1. Whole Life Costs Toolkits Brad Bamfield Chairman@wlcf.org.uk Brad_Bamfield@thesolutionorganisation.com

2. Today What is Whole Life Cost Worked examples WLC methods Rules of thumb How to do it – tools Whole life performance – Sustainability

3. Worked examples We are selecting between 2 assets The options offer the same business benefit How do we decide which one to select? –Advertising –Like the rep –Bias –Think one is “better” Use logic and structured approach

4. Worked example 1 Option 1Capital cost1 000 2Capital cost1 500

5. WLC Finance Matters Discounted cashflow (methods / ratios) BUSINESS NEWS The Headlines... Are you using NPV? It’s the preferred method for assessing business cases on a whole life basis N et P resent V alue Ignore it at your peril! IRR Internal Rate of Return - a discount rate by trial and error found when NPV= 0 then compare cost of capital “Profitability measure where options have same lives” PBP Payback Period - time taken for business case to break even “Doesn’t measure return on investment” NPV Net Present Value - includes costs and benefits and used widely to compare investments “Measures profitability and least cost and can deal with differing life options” BCR Benefit to cost ratio - indicates economic value of business case by the size of the ratio “Measures return on investment only as a ratio. If ratio > 1 then larger the ratio the better”

6. WLCF definition of WLC Whole Life Cost is the analysis of all relevant and identifiable financial cashflows regarding the acquisition and use of an asset.

7. WLC is A method to help decision making Capital costs Revenue costs Does it include end of life cost for any project exceeding 10 years? –Demolition is first cost of next project –How do I cost what I don’t know

8. WLCF definition of WLC Whole Life Cost is the analysis of all relevant and identifiable financial cashflows regarding the acquisition and use of an asset. relevant and identifiable

9. WLC is A method to help decision making Capital costs Revenue costs Does it include end of life cost for any project exceeding 10 years? –Demolition is first cost of next project –How do I cost what I don’t know Expressed as an annual cashflow for the life of the asset

10. What is an asset? An asset is anything that we buy or construct Can be a facility (building) Can be a component Any number of assets can be combined The asset can be income generating or not.

11. WLC – The Big PictureBuild 2 Years Design 1 Year £ 17% £ 3%Operate 25 Years Run / Maintain £ 40% Repair £ 30% Periodic Replacement / Refurbish £ 10%TotalTotalDispose 1 Year 100% Cost of Ownership £ ?% £ ?% Source Gardiner & Theobald

12. Worked example 2 Option12345 1Capital cost1 000 Maintenance125 625 Total1 625 2Capital cost1 500 Maintenance90 450 Total1 950

13. WLC - client’s view Compulsion –Climate Change Levy –Carbon Trading –PFI Conditions –Funding Concern for Environment Value for money Competitive Advantage Profit

14. WLC - contractor’s view Client driven Legislation Leading player in the industry Staff benefits Concern for Environment Supply chain PR Corporate credibility Competitive Advantage Long term view Profit

15. WLC - supplier’s view Client driven Legislation Leading player in our sector Staff benefits Concern for Environment Supply chain PR Corporate credibility Competitive Advantage Long term view Profit

16. What is common to all Profit

17. Who Do You Work For? ClientCapitalManagerRevenue Manager QSCapital Manager ArchitectCapitalManager Contractor CapitalManager & Architect M & EContractor & Architect Suppliers Contractor FM Revenue Manager Where does the Occupier fit in? Capital costsCost in Use

18. Why? Time, Visibility and Risk Construction –Big Spend – Short Time – Major Risk (perceived) FM –Low Spend – Long Time – Lower Risk (perceived) Project £100m 10% overspend = £10m FM £5m annually 10% overspend = £0.5m per year or £25m over life

19. Worked example 3 Year Option12345 1Capital cost1 000 Maintenance125 625 Refurbishment700 Energy60 300 Cashflow pa1 000185 8851852 625 Total2 625 2Capital cost1 500 Maintenance90 450 Refurbishment0 Energy50 250 Cashflow pa1 500140 Total2 200

20. How much does an asset cost? Capital Cost 1 1:5:200 The long term costs of owning and using buildings (November 1998) The Royal Academy of Engineering Business Cost 200x Revenue Cost 5x

21. WLC rules of thumb

22. Revenue cost breakdown EnergyEnergy CleaningCleaning MaintenanceMaintenance Admin ServicesAdmin Services SecuritySecurity Admin and Management InsuranceAdmin and Management Insurance 7% 10% 20% 27% 31% 5%

23. How do we measure WLC Total whole life cost ~ TWLC Annualised whole life cost ~ AWLC Discounted cashflow ~ DCF –£’s x % = a number Net present value ~ NPV Discount rate –What % should we use? Can be used for non financial e.g. kWh

24. Social Environmental Economic Activities in Sustainability Whole Life Cost Materials Aesthetics

25. But there are questions What is the “Life”?

26. Notes: Period of Consideration- 60 years Discount Rate- 6% WLC design life profiles Building Element Foundations and Piling Superstructure External Cladding Windows Roof Coverings Rainwater Goods Internal Partitions Demountable Partitions Doors and Ironmongery Finishings Generally Raised Floors Floor Coverings Suspended Ceilings Fittings and Furnishings Mechanical Services Electrical Services Public Health Services Builder’s Work Life Expectancy Prior to Complete Replacement (Years) Capital Cost £ Whole Life Cost £ Total £ 0-55-1010-2020-4040-6060-100100+

27. But there are questions What is the “Life”? When does Year 1 start? What does the Discount Rate include? Should the Suppliers pick their own Discount Rate? What is the right Discount Rate? What Discount Rate range do we expect? Do we apply a Test Discount Rate?

28. Discount Rate The % is a combination of factors Including –The weighted cost of capital of the business –Risk – project and client Letting suppliers set own Discount Rate tells us a lot See www.wlcf.org.uk for morewww.wlcf.org.uk

29. What We Need To Do Develop WLC in your organisation and your supply chain Take Small Steps - Progress Slowly Understand What You Have Achieved Step back - see the ‘Big Picture’ Benchmark - process not answers Appropriateness & Fitness - Every Project is Different

30. Consultant or Supplier Who will advise? QS, cost consultant, project manager? Supplier? Each one has a different agenda Each one will work at different levels of complexity Will the answer be any use?

31. Whole Life Cost Model – Input Owner’s Map – Stations Date: 26/06/02Key: ** NACs are related to asset availability / performance requirementsDrawn by K. Owen G&T / Rev 0 By function By asset type / asset Owner : G&T Whole Life Cost Model Business case only * Business Issues Output Levels - Station - Function - Asset type - Asset Capital Costs Total Project Costs - Design Fees - Engineering costs - Attendance costs - Management costs Taxation / Capital Allowances / VAT NACs downtime Risk Owner : Model Input Criteria Prices Test discount rate Study period Owner : FM Costs Cleaning Maintenance Energy Rates Insurance Admin and Management ANO (please define) Owner : Assets Forming Part of Station Regen Design / service life of each asset type/asset Condition base level to be achieved /maintained Availability required** / operational strategy / plan(s) to be maintained Intervention points (to be achieved / maintained) - Replacement and non-availability - Cyclical and non- availability - Annual and non- availability Maintenance strategy / plan(s) Owner : Assets NOT part of Station Regen Owner : Work Breakdown Structure List of functions (eg platform, ticket hall, etc) List of asset types - per function - per type Owner : Design / service life of each asset type / asset Condition base level to be achieved /maintained Availability required** / operational strategy / plan(s) Intervention points - Replacement and non-availability - Cyclical and non- availability - Annual and non- availability - Adhoc and non- availability Maintenance strategy / plan(s) Are there any areas / assets which are not to be moded What happens with rest of station eg lifts / escalators? What else? CAPEX Consultant REVEX Asset Maintain

32. Year Option12345 1Capital cost1 000 Maintenance125 625 Refurbishment700 Energy60 300 Cashflow pa1 000185 8851852 625 5%Discount1.000.950.900.860.810.77 Discounted cashflow1 0001761671597211432 365 2Capital cost1 500 Maintenance90 450 Refurbishment0 Energy50 250 Cashflow pa1 500140 2 200 5%Discount1.000.950.900.860.810.77 Discounted cashflow1 5001331261201141082 102 Worked example 4

33. What is industry looking for? Business Added Value Performance Improvements Alternative Solutions/Profiling Design Lives Common Standards Benchmarking Credibility

34. Question why do we do things the way we do. Why buy in first place? Can we rent or lease? When we buy a boiler what are we really providing? –Heat –What are the alternatives? WLC improves performance

35. WLC Improves Performance Accept we all hate new things & changes Adopt simple easy to use processes Use them all the time Require your supply chain to provide the information Ensure that the decision information is accurate Validation & accreditation

36. WLC Tools Rules of thumb Spreadsheet –Simple, easy to use, easy to manipulate Proprietary –Restrictive WLCF –Uses WLCF view and is supplier based –Can be used for Buildings

37. The WLCF

38. WLCF helps you The web based WLC Comparator Tool Common Data Structures Common Calculation Methodologies Access to Database Optioneering Benchmarking Credibility Help - You Are Not Alone Accreditation

39. WLCF Web Site

41. The WLCF on line tool Access through the Web http://www.wlcftool.com/http://www.wlcftool.com/ Easy to use Cheap to use (6 months free to all delegates) Provides calculation validation NPV, IRR, TWLC, AWLC No need to become a member

42. The Solution Organisation Whole Life Costs –Processes –Training PFI Bid and tender support Sustainability –Environment –Social Discount rate tables –http://www.thesolutionorganisation.com/library.htmlhttp://www.thesolutionorganisation.com/library.html

43. How to use WLC - Clients Ask only for the things that will help Don’t ask for the impossible Ask what, how and when, the tenderers will use WLC Ask for the WLC processes & how it will be demonstrated Start with something simple –Energy consumption prediction & measure

44. How to use WLC – Design Team WLC starts with design, Good design starts with WLC Ask suppliers for Cost in Use information Use WLC when every element within the options is considered Don’t jump to conclusions

45. How to use WLC - Contractors Understand why the Client needs you to use WLC Develop simple WLC processes that can be used at every decision point Develop the reporting process Work with your supply chain to develop everyone in it Drop suppliers that won’t engage & try

46. How to use WLC - Suppliers Start now –even if your clients don’t ask for it What are the costs in use for your products? Would you offer supply and maintain? –If not why not? Ask your client to help measure the results

47. Process Use the method that suits you NPV - allow Discount Rate freedom Use for every decision point Report the results

48. Moving on to WLP Whole Life Performance WLC + Non financial measures –Environmental –Social Reduce to NPV and single score –Example

50. Summary WLC –Why –Methods –How –Benefits WLCF –On line Tool Next steps