ASSET AND SPACE MANAGEMENT

(B S B 3 1 5)

LECTURE 3:

ASSET LIFE CYCLE

By:
Sr.Wan Samsul Zamani Wan
Hamdan & Sr.Dr.Fadzil Yasin
 Lecture Outlines
• What is Asset Life Cycle?
• Physical Building Life
• Economic Building Life
• Life Cycle Cost
• Building Income and Expenses
• Depreciation
 What is Asset Life Cycle?
• The processes involved trough out the life
span of an asset.
 START
Physical Building Life
• Build

• Occupy/use

• Maintain/repair

• Refurbish/ change of use

• Demolish
END
 Economic Building Life
• Economically viable for the building
• Expenses vs. Revenue, Profit vs. loss, asset vs.
liability of one building.
 Life Cycle Costs
• This is the cost of an asset, or its part
throughout its cycle life, while fulfilling the
performance requirements.
Source: BS/ ISO 15686-5 Buildings & Constructed Assets: Service Life
Planning: Life Cycle Costing

• There are different terms used in the

literature today like, “cost in use”, “life cycle
costs” (LCC), “whole life costing” (WLC) and
“whole life appraisal” (WLA). (Flanagan and
Jewell, 2005).
 WHAT IS LIFE CYCLE COST ANALYSIS?

• LCCA is a process of evaluating the economic performance of a building over its

entire life. Sometimes known as “whole cost accounting” or “total cost of
ownership,” LCCA balances initial monetary investment with the long-term
expense of owning and operating the building.
• LCCA is based upon the assumptions that multiple building design options can
meet programmatic needs and achieve acceptable performance, and that these
options have differing initial costs, operating costs, maintenance costs, and
possibly different life cycles.
• For a given design, LCCA estimates the total cost of the resulting building, from
initial construction through operation and maintenance, for some portion of the
life of the building (generally referred to as the LCCA “study life”).
• By comparing the life cycle costs of various design configurations, LCCA can
explore trade-offs between low initial costs and long-term cost savings, identify
the most cost-effective system for a given use, and determine how long it will take
for a specific system to “pay back” its incremental cost. Because creating an
exhaustive life cycle cost estimate for every potential design element of a building
would not be practical, the Guidelines for LCCA focus on features and systems
most likely to impact long-term costs.
• The process of identifying and documenting all the costs
involved over the life of an asset is known as life-cycle costing
(LCC).
• The Australian and New Zealand standard Life Cycle Costing -
An application Guide (AS/NZS 4536:1999) details the process
of LCC. The standard defines it as the process of assessing the
cost of a product over its life cycle or portion thereof.
 DEFINITIONS
• acquisition costs – the initial cost to gain possession of the
completed product. Includes anyresearch, development,
testing and evaluation costs, as well as the investment and
installation cost.
• life cycle – the time interval between a product’s
recognition of need or opportunity and its disposal
• life-cycle costing – an assessment of design alternatives
considering all the significant costs of ownership (NPWC),
or an assessment of the cost of a product over its life cycle.
• life-cycle cost – the total cost of providing, owning,
operating and maintaining a building or component over its
useful life (NPWC), or the sum of acquisition cost and
ownership cost of a product over its life cycle.
 DEFINITIONS
• disposal cost – the cost of removing a product after its usefulness
has ended, including costs to decommission, dismantle, make
environmentally safe, transport and dump. If the products are sold
and the proceeds from the sale exceed the other costs of disposal,
the product will have a disposal value that reduces the life-cycle
cost.
• discounting – the conversion of the value of a cost or benefit at
some later point of time to its present value.
• discounted cost – the resulting value when real cost is discounted
by the real discount rate, or when nominal cost is discounted by the
nominal discount rate.
• discount rate – the indicated rate to be used in the discounting
process.
• discounted payback period – the number of years required for the
present value of benefits to exceed the present value of costs.
 DEFINITION
• net present value (NPV) – the sum of the present values of all
benefits less the sum of the present values of all costs.
• nominal cost – the expected price that will be paid when a cost is
due to be paid, including estimated changes in price due to forecast
changes in efficiency, inflation/ deflation, technology and the like.
• present value – the value of a cost or benefit in the future,
discounted to some base date.
• real cost – the cost expressed in values of the base date, including
estimated changes in price due to forecast changes in efficiency and
technology, excluding general price inflation or deflation.
• risk management – the systematic application of management
policies, procedures and practices to the tasks of identifying,
analysing, assessing, treating and monitoring risk.
 Main Purpose
• It should be considered that LCC is a decision making tool in
the sense that it could be used to select among alternative
projects, designs or building components.

• Consequently LCC data should be presented in a way that

enables such comparison.

• For that reason the cost breakdown structure is an important

concept for LCC (Bakis et al., 2003).
LIFE CYCLE COST
Source:
http://www.ebsconsultants.com/green-building-services/financial-life-cycle-costing-analysis/
Impact of future costs on current decisions
When planning the acquisition of a major asset, organisations spend considerable time and effort in making an economic evaluation of
the initial (capital) cost. This evaluation typically considers the:

• required size or capacity of the item;

• operating performance requirements;
• physical appearance or image projected;
• the capital cost; and
• alternative product options.

Future costs are less visible, as they are often “hidden” within general operating expenses, but they can have a significant impact on
the future viability of an organisation. These future costs will arise from the following:

• Operational needs, including labour, equipment, insurances and overhead charges. Major plant with complex operational processes
will require expert personnel and significant supporting infrastructure.
• Consumables, such as power, fuel, water, toner and ink.
• Maintenance and Minor Repairs, including labour, parts, materials, and overhead charges to maintain the asset at the desired
condition and performance level. These maintenance costs may arise through in house resources or by the engagement of external
contractors.
• Upgrade and Renewal, including major repairs, refurbishment, renewals and overhauls to extend the life of the asset
or equipment.
• Disposal, including costs associated with selling, demolishing and safely disposing the remnants of the asset.

The scale of these costs depends on the level and frequency of usage of the asset. There are also broader environmental implications
that flow from the decision to acquire a major asset. Resources are used during the creation, operation and disposal phases, with the
potential to affect environmental sustainability, and there may also be direct environmental impacts. The study of these broader
issues is often termed life-cycle assessment. This guide does not specifically address these broader issues but they should be part of a
complete assessment of the merit of a specific project.
WHY LCCA IS IMPORTANT
• Funds secured or set aside to construct new campus
buildings rarely extend to ongoing operational costs.
Increasingly, campuses are experiencing shortfalls in their
annual budgets for building operations. These lead to
deferred maintenance and eventually to declining building
utility and performance.
• Designing new and renovated buildings with maintenance
and operating costs in mind can result in significant savings.
The Guidelines for LCCA help Project Teams calculate these
costs and use them to inform planning, design, and
construction decisions. Stanford’s decision to implement
LCCA as part of the PDP is a direct effort to reduce the total
cost of building ownership.
 The life of an asset

• The life cycle of an asset is defined as the time interval between the
recognition of a need or an
• opportunity through the creation of an asset to its final disposal.
This life cycle is characterised by
• a number of key stages:
• • initial concept definition;
• • development of the detailed requirements, specification or
documentation;
• • construction, manufacture or purchase;
• • defects liability period and early stages of usage or occupation;
• • prime period of usage and functional support, with the associated
series of upgrades and
• renewal processes; and
• • the situation at the end of the asset’s useful life.
• The diagram at the beginning of this section shows a typical life cycle cost profile
for an asset, from
• its design to its disposal. The diagram is not drawn to a consistent time scale. The
middle
• operational period is generally much longer than shown in the diagram.
• Assets are formed from a series of actions. There are usually a series of upgrades
and renewal
• processes required during the life of an asset that become necessary as
components of the asset
• reach the end of their useful life during the life span of the total asset.
• The life of an asset will be influenced by both the failure of its key components
and by its ability to
• continue to provide a required service. Many assets reach the end of their useful
life before they
• become unserviceable. Technological developments and changes in user
requirements are key
• factors impacting the effective life of an asset.
LCC in Construction
 Benefits of using LCC

 Typical benefits can include:

 Greater transparency of future costs
 Improved awareness of total costs
 Evaluation of competing options
 Better forecasting
 Ability to plan for future expenditure
 What is obsolescence?

• The Oxford English Dictionary defines the adjective 'obsolete' as ‘no

longer used or practised; outmoded, out of date’, or ‘worn away,
effaced, eroded; worn out, dilapidated; atrophied’, and the noun
'obsolescence' as ‘the process or fact of becoming obsolete or
outdated, or of falling into disuse’, or more specifically ‘the process
whereby or state at which machinery, consumer goods, etc.,
become obsolete as a result of technological advances, changes in
demand, etc.' (OED, 2010). Merriam-Webster’s Dictionary adds to
the adjective ‘no longer current, old-fashioned’ (M-W, 2010).
• In practice, the term 'obsolete' is mainly used to point at the
discarding of all kind of subjects. A search on Google Scholar
resulted in about 300,000 hits, commonly articles like "Is xxx
obsolete?", with xxx varying from market mentality to
vectorcardiography and prisons. Interestingly, none of the first 250
results were about buildings1.
 The significant obsolescence of
building stock in building life cycle
• There are three types of obsolescence:
•  
• 1. Physical Obsolescence is characterized as a condition of aging (i.e. wear and tear) or
deferred maintenance. Examples are worn carpets, peeling paint, a leaking roof, or dead
landscaping.
•  
• 2. Functional Obsolescence is characterized by old or outdated designs or building systems.
Examples include equipment that is not repairable because parts or no longer manufactured;
single pane window systems because they waste a large amount of energy; outdated bathroom
fixtures because of changing designs and tastes.
•  
• 3. Economic Obsolescence represents a loss in value due to outside forces (i.e. location,
market conditions). An example would be an office building, located in a small town, where the
major employer closes. This may result in both lower demand and rental rates.

• 4. Others : Technological, Social, Legal & Environmental 

• Properties begin to deteriorate as soon as they are completed. This process is called Depreciation
and it represents the loss in value from the various forms of obsolescence. Depreciation can be
economically estimated on a broad level.
• The longer the period involved, the more difficult it is to estimate future costs. The reality,
however,
• is that it is often unnecessary, at the outset, to estimate costs beyond 15-20 years. In fact, many
• items of equipment have a useful life of less than 20 years. Even for items with very long lives, the
• process of discounting future costs means that the costs beyond 20 years generally have only a
• small impact on the LCC model.

• Calculation of life-cycle costs can be assisted by the use of cost models that use sophisticated
• algorithms to reflect the impact of different assumptions. These models are normally
implemented,
• as computer programs, which enable many different scenarios to be investigated without adding
• significantly to the time and effort. With these models, a manager can focus on the implications of
• the analysis for decision-making rather than just on the process of calculating the costs.
• Obsolescence can have a wide range of causes. This is mirrored in the
available literature, showing a confusing variety of categorisations like
physical, economic, financial, functional, location, environmental,
political, market, style and control obsolescence. Most of the literature
focuses on a specific causal factor, subsequent explanation and a problem
solving concept.
 
• One main causal factor, inherent to the word obsolete, is acknowledged
overall in the literature: the factor of time (i.e. age and the aging process).
But age alone is not a decisive clarification, considering the huge
diversities in occurrence of obsolescence between and within buildings
and building types. Why are some very old houses still very popular while
others are demolished before the surrounding trees grow to maturity? For
more clarity and a better understanding, it is first necessary to order the
subject by distinguishing the major characteristics: the nature of causes
and effects, the different levels of scale, the building category and building
type, and the kind of tenure and control.
• Several authors have tried to develop a causal explanatory taxonomy of decay and
obsolescence. Most of the attention was originally placed on the physical decay of
the buildings and building parts, but the awareness of the behavioural and
environmental impact has gradually grown. Nutt et.al. (1976) based their model
mainly on the market position of residential property. Prak and Priemus (1986)
based their comprehensive model on multiple case studies of residential stock
including the infamous demolition of the Pruit-Igoe project in St Louis, US where
they distinguish physical, social and economic causes. In a similar way, Golton
(1997) relates residential obsolescence to sustainability, distinguishing four types
of obsolescence: structure economic, utility and social obsolescence. Golton's
model is useful for case studies, but the interrelational effects of the
distinguishable factors are hard to trace. The TOBUS software of Allehaux and
Tessier (2002) assesses the functional performance of office buildings using five
criteria: flexibility, divisibility, maintainability, compliance with user needs and
with regulations. In the property valuation domain, obsolescence is more or less
synonymous to discounting and depreciation (Baum, 1991; Deakin, 1999; Dunse
and Jones, 2005),using - as far as they refer to causes - similar factors.
• From these sources, the most acknowledged and widely applied causal
distinction is between physical factors, related to material processes, and
behavioural factors, related to human actions, and the interactions
between them. The latter is nowadays acknowledged as decisive for most
processes of residential obsolescence (van Kempen et al., 2006). The
effects are commonly divided in technical and economical obsolescence
(Iselin andLemer, 1993).
•  
• Regarding scale, obsolescence can appear separately or combined on the
level of building materials, parts and elements, building construction
systems (structure, fabric, mechanical & electrical, etc), separate
buildings, blocks, quarters and neighbourhoods. It can be regarded as a
range of diseases, spreading over and mutually affecting different levels of
scale, i.e. timber decay and lack of maintenance can corrode the market
position of dwellings and trigger filtering processes. Conversely, the inflow
of more vulnerable residents can, for example, seriously hamper
maintenance investments.
• Within the building category, there are essential differences
between residential and nonresidential buildings. Apart from
differences in purpose, use, funding, management and legislation,
housing is a rather stable function with long life cycle expectancy. In
contrast, non-residential functions like office, retail, leisure, trade
and industry often have a shorter cycle of usage and adaptation
and consequently have a different vulnerability for obsolescence.
 
• Building types, shapes and functions are often interrelated,
sometimes very strongly (e.g. water towers and churches) posing
strong restrictions for reuse and transformation. Sometimes these
factors are less restrictive or facilitate a wide range of functions
(e.g. manor houses converted in offices and then back again into
residences, and warehouses converted in apartments which of
course is the origin of lofts).
• The main determining factors in these cases are space
and structure (Markus et al., 1972). Tenure is decisive
for property management and control. There are
essential differences between rented and owned
property, as well as between profit and non-profit and
between single and joint ownership. (Itard and Meijer,
2008). This holds in particular for residential property,
as social and institutional landlords are (as a rule)
organisations with skilled professionals but have
limited control on usage and care. Single owner-
occupiers generally lack any proficiency, but have (in
principle) full control on usage and care.
• Small landlords and condominium owners take a middle
position, with limited control on usage and care and often
lacking professional support. Similar relations can be found
in non-residential property like shopping centres. Building
type (when compared to building category and tenure) has
a stronger influence on the usage and the appreciation of
property. Detached, terraced, multi-storey, high-rise etc.
have a significant influence on the property value. The
inventory above is not exhaustive; real estate agents will
immediately add size, location, situation, architecture,
services and facilities (Isaac and Steley, 1999), illustrating
the complex influences on property value development as
itself a determining variable of obsolescence.
 Life cycle cost calculation

Method What does it calculate Advantage Disadvantage Usable for

Simple payback Calculate the time required to return the Quick and easy Does not take inflation, investment is profitable
initial investment. The investment with the calculation. interest or cash flow (Flanagan et al., 1989).
shortest pay-back time is the most Result easy to into
profitable one (Flanagan et al., 1989). interpret account (Öberg, 2005,
(Flanagan et al., Flanagan et al., 1989).
1989).
Discount Basically the same as the simple payback Takes the time Ignores all cash flow Should be only used as
payback method method, it just takes the time value into value of money outside a
(DPP)
account (Flanagan et al., 1989). into account the payback period screening devise not as
(Flanagan et al., (Flanagan et al., 1989) a
1989). decision advice
(Flanagan et al., 1989).
Equivalent This method express the one time NPV of Different Just gives an average Comparing different
annual cost an alternative as a uniform equivalent alternatives with number. It does not alternatives with
(ECA)
annual cost, for that it take the factor different lifes indicate the actual coast different life’s length
present worth of annuity into account length can be during each year of the (ISO, 2004).
(Kishk et al., 2003). compared (ISO, LCC (ISO, 2004).
2004).
 Method What does it calculate Advantage Disadvantage Usable for

Net present NPV is the result of the application of Takes the time Not usable when the Most LCC models
value (NPV) discount factors, based on a required rate value of money into comparing utilize the NPV
of return to each years projected cash flow, account. alternatives have method (Kishk et al.,
both in and out, so that the cash flows are Generates the different life length. 2003).
discounted to present value. In general if return equal to the Not easy to interpret Not usable if the
the NPV is positive it is worth while market rate of (Kishk et al., 2003). alternatives have
investing (Smullen and Hand, 2005). But as interest. It use all different life length
in LCC the focuses is one cost rather than available data (Flanagan et al., 1989).
on income the usual practice is to treat cost (Flanagan et al.,
as positive and income as negative. 1989).
Consequently the best choice between two
competing alternatives is the one with
minimum NPV (Kishk et al., 2003).

Internal rate of The IRR is a discounted cash flow criterion Result get Calculations need a Can be only use if the
return (IRR) which determines an average rate of return presented in trail and error investments will
by reference to the condition that the percent which gives procedure. IRR can be generate an income
values be reduced to zero at the initial an obvious just calculated if the which is not always the
point of time (Moles and Terry, 1997). It is interpretation investments will case in the
possible to calculate the test discount rate (Flanagan et al., generate an income construction industry
that will generate an NPV of zero. The 1989). (Flanagan et al., (Kishk et al., 2003).
alternative with the highest IRR is the best 1989).
alternative (ISO, 2004)
Net saving (NS) The NS is calculated as the difference Easily understood NS can be only use if Can be used to
between the present worth of the income investment the investment compare investment
generated by an investment and the appraisal technique generates an income options (ISO, 2004).
amounted invested. The alternative with (Kishk et al.,2003). (Kishk et al., 2003). But just if the
the highest net saving is the best (Kishk et investment generates
al., 2003). an income (Kishk et
al., 2003).
 When should it be used?

• There are broadly three stages at which LCC should be

applied. These are:
• • the conceptual stage, when initial proposals for
investment are being considered;
• • the acquisition stage, when tenders for the supply of
equipment, facilities or software are being
• assessed; and
• • the in-service stage, when decisions are being made
on whether to maintain, improve or dispose
• of the asset.
 Conceptual stage

• LCC at the conceptual stage of a project potentially

provides the greatest return for effort. The
• emphasis here should be on getting at least initial estimates
for all the key components of lifecycle
• costs organised consistently so as to ensure a fair
comparison between alternatives.
• A major purpose of LCC at this stage is to estimate the
pattern of future costs over the life of the
• asset, enabling provision to be made in future budgets for
the cost of acquisition, operation, refit
• and support. The LCC information can also be used to make
cost-performance trade-offs before an
• acquisition approach is finalised.
 Acquisition stage

• The emphasis here is on using LCC to help select the most cost-effective option or
offer. The LCC
• analysis can also form part of a tender evaluation process, using:
• • a preliminary model of the asset and its environment;
• • identification of the potential acquisition cost and major influences on support
cost; and
• • consideration of the means of constraining these costs.
• Where the purchase involves equipment of new design, there should be a
contractual provision
• enabling the purchaser to be assured that the designer has taken into account key
LCC parameters
• such as reliability, maintainability and availability in the design of the equipment.
There should be
• similar provisions relating to the use of LCC in the design of logistic support
infrastructure. There may be scope to have tenderers’ assertions relating to
reliability and life-cycle costs translated into contractual commitments.
 In-service stage

• A good knowledge of the actual operating costs of an in-service asset is important not only for
• improving the cost-effectiveness of the asset in question, but also to improve the specification of
• future assets. Given the dispersed nature of many agencies, it needs to be made clear at the
• outset which person or group is responsible for recording in-service costs over an asset’s life.
• Having a comprehensive and readily useable data base of life-cycle costs enables decisions on
• changes to the asset and revisions to maintenance policy to be made with the assurance that the
• cost implications of these changes are well founded. Calculating the LCC impact of a configuration
• change can be made easier by establishing cost relationships that indicate the cost variations
• contingent on factors such as weight, power consumption, reliability and time to remove failed
• components. Further, the ability to identify those components and features generating high costs
• in systems currently in use can help to drive improvements that lead to cost reductions, and enable
• better budgeting for future expenditure.
• A comprehensive database will also allow tracking of costs as they vary (normally increase) with
• system age. This will provide information to assist decisions on whether to:
• • continue as is;
• • initiate modification to the asset to avoid increasing costs; or
• • retire the asset and recycle or dispose of its elements.
 Applying LCC
LCC analysis should begin by developing a plan that
addresses the purpose and scope of the analysis.
The plan should be to:
• define the objectives;
• identify the cost drivers and establish their
parameters;
• apply the formula, and choose the appropriate
discount rate; and
• analyse the results.
 Benefits available from LCC

The information generated by a life-cycle cost

analysis can assist managers at various stages in
the life of an asset:
• planning and analysis of alternative solutions;
• selection of preferred options;
• securing funding; and
• review of predicted and actual outcomes.
 Planning and analysis

• The best opportunities to achieve significant cost benefits occur

during the early concept
• development and design phase of any project. At this time,
significant changes can be made for
• the least cost. At later stages of the project many costs have
become locked in. To achieve the
• maximum benefit available during this stage of the project it is
important to explore:
• • a range of alternative solutions;
• • the cost drivers for each alternative;
• • the time period for which the asset will be required;
• • the level and frequency of usage;
• • the maintenance and/or operating arrangements and costs; and
• • quantification of future cash flows.
 Selection of preferred option

• When a life-cycle cost analysis has been prepared for

each option under consideration, it is
• possible to:
• • calculate the NPV of each option;
• • consider projected cash flows in the context of the
funding available; and
• • identify issues related to the ultimate disposal of the
asset.
• This information can be used by decision-makers as
part of the selection process in conjunction
• with any other operational or policy constraints.
 Securing funding

• The application of the NPV technique for comparing

options that have different cash flow patterns
• over time is important, but there may also be
corporate cash flow issues that need to be
• considered. There will always be competing demands
for the available cash resources at any given
• time. Management of cash flow is simplified if the
pattern is predictable over the long term. The
• life cycle analysis provides a sound basis for projecting
cash requirements, which can assist in a
• group securing approval for a particular project.
 Review

• The credibility of future life-cycle plans can be enhanced by systematic

collection of historical data
• related to previous projects. A comparison of projected life-cycle costs
with those that actually
• occur can provide:
• • confirmation of the reliability of the life-cycle model;
• • information to improve future similar life-cycle models; and
• • an appreciation of the risks associated with the various assumptions.
• A well documented LCC process justifying a higher initial cost offset by
lower long-term costs
• provides clear evidence for consideration during any review or audit
process. In the APS context, it
• also provides a useful record of the rationale for the decision, which will
be valuable to help a new
• manager understand the reasons for a decision taken by others.
THANK YOU