Life cycle costing New 490 | CCE 491/591

Outline Intro to life cycle costing and importance to green design Examples Tools for your projects

Purpose To estimate the overall costs of project alternatives and to select the design that ensures the space will provide the lowest overall cost of ownership consistent with its quality and function (Fuller 2007) You must determine the economic effects of alternative designs of buildings and building systems – QUANTIFY: express this in DOLLARS

What is life cycle costing and why is it relevant to green design? Traditionally referred to as “cradle to grave” costs for a building/other project, including some or all of the following: – Initial Costs: Purchase, Acquisition, Construction Costs, Planning and Design, Engineering, R&D – Fuel Costs, Consumables – 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 Hugely complex analysis for large building projects

For commercial construction, put building costs in perspective

Life cycle costing considers Capital cost Operation and maintenance Disposal, recycling Impact on other systems – Water, wastewater, energy, HVAC, etc Environmental impact

What is life cycle costing and why is it relevant to green design? Green building has reclaimed LCCA because it justifies many of the costs we may incur on the front end as we prioritize more durable materials, pricy but efficient systems, innovations that are smart – Recouping our capital costs through savings in energy, HVAC, water, wastewater – Factoring in the costs of disposing waste in buildings that are not designed to last Also LCCA is a way to include environmental costs that are not traditionally accounted for in buildings

Calculate present value Calculate for the entire design life – Include all costs, including replacement and disposal costs C 0 is initial cost C t represents subsequent costs r is the discount rate (cost of capital – interest rate on money used elsewhere): use 5-10%

The formula LCC = I + Repl — Res + E + W + OM&R + O LCC = Total LCC in present-value (PV) dollars of a given alternative I = PV investment costs (if incurred at base date, they need not be discounted) Repl = PV capital replacement costs Res = PV residual value (resale value, salvage value) less disposal costs E = PV of energy costs W = PV of water costs OM&R = PV of non-fuel operating, maintenance and repair costs O = PV of other costs

Traditional design heuristic

Water and energy costs For each year in the design life, calculate the water and energy savings associated with your project Requires holistic look at building costs – Translation: a big spreadsheet with everything in it Estimate those costs & savings based on current trends – Water and energy costs are not constant – Value of a dollar isn’t constant either Calculate the net present value in a traditional analysis

Adding in other costs: possible Environmental costs: establishing carbon footprint of materials – Requires economic value placed on carbon savings – We don’t have that yet – Why is gas so cheap? Manufacturing, transport, disposal costs of all materials Keep in mind that most materials are priced ARTIFICIALLY LOW because they don’t reflect the actual costs: this is the realm of the environmental economist Green design pays for itself if you look at the big picture – At least, that’s the theory – Often, this perspective conflicts with the business bottom line – Businesses may weigh the PR benefits of green versus the often unconventional economic justification that posits dollar values for non-utility services of the environment

Cases where all of this traditional LCCA might be irrelevant The owner isn’t concerned about payback – Wants to be green for advocacy or moral reasons Discount rate is zero (money would not be invested or otherwise used) – Some organizations are not rational actors in this sense No financial time horizon: no extra money to spare now, even if it makes sense in the long run

Alternative measures to consider using NS = Net Savings: operational savings less difference in capital investment costs SIR = Savings-to-Investment Ratio: ratio of operational savings to difference in capital investment costs AIRR = Adjusted Internal Rate of Return: annual yield from an alternative over the study period, taking into account reinvestment of interim returns at the discount rate SPB = Simple Payback: time required for the cumulative savings from an alternative to recover its initial investment cost and other accrued costs, without taking into account the time value of money DPB = Discounted Payback: time required for the cumulative savings from an alternative to recover its initial investment cost and other accrued costs, taking into account the time value of money

Alternative measures to consider using NS = Net Savings: operational savings less difference in capital investment costs SIR = Savings-to-Investment Ratio: ratio of operational savings to difference in capital investment costs AIRR = Adjusted Internal Rate of Return: annual yield from an alternative over the study period, taking into account reinvestment of interim returns at the discount rate SPB = Simple Payback: time required for the cumulative savings from an alternative to recover its initial investment cost and other accrued costs, without taking into account the time value of money DPB = Discounted Payback: time required for the cumulative savings from an alternative to recover its initial investment cost and other accrued costs, taking into account the time value of money

Practical points to consider for your projects Green materials will be more expensive Explore where and how you can recoup costs in water and energy Also factor in durability of materials (when you’ll have to replace them) Factor in disposal costs, which may be less for recyclable or non-hazardous materials Where you can get savings in one area (e.g., using local stone for a patio), put the savings back into the building (solar panels) Consider what the building will be used for – Both are located within non-profits who want to show their environmental ethic: value of advocacy and leadership may outweigh the dollars and cents of it

Tools Calculating present value: Simple spreadsheet