President

MCM Value Sdn Bhd

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 LIFE CYCLE COSTING

Adj. Prof. Sr Dr Mohd Mazlan Bin Haji Che Mat, JMK, CVM, AVS
MCM Value Sdn Bhd (489028-P)
PhD, MBA, B.QS (Hons), Dip QS, Dip. M (CIM)
MCIM, MIVM (Aust.), FISM, FIVMM,
Registered Quantity Surveyor and
Certified Value Manager by CIDB Malaysia

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Please Introduce Yourself

Your name

Your discipline, department and duties

Did you take a VM course or attended a lecture on VM? If

so, when?

Did you participate in a VM Study?

What do you expect to get out from this training?

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HISTORY & CONCEPT

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History
Construction costs have historically only
focused on the initial costs of
construction.

◦ Tero-technology (1960)
◦ Costs in use (1970)
◦ Life cycle costing (1980)
◦ Whole life costs (2000)

Source: Prof. Ashworth

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Whole Life Costing

The systematic consideration of all

relevant costs and revenues
associated with the acquisition
and ownership of an asset.

Source: Construction Best Practice Programme, 1998.

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 Life Cycle Costing
Dell ‘Isola, A.J and Kirk, S.J (1981)
defines as
“an economic assessment of an item,
area, system or facility that considers
all the significant costs of ownership
over its economic life,
expressed in terms of equivalent dollars”

© Copyright 1998-2010 MCM 8


Life cycle cost is a techniques that
satisfies the requirements of owners for
adequate analyses of total costs.

A significant key to life cycle cost is an

economic assessment using equivalent
dollars.

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 Concept of LCC
This Life Cycle Cost is effective in
the decision making process in four
main ways:

It identifies the total cost
undertaken in the acquisition of an
asset.

It facilities an effective choice
between alternative methods by
taking into account various options
which display differing capital and
running costs.
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 Concept of LCC

It is a management tool that details all
costs capital, running and replacement
cost associated with either a total building
or components within that building.

The summation of the above is that
investment decisions should be made on
the total Life Cycle Cost of an asset not
just the initial capital cost as future are as
important as those incurred in the capital
acquisition.

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 Advantages of WLC / LCC

The emphasis is on whole cost rather than
concentrating only on the initial costs.

A more effective choice made between competing
proposals.

Whole life costs considers all costs over the lifetime
of the asset.

It is an asset management tool that allows the
operating costs of premises to be evaluated at
frequent intervals.

It enables these costs to be correlated with changes
in working practice such as hours of operation, the
introduction of new plant or machinery.

Whole-life costing can be used throughout the
different phases of the building’s life.

Source: Prof. Ashworth 12

APPLICATIONS

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Applications of LCC

At Inception

At the design stage

At procurement

At the construction stage

During the project’s use and occupation

For energy conservation

Sustainability

Source: Prof. Ashworth

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 No Major Document
Revision Necessary Document
Revision Required
Major Revision
Required

Cost Reduction
Potential
Varies with
Cost

Net Savings Particular

Potential Facility
Item
Feedback of
ideas into earlier Cost to Implement
phases of
subsequent
projects
Operation &
Concept Design Development Construction Maintenance Replacement

Time & LCC

Phase cost reduction, facilities construction

Source: Dell ‘ Isola, A.J and Kirk, S.J (1981), Life Cycle Costing For Design Professional,

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 Considerations

The earlier that whole life costing is considered, the
greater are the potential benefits.

Lower capital costs, reflecting a more efficient

design, can result in lower whole life costs.

Buildings with low in-built running costs will have a

lower impact on the building owner’s or occupier’s
business.

Buildings whose performance can be readily and

economically maintained will benefit the occupants
and help to improve their productivity.

Source: Prof. Ashworth

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 Inter-Relationship of VM and LCC
Generation Of Alternatives Economic Predictions Evaluation & Selection
V.E. Function Analysis, Engineering Economics Non-Economic
Creativity/ Criteria Evaluation
Brainstorming

Basic Site
& Facility
Information
Start
Design ‘Total’ Design
Cost Comparison
Of Solutions Selection
Subsystem
Information

The New Design Alternative (s)

LIFE CYCLE COST ANALYSIS

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ELEMENTS

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 Elements of LCC
• The Life Cycle Cost states that all significant costs of
ownership be included. The illustration below shows
the costs involved in the Life Cycle Cost
Operating
Financing Maintenance
(Energy)
Cost Costs
Costs

Initial Cost Owner’s total cost

Salvage Cost Associated Tax Alteration &

Costs Elements Replacement
- insurance Costs
- security
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Initial costs include the owner’s costs associated
with the initial development of a facility

Financing costs include the costs of any debt
associated with the facility’s initial costs

Operation (Energy) costs are used to keep track of
such items as fuel and salaries required to operate
the facility

Maintenance costs includes costs of regular
custodial care and repair, annual maintenance
contracts and salaries of the facility’s staff
performing maintenance tasks.

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Alteration costs are those involved in changing the
function of the spaces. Replacement costs would be
a one time costs to be incurred in the future to
maintain the original function of the facility or item

Associated costs include other identifiable costs not
covered previously but related to a facility decision

Salvage Value is the value competing alternatives at
the end of the life cycle period

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 Where are the “Hidden Costs”?

Site
Cost
Capital
Fees Cost

The Client
Furnishing
Occupancy
Cost Energy
Cost

Operating Maintenance
Cost Cost

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 Relative costs of owning a building
Costs %
Design 3
Construction 16
Running and maintenance 40
Repairs 30
Periodic refurbishment 10
Demolition/disposal 1
Costs of ownership 100

Source: Royal Academy of Engineering, 1998

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Category Commercial Recreation Educational Dwellings

Utilities and Energy 35 22 32 22

Overheads 24 19 23 13
Administration 12 29 14 20
Cleaning 12 13 16 25
Fabric Maintenance 9 6 5 6
Services Maintenance 5 7 7 6
Decorations 3 4 3 8
Totals 100 100 100 100

Source: The Construction Best Practice Programme

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 Example
Floor Screed

16% Capital Cost

39.5%
41.1%
Maintenance &
Cleaning 23.5% Carpet
19.4%

Replacement
Floor covering life cycle cost
© Copyright 1998-2010 MCM
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For a 160 bed Hospital – Life span is 25 years
Initial Cost = SR 124 M

Source: Al-Yousefi (2008) 26

IMPLEMENTATION

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 The Implementation of LCC
Flanagan and Norman, G (1983) identified seven (7)
steps which facilitates the implementation of Life Cycle
Cost which are as follows:

Step one - Establish the Objective

Step two - Choice of Method

Step three - Formulate Assumptions

Step four - Identify the Cost and the Life Cycle

Step five - Compare Cost and Rank the
Alternatives

Step six - Sensitivity Analysis

Step seven - Investigate Capital Cost Constraints

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LIFE CYCLE

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 Life Cycle
It is rather difficult to identify the actual life of a building
because it may become obsolete in several different ways:

 Physical Obsolescence
- When The Physical Collapse Of A Building Occurs

 Economic Obsolescence
- When The Site On Which A Building Sits Has A Better
Economic Use.

 Functional Obsolescence
- When The Building Ceases To Function For The Same
Use As It Was Developed

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 Life Cycle
 Technological Obsolescence
- When A Building Or A Component Is No Longer
Technically Superior To The Alternatives Available

 Social Obsolescence
- When Society Requires Replacement Or Curtailment
Of Use Before The End Of The Development’s
Economic Life

 Legal Obsolescence
- When A Development Use Must Be Curtailed Due To
Legal Constraints

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 Indicative Renewal Periods

International fast food outlet - 5 years

Car production factory - 10 years

Office development - 20 years

Local authority school - 30 years

Prison - 60 years

Source: Prof. Ashworth 32

 Component life

Factors in determining the length of component lives:
◦ original specification of the component
◦ its appropriate installation within the building
interaction with adjacent materials
◦ use and abuse
◦ frequency and standards of maintenance
◦ local conditions
◦ acceptable level of actual performance by the user
◦ management policies used by owners or occupiers.

Source: Prof. Ashworth

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 Predicting Future Component Life

Components that fail due to ageing and
predictable wear and tear (replacement
predictable).

Risk of accidental damage such as storm,
vandalism and misuse where prediction is only
possible on the basis of probability.

The effect of delaying maintenance which
may be indicated by a partial failure of
components.

Source: Prof. Ashworth

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 Issues to consider

Building’s life
◦ Is this properly considered during design?

Depends upon:
◦ Type of building
◦ Construction methods
◦ Maintenance policies
◦ Changes in demand and use
◦ Management policies

Source: Prof. Ashworth

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 Predicting the future
Can LCC predict the future?

Technological change

Fashion changes

Cost and value changes

Policy-making and decision-making changes

Historical perspectives

Source: Prof. Ashworth 36

SENSITIVITY ANALYSIS

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 Sensitivity Analysis

One of the method to cope with uncertainties
and risks due to assumptions and projections

If the difference of the lowest two of LCC is less
than 5%.

Variables that can be used in Sensitivity Analysis:
◦ Life Span of Building
◦ Life Span of Components
◦ Discount Rate
◦ Initial Cost

© Copyright 1998-2010 MCM 38

DATA SOURCES

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 Sources of data

Product manufacturers

Building Cost Information Service

Building maintenance information

Research organisations

Personal records and anecdotal data

Source: Prof. Ashworth

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 Data Difficulties
The vicious circle of Whole Life Cost implementation

Lack of sufficient and

appropriate data

Lack of No real
confidence in feedback on
any results performance

Lack of real evaluation

Source: Prof. Ashworth 41

GREEN AND SUSTAINABILITY
Green building is the practice of creating
structures and using processes that are
environmentally responsible and
resource-efficient throughout a building's
life-cycle from sitting to design,
construction, operation, maintenance,
renovation and deconstruction

Source: US Environmental Protection Agency

 Sustainability

Everything that we need for our survival
and well being depends, either directly
or indirectly on our natural environment.

Sustainability creates and maintains the
conditions under which humans and
nature can exist in productive harmony
that permit fullfilling the social,
economic and other requirments of
present and future generations.
 Green and Sustainability

How does it works?

It requires close cooperation of the following:
◦ Design team,
◦ The Architects ,
◦ The Engineers
◦ The Clients
At all stages in project life cycles.
 Green and Sustainability

The Green Building practice expands and
complements the classical building design
concerns of :
◦ economy,
◦ utility,
◦ Durability, and
◦ comfort.
 Green and Sustainability

Although new technologies are being developed to
complement current practices in creating greener
structures, the common objective is that green
buildings are designed to reduce the overall impact
of the built environment on human health and
natural environment by:
◦ Efficient using energy, water and other resources
◦ Protecting occupant health and improving
employee productivity
◦ Reducing waste, polution and environment
degradation
 Green and Sustainability

Modern sustainability initiatives call for for an
integrated and synergistic design to both new
construction and in the retrofitting of existing
structures.

It is also known as sustainable design, this approach
integrates the building life-cycle with each green
practice employed with a design–purpose to create a
synergy among practices used.
 Green and Sustainability

Aesthetic side of Green Architecture or sustainable

design is the philosophy of designing a building that
in harmony with natural features and surrounding
the site.
 SUSTAINABILITY ELEMENTS
GREEN AND
Life cycle
Assesment

Sitting and
Watse structure
reduction design
efficiency

Indoor
Environment Energy
Quality Eficiency
Enhancement

Operation
and Water
Maintenance Effiecincy
Optimization

Materials
Efficiency
 Green and Sustainability

Life Cycle Assesment ( LCA):
Assesing the full range of impacts associates
with cradle-to-grave stages of process; raw
material extraction, processing, manufacture,
distribution, use, repair, maintenance and
disposal or recycling.
 Green and Sustainability

Green building brings together a vast array of
practices, techniques and skills to reduce and
ultimately eliminate the impacts of building on the
environment and human health.

Often emphasizes on taking advantage of renewal

energy, using plants and tress, or using low impact
buidling materials, operation and maintenance
optimization, waste and toxic reduction.
 Green and Sustainability

Life Cycle Assesment ( LCA):
Assesing the full range of impacts associates with
cradle-to-grave stages of process; raw material
extraction, processing, manufacture , distribution,
use, repair, maintenance and disposal or recycling.
 Green and Sustainability

Siting and Structure Design Efficiency
◦ The foundation of any construction project is
rooted in the concept and design stages as it has
the largest impact on cost and performance.

Energy Efficiency
◦ Green Building often include measure to reduce
energy consumption and high performance
building use less operating energy .
 Green and Sustainability

Water Efficiency
◦ Reducing water consumption and protecting water
quality are key objectives in sustainable building.
Faciltities should increase their dependence on water
that collected, used, purified and re-used on-site.

Material Efficiency
◦ The EPA ( Environmental Protection Agency) suggests
using recycled industrial goods, such as coal conbustion
poducts, foundry sand and demolition debris in
construction projects.
◦ Building should be extracted and manufactured locally
to the building site to minimize the energy embeddedin
their transportation.
 Green and Sustainability

Indoor Environmental Quality Enhancement
◦ Addresses the design and construction
guidelines especially on indoor quality, thermal
quality and lighting quality.
◦ Indoor qualityseek to to reduce volatile organic
compounds or other air impurities as microbial
contaminants, adequate ventilation of cleaner air
from outdoor or recirculated or filteed air
(mechanically, pasive/natural powered).
 Green and Sustainability

Operation and Maintenance Optimization
◦ No matters how sustainable a building may have
been in its design and construction, its can only
remain so if it is operated responsibly and
maintained properly. Ensuring operations and
maintenance (O&M) personnel are part of the
project planning’s and development process will
help retain the green criteria designed at the
onset of the project.
 Green and Sustainability

Waste Reduction
◦ Green architecture also seeks to reduce waste of
energy, water and materials used during
construction via minimal amount of material, wood
going to landfills, ‘Greywater’for subsurface
irrigation, waste watertreatment system which
could produce liquid fertilizer

◦ Note: Greywater : waste water from dishwashing or

washing machine.
 Green and Sustainability :
Cost and Payoff

Cost and Payofff is the most criticized issue about
constructing environmentally freindly building.
◦ Example: Photo-voltaics, new appliances and
new technologies tend to cost more money.

Most geen building cost a premium of <2% but
yeild 10 times as much as more over the entire life
of the building.
Green and Sustainability Challenges

1. New technology needs massive funding for

research and development. The money will not
only be used to fund the energy research
project itself, but also the means to deliver the
energy and use it efficiently. Thus, the
gathering of financial resources will be a
gigantic and on-going process, something that
becomes particularly difficult during times of
financial crises, like today.
Green and Sustainability Challenges

2.The birth of a new industry usually means the

death of another. Thus, corporate interests
certainly come into the picture. Today, more
than a fourth of all of the world’s electricity
production is from renewable energy resources
like wind turbines and geothermal power plants.
Thus, the need for traditional fuel – coal and
other petroleum derivatives – goes down.
Green and Sustainability Challenges
3. Enormous number of government contracts in
developing countries have to do with using
petroleum and other non-renewable energy
sources.
Green and Sustainability
Recomendations
Strengthen
the
Institutional
Framework

Provide
Conducive
Promotion
and Public
Awarness
5 Strategic Enviromental
for Green

Thrusts of Technology
Development

Green
Technology
Intensify
Human Intensify
Capital Green
Development Research and
in Green Innovations
Technology
TIME VALUE OF MONEY

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One person has RM4,000 in hand

Another person has RM4,000 promised
ten years from now

Other person is collecting RM400 a
month for 10 months

Are the assets equivalent in terms

of today’s purchasing power?

© Copyright 1998-2010 MCM 64

 Concept Of Time Value Of Money

‘Money today’ is not equivalent to ‘Money

tomorrow’

Basically, the value of our monies over time is

influenced by interest and inflation rates.

To quantify the impact of interests rate in

relating ringgit spent today and Ringgit spent in
the future, several interest formulas are used.

© Copyright 1998-2010 MCM 65

  Future Value (compound interest)
To determine the single future amount of a
single present amount which is compounded
over n periods at an interest rate of k %

 Present Value
To determine the present amount of a future
amount discounted at interests rate k for n
periods.

© Copyright 1998-2010 MCM 66

  Future Value of an Annuity
To determine the future amount of equal n
periodic payments at k percent interests rate.

 Present Value of an Annuity

To determine the present amount at k
percent interest rate of n equal periodic
payments

© Copyright 1998-2010 MCM 67

TECHNIQUES

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 Techniques of LCC
Using the mentioned interest formulas, it is possible to
convert monies spent at various points in time to a
common basis, be it in :
 Present value – converts all present and future costs to
a single point in time, usually at the time of the first
expenditure
OR,
 Annualised value – converts all costs to an equivalent
uniform annual costs. This is useful in determining
rental rates or forecasting annual budgets.

© Copyright 1998-2010 MCM 69

 THANK YOU

E: [email protected] / [email protected]
Mobile : +6019-7784 027
W: www.mcmvalue.com

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