Prime Contractors

What Does Whole Life Cost Mean to You?

Building owners and occupiers increasingly require that the costs of using a building are reasonable, and have been taken into account when designing and constructing the building.

One of the key features of Prime Contracting is the validation of through-life costs and associated compliance periods to support whole life cost predictions. Prime Contracting provides evidence that today clients and tenants are selecting on wider criteria than in the past - not just on price but also in terms of performance.

What is Prime Contracting?
The Prime Contracting model includes 2 important components:

Firstly, the requirements to be satisfied by the Prime Contractor are specified wherever possible in output terms within an Output Specification. The key objective in specifying output terms is to allow the Prime Contractor and his supply chain to deliver innovative and more efficient services that embrace technological advances and operational experience.

Secondly, a Strategic Brief identifies the requirements to be satisfied by the Prime Contractor for the Core (capital) Works element of a Prime Contract (whether Regional, Capital Stand-Alone or Functional).

What about whole life costs?
Whole life costs are about understanding the balance between ‘capital costs’ and ‘costs in use’ (also called ‘revenue costs’ and ‘life cycle’ or ‘through life costs’) to deliver the performance or service level required for that 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:-

Capital Cost

Cost in Use

Business Costs

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 the owner, consultants or contractors just focus on lowest capital cost, ignoring performance, and 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

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-style and Prime Contract-style agreements to ensure their investments pay off.

What are the benefits for contractors?
Contractors who have identified the trends and are using whole life costs increase their competitive advantage, and are the companies that better clients wish to work with.

New conditions of contract and partnering rely on performance to deliver the appropriate design and implementation to ensure the asset works the way the client needs.

What can contractors do?

·	Develop your knowledge base and use whole life costs.

·	Understand what ‘required performance of assets’ means to your clients and your supply chain.

·	Appreciate the value and competitive advantage derived from spending the right amount on ‘hidden’ aspects of the building as the cost of running the building will become evermore important in the future.

·	Use the Whole Life Cost Forum Online Comparator Tool to assess your building proposals at the level of ‘Facility’.

·	Use the WLCF Online Comparator Tool to seek quotations for goods and services – this will force you to identify the required performance of the asset.

·	Use whole life costs in your supply chain, developing understanding of whole life costs with them. It is your supply chain, and how you manage it, that will deliver the best clients to you. This requires ‘best in class’ supply organisations that can provide accurate cost in use projections.

·	Require that your supply chain use the WLCF Online Comparator Tool to submit quotations or proposals to you, and ask them to supply alternatives if they could better meet the performance requirements of the project.

·	Use the WLCF Online Comparator Tool to benchmark your design and specification proposals, and demonstrate to the clients that you are optimising whole life costs, whilst satisfying the performance requirements of the asset.

Further information
For further information see the sections on:-

Funders
Speculative Developers
Consultants
Contractors
Suppliers

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.