 / SF % of Total Building Cost Source: Means Life Cycle Costing For Facilities

Life Cycle Cost – Office Building - $200 / SF Initial Cost Operational Cost Life Cycle Cost – Present Value $ / ft2 Source: Means Life Cycle Costing For Facilities

Example – Existing buildings In the table, Life Cycle Costs are correct. However, what is confusing/interesting/missing in other numbers? Interest cost pitää sisällään P:n Positive resale value / negative disposal cost  tontti arvokas, talo kustannus

Four Supplementary Evaluation Measures Net Savings - (NS) Savings-to-Investment Ratio - (SIR) Adjusted Internal Rate of Return - (AIRR) Discounted Payback - (DPB)

Example – Attic roof insulation Additional Investment Cost – I $1500 Annual Energy Savings – A0 $260 Financial Criteria: d = 8% Ie = 6% N = 30 yrs

Supplementary Evaluation Measures – Attic roof insulation Net Savings (NS) $4,420 Savings-to-Investment Ratio (SIR) 3.9 Adjusted Internal Rate of Return (AIRR) 13% Discounted Payback (DPB) 6.2 years

Outcomes of LCCA analysis Data for every alternative are analyzed, and the lowest LCC option become preferred But the lowest LCC option may not necessarily be implemented when other considerations, such as risk, available budgets, non-monetary preferences, political and environmental concerns are taken into account LCCA provides critical information to the overall decision-making process, but not the final answer

Home work

Individual Home work Calculate Life Cycle Costs of two alternative apartments with similar size and location Select e.g. for sale apartments from websites One built in 2000s, other in 1980s or earlier Evaluation period is 40 years Take into account several cost elements: Investment cost Energy & Water Costs Operation, Maintenance & Repair Cost Other Costs? Ignore resale value / disposal cost Calculate and compare net present values of the apartments

Individual Home work Use apartment-specific data as much as possible, such as maintenance charges If some data is not directly available, try to estimate using different sources (websites, catalogues) e.g. costs and typical renovation and repair periods of drains and sewers and exteriors Write a short report of the analysis and results (max 2 pages); What was interesting in results? What data was not available? What was hard to estimate? Return report in My Courses Deadline is 31.10.2016

Further readings Fuller, S. (2010) Life-Cycle Cost Analysis (LCCA), National Institute of Standards and Technology (NIST). https://www.wbdg.org/resources/lcca.php Hyartt, J. (2009) Kiinteistöjen ylläpidon kustannustieto 1992. Teknillinen korkeakoulu. Multiprint Oy, Espoo.