Life-cycle cost analysis (LCCA) is a method for assessing the total cost of facility ownership. It takes into account all costs of acquiring, owning, and disposing of a building or building system. LCCA is especially useful when project alternatives that fulfill the same performance requirements, but differ with respect to initial costs and operating costs, have to be compared in order to select the one that maximizes net savings.
A. Life-Cycle Cost Analysis (LCCA) Method
The purpose of an LCCA is to estimate the overall costs of project alternatives and to select the design that ensures the facility will provide the lowest overall cost of ownership consistent with its quality and function. The LCCA should be performed early in the design process while there is still a chance to refine the design to ensure a reduction in life-cycle costs (LCC).
The first and most challenging task of an LCCA, or any economic evaluation method, is to determine the economic effects of alternative designs of buildings and building systems and to quantify these effects and express them in dollar amounts.
Viewed over a 30 year period, initial building costs account for approximately just 2% of the total, while operations and maintenance costs equal 6%, and personnel costs equal 92%.
Graphic: Sieglinde Fuller
Source: Sustainable Building Technical Manual / Joseph J. Romm,Lean and Clean Management, 1994.
Initial Costs—Purchase, Acquisition, Construction Costs
Operation, Maintenance, and Repair Costs
Replacement Costs; Residual Values—Resale or Salvage Values or Disposal Costs, Finance Charges—Loan Interest Payments
Non-Monetary Benefits or Costs
Only those costs within each category that are relevant to the decision and significant in amount are needed to make a valid investment decision. Costs are relevant when they are different for one alternative compared with another; costs are significant when they are large enough to make a credible difference in the LCC of a project alternative. All costs are entered as base-year amounts in today’s dollars; the LCCA method escalates all amounts to their future year of occurrence and discounts them back to the base date to convert them to present values. […]
Energy and Water Costs
Operational expenses for energy, water, and other utilities are based on consumption, current rates, and price projections. Because energy, and to some extent water consumption, and building configuration and building envelope are interdependent, energy and water costs are usually assessed for the building as a whole rather than for individual building systems or components.
Energy usage: Energy costs are often difficult to predict accurately in the design phase of a project. Assumptions must be made about use profiles, occupancy rates, and schedules, all of which impact energy consumption. At the initial design stage, data on the amount of energy consumption for a building can come from engineering analysis or from a computer program such as eQuest.ENERGY PLUS (DOE), DOE-2.1E and BLAST require more detailed input not usually available until later in the design process. Other software packages, such as the proprietary programs TRACE (Trane), ESPRE (EPRI), and HAP (Carrier) have been developed to assist in mechanical equipment selection and sizing and are often distributed by manufacturers.
When selecting a program, it is important to consider whether you need annual, monthly, or hourly energy consumption figures and whether the program adequately tracks savings in energy consumption when design changes or different efficiency levels are simulated. […]
Operation, Maintenance, and Repair Costs
(Courtesy of Washington State Department of General Administration)
Non-fuel operating costs, and maintenance and repair (OM&R) costs are often more difficult to estimate than other building expenditures. Operating schedules and standards of maintenance vary from building to building; there is great variation in these costs even for buildings of the same type and age. It is therefore especially important to use engineering judgment when estimating these costs.
Supplier quotes and published estimating guides sometimes provide information on maintenance and repair costs. Some of the data estimation guides derive cost data from statistical relationships of historical data (Means, BOMA) and report, for example, average owning and operating costs per square foot, by age of building, geographic location, number of stories, and number of square feet in the building. The Whitestone Research Facility Maintenance and Repair Cost Reference gives annualized costs for building systems and elements as well as service life estimates for specific building components. The U.S. Army Corps of Engineers, Huntsville Division, provides access to a customized OM&R database for military construction (contact: Terry.L.Patton@HND01.usace.army.mil).
The number and timing of capital replacements of building systems depend on the estimated life of the system and the length of the study period. Use the same sources that provide cost estimates for initial investments to obtain estimates of replacement costs and expected useful lives. A good starting point for estimating future replacement costs is to use their cost as of the base date. The LCCA method will escalate base-year amounts to their future time of occurrence.
The residual value of a system (or component) is its remaining value at the end of the study period, or at the time it is replaced during the study period. Residual values can be based on value in place, resale value, salvage value, or scrap value, net of any selling, conversion, or disposal costs. As a rule of thumb, the residual value of a system with remaining useful life in place can be calculated by linearly prorating its initial costs. For example, for a system with an expected useful life of 15 years, which was installed 5 years before the end of the study period, the residual value would be approximately 2/3 (=(15-10)/15) of its initial cost.
Finance charges and taxes: For federal projects, finance charges are usually not relevant. Finance charges and other payments apply, however, if a project is financed through an Energy Savings Performance Contract (ESPC) or Utility Energy Services Contract (UESC). The finance charges are usually included in the contract payments negotiated with the Energy Service Company (ESCO) or the utility.
Non-monetary benefits or costs: Non-monetary benefits or costs are project-related effects for which there is no objective way of assigning a dollar value. Examples of non-monetary effects may be the benefit derived from a particularly quiet HVAC system or from an expected, but hard-to-quantify productivity gain due to improved lighting. By their nature, these effects are external to the LCCA, but if they are significant they should be considered in the final investment decision and included in the project documentation. See Cost-Effective—Consider Non-Monetary Benefits.
To formalize the inclusion of non-monetary costs or benefits in your decision making, you can use the analytical hierarchy process (AHP), which is one of a set of multi-attribute decision analysis (MADA) methods that consider non-monetary attributes (qualitative and quantitative) in addition to common economic evaluation measures when evaluating project alternatives. ASTM E 1765 Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multi-attribute Decision Analysis of Investments Related to Buildings and Building Systems published by ASTM International presents a procedure for calculating and interpreting AHP scores of a project’s total overall desirability when making building-related capital investment decisions. A source of information for estimating productivity costs, for example, is the WBDG Productive Branch. [….]
D. Life-Cycle Cost Calculation
After identifying all costs by year and amount and discounting them to present value, they are added to arrive at total life-cycle costs for each alternative:
LCC = I + Repl — Res + E + W + OM&R + O
LCC = Total LCC in present-value (PV) dollars of a given alternative
I = PV investment costs (if incurred at base date, they need not be discounted)
Repl = PV capital replacement costs
Res = PV residual value (resale value, salvage value) less disposal costs
E = PV of energy costs
W = PV of water costs
OM&R = PV of non-fuel operating, maintenance and repair costs
O = PV of other costs (e.g., contract costs for ESPCs or UESCs)
E. Supplementary Measures
Supplementary measures of economic evaluation are Net Savings (NS), Savings-to-Investment Ratio (SIR), Adjusted Internal Rate of Return (AIRR), and Simple Payback (SPB) or Discounted Payback (DPB). They are sometimes needed to meet specific regulatory requirements. For example, the FEMP LCC rules (10 CFR 436A) require the use of either the SIR or AIRR for ranking independent projects competing for limited funding. Some federal programs require a Payback Period to be computed as a screening measure in project evaluation. NS, SIR, and AIRR are consistent with the lowest LCC of an alternative if computed and applied correctly, with the same time-adjusted input values and assumptions. Payback measures, either SPB or DPB, are only consistent with LCCA if they are calculated over the entire study period, not only for the years of the payback period.
All supplementary measures are relative measures, i.e., they are computed for an alternative relative to a base case. […]”<