What Does Whole Life Cost Mean to You?
Whole life costing is about understanding the balance between ‘capital costs’ and ‘costs in use’ (also called ‘revenue costs’ and ‘life cycle costs’) to deliver the performance or service level required for an asset.
Why is it about performance?
Recent and widely reported research into office accommodation has identified the relationship between capital cost, the cost in use and the cost to the business of assets as:-
Recent and widely reported research into office accommodation has identified the relationship between capital cost, the cost in use and the cost to the business of assets as:-
Capital Cost
Cost in Use
Business Costs
1
5
200
Source.: "The long term costs of owning and using buildings" - published by The Royal Academy of Engineering (November 1998).
What this means is that to operate and maintain the building will cost 5 x the capital costs over the life of the building.
However, the cost to the business, including salaries and staff productivity, occupying the asset is 200 x the capital cost.
And these relationships work in reverse as well.
So, if Consultants just focus on lowest capital cost, ignoring performance, and help to produce a poor building, the effect (per £1m capital cost) of reducing the capital cost by 10% may be:-
Capital Cost
Cost in Use
Cost to Business
1
5
200
-£100k
+£500k
+£20m
over its life compared to a well designed, and performance specified, building.
This relationship was recognised by the UK Government in the early 1990’s and all Government procurement now has to consider whole life costs, rather than being capital focused. This is an example of the Government actually leading the private sector as a client, and introducing the Private Finance Initiative to start the process off.
The private sector is also increasingly recognising this relationship and occupiers, project funders and insurers are beginning to accept that a lowest capital cost focus leads inevitably to higher costs in servicing, maintenance and repairs - particularly when the opportunity cost is included (i.e. lost opportunity when the asset is out of use or functioning at lower than optimal performance).
Just as you would not buy a car without some knowledge of the costs of running that car, and it’s expected life, so the larger tenants are putting a greater emphasis on costs in use when selecting new premises.
To add to the pressure on the construction industry, long-term funders are beginning to be concerned about the future financial value of their assets, and are using PFI and PFI-style contracts to ensure their investments pay off.
A good example is that the old 25-year, fully insuring and repairing (FRI), leases are being changed, with shorter leases now being more common. This has benefits for both tenants and owners: The tenant has the option to move to premises more suitable to its current requirements, and it allows the owner to revalue the rent. However, funders are now using the likely performance of their buildings at 10-years of age as an indicator of prospective rent levels, quality of tenants, and hence valuation.
A building will have a better chance of attracting better quality tenants, throughout its life, if it has been designed using performance requirements across all asset levels, from Facility (Building), through System (Heating and Cooling System), to Component (Air Handling Unit), and even Sub-Component (Fans or Pumps).
In and around London today, it is clear that buildings that attracted good tenants and high rents in the 1980’s and early 90’s are now tending to only attract secondary or tertiary covenants, in multiple occupancies, leading to lower rents and valuations. This is an example of how long-term funders are seeing their 25-35 year investments substantially underperforming in mid life, thus driving the need for better whole life designed buildings.
What Can Contractors Do?
Just as clients and designers already understand that entrances, common areas and facades are important to the value of the asset, and there is a balance to strike between capital spends, the next step is to help them appreciate the value and competitive advantage derived from spending the right amount on ‘hidden’ aspects of the building. The ‘hidden’ elements become more important as the cost of running the building becomes increasingly significant as the building ages.
Just as clients and designers already understand that entrances, common areas and facades are important to the value of the asset, and there is a balance to strike between capital spends, the next step is to help them appreciate the value and competitive advantage derived from spending the right amount on ‘hidden’ aspects of the building. The ‘hidden’ elements become more important as the cost of running the building becomes increasingly significant as the building ages.
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Start by using the Whole Life Cost Forum Online Comparator Tool to assess your clients building at the level of ‘facility’.
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Encourage your clients to set required performance for their assets.
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Ensure that the supply chains you work with have knowledge of using whole life costs and understand what required performance for assets means to them. Ask what they are doing to develop whole life costs in their supply chains. Require them to use the WLCF Tool when deciding which components to install once they have understood the required performance.
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They must fully understand the importance of designing and constructing using required performance for assets.
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As the client, it is your supply chain that will deliver maximise the value of the asset so the whole chain needs to be ‘best in class’ and that means using whole life costs and required performance as very important factors in decision making.
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Further information
For further information see the sections on:-
For further information see the sections on:-
If you need help and assistance with any aspects of whole life costs, or specific projects you may wish to contact some of the members of the Whole Life Cost Forum. WLCF members have worked for 3 years to develop the WLCF standard processes and methods.
© Brad Bamfield – The Whole Life Cost Forum
Reproduction of this article is permitted with full references only
Reproduction of this article is permitted with full references only