LIFE CYCLE COSTING FOR A DESIGN LIFE STANDARD

LCC in ISO TC59 SC14

A.F. BENNETT, I.C. PAGE

Building Research Association of New Zealand
K. BOURKE
Building Research Establishment UK
S.N. TUCKER
CSIRO Building, Construction and Engineering, Australia
T. NIREKI
Tsukuba Building Test Laboratory - Center for Better Living, Japan

Durability of Building Materials and Components 8. (1999) Edited by M.A. Lacasse

and D.J. Vanier. Institute for Research in Construction, Ottawa ON, K1A 0R6,
Canada, pp. 1509-1517.
 National Research Council Canada 1999

Abstract

This paper reviews the progress made to date by Working Group 5 of ISO TC59
Building Construction SC14 “Design Life”. Working Group 5 was set up to prepare a
draft standard on life cycle costing (LCC) as a tool to be used when planning the
design life of buildings. The LCC draft is intended to utilise the outputs generated by
building practitioners using documents published as parts of ISO 15686 to enable an
economic comparison of different planning/ design/ construction/ use/ disposal
options so that the client’s requirements can be fulfilled.

Keywords: Design life, life cycle costing, maintenance, buildings

1 Introduction

Attention has in recent times become directed at the concept of “design life”
where materials performance is ideally matched to the intended function and life of
the building. Durability and service life are still important aspects of design life, but
are now part of a broader process which is intended to deliver the optimal building
solution to the building owner and users, taking into account all relevant regulatory
requirements.
Research on materials performance has often been stimulated by poor
performance of building materials and components in service. Early failures of
building materials and components cost national economies substantial sums of
money due to the costs of maintenance and indirect costs associated with temporary
(sometimes permanent) loss of functionality associated with maintenance activities.
As a result, much of the research carried out on materials performance has focused on
determining what causes the degradation of materials, how rapidly this occurs and
how to slow or stop this degradation, but not how to best choose among options
where known problems occur. CIB committee W80 has been active in this area for
many years.
“Design life” is the title of a new subcommittee (SC14) of ISO TC59 “Building
Construction”. The members of the sub-committee had previously been active as
WG9 in SC3. SC14 is working on six documents at the present time all related to
design life as parts of ISO 15686. These are:
• general principles
• service life prediction
• auditing
• data formatting
• life cycle costing
• environmental sustainability.
The inclusion of life cycle costing (LCC) as a part of the SC14 working brief
recognises that costs over the design life are often as important as form and
functionality to the building owner.

2 Life cycle costing

2.1 General principles

Any analysis of an investment must include both initial and ongoing costs and
returns over the period of the investment. Such an analysis allows investors to
compare different options and decide which offers the best return for their particular
circumstances over the lifetime of the investment. Construction works generally
require a considerable initial capital investment and have lifetimes of 20-100+ years.
As a result, building designs are often selected on the basis of the lowest initial
acquisition cost, provided that certain functional and aesthetic parameters are met.
This is particularly the case with design-build speculators who are often active when
economic growth is bullish and intend to quickly on-sell the building, often before it
is completed.
The overall concept of LCC is simple; all the costs associated with the design,
construction, use, maintenance and disposal of the building are estimated or
calculated over a defined period. This period may be the design life of the building or
a shorter period. The costs are then adjusted to take into account interest rates and, in
some cases, inflation, to bring the whole life cost over the defined period into today’s
currency. This then allows a comparison to be made between different design
options.
3 ISO TC59 SC14 Draft standard

3.1 Work-to-date
A core group of ISO TC59 SC14 Working Group 5 met in Melbourne in
November 1998 and produced the backbone of a draft titled “ISO 15686 Part 5 –
Maintenance and life cycle costing”. This document was circulated to the full
working group prior to the end of 1998 for additional comment. Comment was
incorporated into the draft and the revised draft circulated to the full SC14 sub-
committee in March 1999. These comments were then considered at an SC14 WG5
meeting held prior to the 8th DBMC in Vancouver. The convenor of the Working
Group is Kathryn Bourke from BRE.

3.2 Scope of the draft

The basic aim of the document is to facilitate a comparative assessment of the
cost performance of construction works to be made over an agreed period of time.
The term “cost performance” is important because the draft is not intended to be a
complete investment tool. It is intended to enable comparisons of costs incurred by
various design, construction, maintenance and disposal options. In some cases these
options may have a direct effect on income associated with the building and may be
included in the analysis. These are restricted to cases where maintenance operations
(or lack of maintenance) or design options may directly affect future revenues such as
rents or result in penalties.
It was recognised that as well as cost, investors in buildings will require a wider
consideration of investment options, such as volume of space, location, type of
investment (construction versus stocks or bonds etc.) and tax issues. However, the
working group was of the view that a complete economic investment tool could not
be realistically produced under the SC14 scope of work and that these issues should
be left to a future ISO Standard or dealt with by existing economic analysis tools. It
should be noted that documents have already been published which provide guidance
on evaluating investment returns in buildings; documents such as ASTM E1185
(1993) and ASTM E1074 (1993). This draft is intended to cover construction works,
which includes buildings, infrastructure items such as civil engineering works and
building services.

3.3 Outline of draft

The draft includes the following sections. Note that the numbering does not
refer to the numbering in the draft but is used for ease of reading in this paper.

3.3.1 Normative references

A mandatory ISO section covering other ISO standards which are referenced in
the draft ISO 15686 - Part 5.
3.3.2 Definitions
Another mandatory section that explains terminology used in the draft and
complements definitions included in other parts of ISO 15686.

3.3.3 Maintenance planning issues

Maintenance as a design life issue has not been extensively covered in the other
parts of ISO 15686. Given the importance of maintenance in ensuring that the actual
service life of a building matches the design life, this issue was originally scheduled
to be covered in Part 5 along with LCC. The current draft recognises the role that
maintenance plays in an LCC analysis, and that ideally the maintenance plan for a
building is derived after the completion of the LCC. This is because the cost
effectiveness of the different maintenance options can only be compared on a cost
basis using LCC techniques.
Building maintenance is a sophisticated discipline in its own right and a great
deal of information exists on this topic. One of the issues facing the Working Group
is whether sufficient detail can be included in a Standard which covers both LCC and
maintenance to do justice to both topics, or whether a separate part to ISO 15686
should be developed to cover aspects of maintenance outside those covered in LCC
analyses. The activities of CIB W70 “Management, Maintenance and Modernisation
of Building Facilities” are focused on maintenance and the input from this group will
be sought on a formal basis by the time of the 8th DBMC.

3.3.4 Life cycle costing issues

The basic principles of LCC are set out, highlighting that LCC is driven by a
client brief. LCC primarily sets out to provide information that will be used to assist
in a decision making process. The phases of the life cycle are as follows:
• acquisition
• use and maintenance
• renewal and adaptation
• disposal.
The third phase may not exist but when it does, the use and maintenance phase
commences again so that there are cyclic restoration and use steps which may repeat a
number of times before the disposal phase occurs. Each of these phases may consist
of a number of activities.
The acquisition phase covers the range of activities from the client’s decision to
seek useable “space or functionality” to the time at which occupation or use of the
facility begins. It is this phase where much of the opportunity to influence whole life
costs can be made. Decisions on location, size and type of structure, materials,
services and energy sources can be altered much more readily before the structure is
completed. This brings up the point that the full benefits of an LCC are realised only
with new structures. However, LCC can have significant uses for existing buildings.
The use and maintenance phase is usually the longest phase in the life cycle of
construction works yet is often the most neglected in the planning stages for major
construction works. Choices made on the frequency and type of maintenance can
have significant impacts on both the service life achieved and the costs incurred over
the life of a structure. For existing buildings, LCC techniques can be used to evaluate
the costs associated with various maintenance options for the whole or parts of a
structure. This could include a review of the original maintenance schedule in light of
the performance to-date or to evaluate alternative maintenance solutions resulting
from unexpected failures.
The renewal and adaptation phase is essentially a partial repeat of all those
activities in acquisition (plus some others) but at different times in the life of the
works. The use and maintenance phase then begins again with different starting
characteristics.
The disposal phase includes demolition, preparation for recycling and/or
dumping as waste. Disposal may result in an income rather than a cost if the works
have further potential use.
Life cycle costing can be carried out over the design life of the works, or over a
finite period of the design life (the period of analysis). The technique is most
commonly used for new works, but it is equally applicable to the future use of
existing works. It can be applied to a complete works, or to a specific assembly,
component or system, such as plant or a roofing assembly.
The life cycle cost for a complete building or structure is built up from the sum
of the independent parts plus the interaction between them and the consequential
costs, if any. Life cycle costing can be carried out at a gross level using industry
average figures for that type of construction, or at a specific level on the basis of
specific estimates or predictions of component performance and required maintenance
activities. Calculations of life cycle cost can be made at various levels depending on
which phase of the project process is entailed. Similarly, the degree of detail and
information available will play a decisive role. The general principle that determines
the level at which calculations of life cycle cost are made is the corresponding level of
detail employed to calculate the acquisition costs.
Repercussions or consequences of selecting an alternative must be considered,
e.g. a change in the thermal resistance properties of different claddings may result in
changes in heating and cooling costs, changing from a paint to a lightweight stain may
have a different regime of coating, and different frequencies. In particular, options
may have different external or intangible costs, such as access, disruption to building
activities, or costs borne by others than the client (e.g. retail tenants to a shopping
centre during building maintenance).
3.3.5 Inputs needed for LCC analysis
Attempts to obtain accurate life cycle costs should be consistent with both the
ability to predict these costs and the potential for these costs to influence the decision
being taken, as well as the size of the investment. Values for the costs can be derived
from:
• direct estimation from known costs and components
• historical data from typical applications
• models based on expected performance, averages etc
• best guesses of the future trends in technology, market and application.
For each cost, whether a cost element or a detailed cost category, there must be
an associated time or times during the service life when the cost occurs (or recurs) for
life cycle costing to be carried out. Time profiles of the costs may only consist of one
occurrence but any cost spread over time or one which is repeated will generate a
series of cost and time pairs. Costs may be fixed or variable over time. These values
are most readily converted into life cycle costing calculations using a computer
spreadsheet or purpose written software. Input parameters are:

• Acquisition costs • Residual/ disposal values/ costs

• Operating costs • Economic parameters
• Maintenance costs • Discount and inflation rates
• Service life data • Taxes and regulatory expenses
• Period of analysis • Intangibles
• External costs and savings data • Environmental impacts

3.3.6 Decision variables

The concepts and formulae of LCC calculations are well known and the draft
draws on established documents such as ASTM E917 (1994) and ASTM E833
(1997). Some of the general concepts are briefly discussed here but the reader should
refer to the documents above or other references on LCC techniques for specific
details.
Costs in a life cycle costing analysis can be in real, nominal or discounted terms.
A value in real cost is the monetary amount to be paid if the cost occurred at the base
date, regardless of which point in time it occurs. The need to refer to a year when
using real costs is because of general price inflation and also the fact that future prices
may not necessarily change at the same rate for all items being covered by the LCC.
The main benefit in using real costs is that it allows for more accurate estimates of
costs since current values are used.
Real costs are not generally appropriate for preparing financial budgets where
the actual monetary amounts in today’s currency are required to ensure actual
amounts in future currency are available at the time when they are to be spent.
Nominal costs are ascertained from projected economic, technological and efficiency
factors. The nominal cost is related to the real cost by the expected general price
inflation.
 Discounted costs are calculated by taking costs that occur in future years and
reducing them by a discount factor derived from the discount rate. Different discount
rates apply depending on whether nominal costs or real costs are being discounted.
With nominal cost, the discount rate should include an inflation component. If real
costs are used, the discount rate should not include an inflation component. Different
discount rates also apply to different organisations and individuals. The discount rate
reflects the preference for money now rather than later. The discount rate is the
interest rate that would make it just worthwhile for the decision-maker to spend
money in a year’s time rather than now. It is also the rate by which future income
would need to be discounted each year so that the decision-maker would prefer to
have it now rather than in a year’s time.
When evaluating life cycle costs, two different terms may be used to enable
comparison of different options. Present value is the cost found by discounting future
cash flows to the base date. It is used for comparing alternatives with the same period
of analysis. Where options have a different period of analysis, the annual equivalent
cost is used.

3.3.7 Uncertainty and risk

There are uncertainties inherent in LCC methodology and it is necessary to
guard against gross errors in the results. The degree of confidence in the results of
LCC analysis depends on the quantity and quality of the data used as input into the
analysis. For the acquisition phase, cost figures for various options can usually be
estimated with some degree of accuracy since they are derived from current costs.
Estimates of operating costs are also reasonably reliable for the new structure but
become less certain as the time span increases due to uncertainties in energy costs,
labour and regulatory changes (e.g. environmental legislation).
The use of very long periods of analysis should be avoided since the use of
times in excess of about 30 years tends to result in costs beyond this becoming
negligible in today’s dollars in many cases. In order to take account of risk and
uncertainties, sensitivity analyses can be undertaken to examine the impact of credible
variations in the data used in the LCC calculation. These ranges should be likely,
within the limits of what is anticipated, and fit within the client’s brief. This will
identify which input data have the most impact on the LCC result and how robust the
final decision is. Data that should be subjected to sensitivity analysis includes:
• discount rates
• period of analysis
• maintenance regime frequencies
• incomplete or unreliable service life data based on assumptions.
Sensitivity analysis entails iterating the calculation with a range of values for the
data variable. The assessment will indicate the vulnerability of the LCC to variations
in this respect. If the sensitivity analysis indicates that the alternative variables have
no effect on recommendations the decision will be unaffected. If however the
recommended option is varied by different rates/lives etc. being applied it may
indicate that further analysis is required or that the decision is based upon factors
other than LCC.

3.3.8 Reporting
The draft contains some basic guidelines for reporting to ensure that users can
clearly understand both the outcomes and the implications of the analysis, including
limitations and uncertainties. The report should include:
• purpose and scope - a statement of objective, materials under consideration,
assumptions, constraints, and alternatives
• intangibles - impacts likely to affect costs either directly or indirectly but which
can not be quantified
• life cycle costing analysis - a presentation of the results, including sensitivity
analysis, cost structure and method of accounting for the time value of money
• discussion - a thorough discussion of the interpretation of the results
• conclusions and recommendations
Reference to ISO 15686 Part 3 Auditing is also made at this point.

3.3.9 Bibliography
The draft makes use of a number of current publications on LCC techniques.
These include ASTM E917 (1994) and a draft AS/NZS Standard (committee OB/11)
on LCC. These are listed in a bibliography.

3.3.10 Annexes
A series of annexes has been included in the draft to show how the LCC
calculations are undertaken. The first annex illustrates the use of present value to
compare the costs of two cladding options with the same service life and period of
analysis. The second annex illustrates the use of the equivalent annual cost method
for a case where the service life of two components is different. The third annex
illustrates parts of a sensitivity analysis where the effects of varying discount rates
and service lives are calculated for a specific example.

4 Conclusions

The draft document provides a framework for further discussion and refinement
by the full Working Group and SC14. The committee is actively seeking input from
recognised international experts on LCC to help ensure that the draft Standard has a
sound technical base before it is circulated widely within SC14, and before it goes for
wider comment. A critical input into LCC is data on the service life of materials and
building components. This is covered in Parts 1 (via the factorial method) and 2
Service Life Prediction of ISO 15686. The data from Parts 1 and 2 along with the
outputs of the LCC are essential to the formation of a sensible maintenance plan for
the building. The provision of detailed guidelines on maintenance planning
procedures and techniques within ISO 15686 has not currently been addressed and
needs further consideration. Environmental considerations also have the potential to
significantly impact on LCC evaluations and the development of Part 6 of ISO 1586
will provide additional tools to integrate environmental aspects into LCC exercises.

5 References

American Society for Testing and Materials. (1993) Guide for selecting economic
methods for evaluating investments in buildings and building systems. ASTM
E1185. Philadelphia.
American Society for Testing and Materials. (1993) Practice for measuring net
benefits for investments in buildings and building systems. ASTM E1074.
Philadelphia.
American Society for Testing and Materials. (1994) Standard practice for measuring
life-cycle costs of buildings and building systems. ASTM E917. Philadelphia.
American Society for Testing and Materials. (1997) Standard terminology of building
economics. ASTM E833. Philadelphia.