By Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al-Hammad, Dr. M. Osama Jannadi, Mr. Sami Abu Saad By Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al-Hammad, Dr. M. Osama Jannadi, Mr. Sami Abu Saad Assessment of the Problems of Application of Life Cycle Costing in Construction Projects in Saudi Arabia College of Environmental Design, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia College of Environmental Design, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia

IntroductionIntroduction Objectives of the StudyObjectives of the Study MethodologyMethodology Problems of ApplicationsProblems of Applications Results of the StudyResults of the Study Other ProblemsOther Problems ConclusionsConclusions IntroductionIntroduction Objectives of the StudyObjectives of the Study MethodologyMethodology Problems of ApplicationsProblems of Applications Results of the StudyResults of the Study Other ProblemsOther Problems ConclusionsConclusions CONTENTS

Life Cycle Costing Concept OIn the past, economic assessment of alternative designs, construction, or other investment has been based on initial (first cost which ignores the total cost incurred for the investment throughout its lifetime. OThe concept of life cycle costing provides an economic tool which takes into account total costs for an invest- ment during its life span. 1.INTRODUCTION

OThe life cycle costing can be defined as follows: an economic assessment of alternatives designs, construction, or other investment considering all significant costs of initial costs and ownership costs over economic life of each alternative, expressed in equivalent economic units. OThe life cycle costing analysis can not be carried out without considering the following: A -total costs B -concept of the time value of money 1.INTRODUCTION (Continued)

A -Total Costs Oinitial costs Oownership costs OInitial costs. They include the followings: -initial construction costs -design costs -land costs -finance costs OOwner costs. They include the followings: -operating costs omaintenance costs outility bills ostaffing fee 1.INTRODUCTION (Continued)

B -The concept of the time value of money oThe value of money today is not equal to the same amount of money in the past or in the future. oThe concept of the time value of money considered the following: -initial costs (P) (present value) -discount or interest rate (i%) -life time of an investment (n) 1.INTRODUCTION (Continued)

oTo make an equivalent value of money for an assessment along its economic life, many methods can be used such as: 1.Present worth method 2.Uniform annual method 1.INTRODUCTION (Continued)

First Cost Annual Maintenance Cost Annual Labor Cost Extra Income Taxes Salvage Value Life, Years$26,000,000$800,000$11,000,000---$2,000,0006 Project A $36,000,000$300,000$7,000,000$2,600,000$3,000,00010 Project B An Illustrated Example: If the minimum required rate of return is 15%, which project should be selected ? Using Uniform Annual Worth Method EUAC A = $18,442,000 EUAC B = $16,925,000

oTo identify the problems of application of life cycle costing in Saudi Arabia. oTo assist the relative severity of those problems from point of views of the government and the private sectors. 2.OBJECTIVES OF THE STUDY

This investigation was undertaken into two phases. The first phase include a literature search and interviews. *The identification of five groups of main problems and a total of 26 specific problems In the second phase *A survey was conducted to assess the relative severity of these causes. *The survey was filled buy 11 government agencies and 12 consulting offices that apply life cycle costing. 3. RESEARCH METHODOLOGY

There are five main categories of problems of life cycle costing: First: Knowledge Problems Second:Data Problems Third:Procedures Problems Fourth:Management Problems Fifth:Cost Problems 4. PROBLEMS OF APPLICATION

First: Knowledge Problems: 1.Unfamiliarity with design-to-cost concept 2.Lack of knowledge of the concept 3.Unknown relation between initial cost and future cost 4.Unavailability of enough references 4. PROBLEMS OF APPLICATION (Continued)

Second:Data Problems 5.Unavailability of capital cost data: 6.Unavailability of maintenance data: 7.Unavailability of operation data: 8.Unavailability of discount or interest rate data 9.Unavailability of time life data 10.Large volume of data needed 11.Unavailability of standard method for collecting & recording of data 12.Unavailability of data base management system 4. PROBLEMS OF APPLICATION (Continued)

Third:Procedures Problems: 13.Unreliability of decision taken 14.Lack of Integrity of forecast 15.Majority of LCC calculations involve uncertainty 16.Unavailability of qualified staff 17.Unavailability of qualified consultants 4. PROBLEMS OF APPLICATION (Continued)

Fourth:Management Problems: 18.Unacceptance of the concept 19.Government non-enforcement 20.Management (client) pressure to meet budget limit 21.Management (client) pressure to meet time deadline on design: 22.Unclear benefits of LCC to management (client) 23.Improper planning and control of management tasks at different LCC stages 4. PROBLEMS OF APPLICATION (Continued)

Fifth:Cost Problems: 24.Cost to be paid for designer to conduct LCC: 25.Cost to be paid for collection of data: 26.Difficulties in defining cost elements: 4. PROBLEMS OF APPLICATION (Continued)

Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups. The severity indexes were grouped to reflect the respondents' ratings as follows: * Strongly severe87.5 < I  100 * Severe62.5 < I  87.5 * Somewhat severe37.5 < I  62.5 * Somewhat not severe12.5 < I  37.5 * Not severe 0 < I  RESULTS OF THE SURVEY

Table 1 shows the severity index for individual problems in government agencies. Table 2 shows the severity index for individual problems in consulting offices. In the same manner. Table 3 shows the severity index for problem groups in government. Table 4 shows the severity index for problem groups in consulting offices. 5. RESULTS OF THE SURVEY (continued)

Table 1 - Results of Government Agencies' Survey of Problems Problem Definition [1]StronglySevere[2]Severe[3]SomewhatSevere[4]Somewhat Not Severe [5]NotSevere[6]SeverityIndex[7] Uniformilization of design-to-cost concept Lack of knowledge of the concept Unknown relation between initial and running cost Unavailability of satisfactory references (a) Knowledge Problems 5. RESULTS OF THE SURVEY (continued)

Problem Definition [1]StronglySevere[2]Severe[3]SomewhatSevere[4]Somewhat Not Severe [5]NotSevere[6]SeverityIndex[7] Uniformilization of design-to-cost concept Lack of knowledge of the concept Unknown relation between initial and running cost Unavailability of satisfactory references (a) Knowledge Problems Table 2 - Results of Consulting Offices’ Survey of Problems 5. RESULTS OF THE SURVEY (continued)

Table 3 - Severity Index of Problem Groups in Government Knowledge Problems Data Problems Procedure Problems Management Problems Cost Problems Group Description ABCDE Group Average Sev. Index 5. RESULTS OF THE SURVEY (continued)

Table 4 - Severity Index of Problem Groups in Firms Knowledge Problems Data Problems Procedure Problems Management Problems Cost Problems Group Description ABCDE Group Average Sev. Index 5. RESULTS OF THE SURVEY (continued)

For government agencies: *Individual problems: Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe". *Problem Groups: Four groups fall in the "severe" category and one group falls in the "somewhat severe". 5. RESULTS OF THE SURVEY (continued) Based on the foregoing results shown in Tables 1, 2, 3 & 4, the following could be indicated:

For consulting firms:  Individual Problems: Six individual problems rated as "severe" and twenty problems rated "somewhat severe".  Problem Groups: All groups fall in the "somewhat severe" category. 5. RESULTS OF THE SURVEY (continued)

For government agencies: *Individual Problems: Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively. * Problem Groups: Procedure problems, management problems and knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively. 5. RESULTS OF THE SURVEY (continued)

For consulting firms: * Individual Problems: Unavailability of data base management systems and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively. * Problem Groups: Data problems, management problems, and procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively. 5. RESULTS OF THE SURVEY (continued)

 In government agencies: Contradiction of LCC concept to government policy which is based on initial cost in selecting alternatives and in bidding.  In consulting offices: Resistance of management to introduction of new concepts. Unclear concepts to clients. Time and cost incurred to update the in-house data base management system.  In government agencies: Contradiction of LCC concept to government policy which is based on initial cost in selecting alternatives and in bidding.  In consulting offices: Resistance of management to introduction of new concepts. Unclear concepts to clients. Time and cost incurred to update the in-house data base management system. 6. OTHER PROBLEMS ADDED BY RESPONDENTS

It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application. However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are: 7. CONCLUSION client or management pressure to meet deadlines for design approval. lack of human resources (qualified consultants and staff) and material resources (sufficient data and data quality)

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