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The Surveyors Construction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 1

PART TWO: CONSTRUCTION DESIGN & ECONOMICS

SECTION 2: LIFE CYCLE COSTING

Introduction

It is becoming increasingly important that investment appraisal uses a whole

life approach in a more systematic way than at present. Major construction

clients are now insisting upon an analysis of life cycle costs and not just

capital costs.

The life cycle cost (LCC) of an asset is defined as the present value of the total

cost of that asset over its operating life (including initial capital cost,

occupation costs, operating costs and the cost or benefit of the eventual

disposal of the asset at the end of its life).

Life cycle cost techniques can be used, for example, to:

evaluate design options at the elemental or component level;

evaluate total building options, for example refurbishment versus new

build;

determine optimum maintenance strategies;

analyse relocation strategies; and

determine sinking fund requirements to finance planned maintenance

programmes.

Worked examples for the above are included in 2.2.5.

The objective of this Section is to inform chartered surveyors of the increasing

need to adopt life cycle costing (2.2.1) and to introduce them to the techniques

and their application.

2.2.1 The Client Context

2.2.1.1 Following the recession of the early 1990s construction clients are generally

more streamlined and competitive and some recognise that their ongoing

property costs may provide them with the business edge they need. There is

therefore increased attention to life cycle costing. The following Sub-sections

expand on this trend by covering recent changes in the industry and their

effect on LCC.

2.2.1.2 VALUEENGINEERING

Value engineering involves preparing structured option appraisals during the

design process so demonstrating value for money for clients. Its use is

I


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Page 2 Part 2, Section 2 (4/99) Effective from 1/6/99 The Surveyors Construction Handbook

increasing and with it comes the opportunity and need for LCC to be part of

the options appraisal criteria.

2.2.1.3 THE

LATHAM

REPORT

Sir Michael Lathams report Constructing the Team1, calls for a 30% real

reduction in construction costs. This statement includes life cycle costs. The

report also strongly advocates the need to build right first time in which

environment life cycle cost calculations (involving assumptions about future

maintenance) have more credibility.

2.2.1.4 CONSTRUCTION(DESIGN ANDMANAGEMENT) REGULATIONS1994

The Construction (Design and Management) Regulations 1994 place a

specific duty upon clients and their designers to consider the potential hazards

associated with the construction process during design, and furthermore to

consider the health and safety implications of maintaining the structure whencomplete. Such increased focus on maintenance may therefore encourage

greater consideration of maintenance costs. This principle is enshrined in

Regulation 13(2)(a)(i) and (ii) which states:

(2) Every designer shall:

(a) ensure that any design he prepares and which he is aware will be

used for the purposes of construction work includes among the

design considerations adequate regard to the need:

(i) to avoid foreseeable risks to the health and safety of any

person at work carrying out construction work or

cleaning work in or on the structure at any time, or of

any person who may be affected by the work of such a

person at work,

(ii) to combat at source risks to the health and safety of any

person at work carrying out construction work or

cleaning work in or on the structure at any time, or of

any person who may be affected by the work of such a

person at work.

It follows that the selection of materials for certain elements of a structure that

may involve maintenance, (particularly where access to those elements

involves working at height), complies with the spirit of Regulation 13. For

example, the selection of PVCu window frames with easy clean hinges

involves limited maintenance and allows cleaning from the inside. Similarly

marble flooring is cheaper than cork tiles over a 60-year period and while the

decision to use marble is economically sound it also removes health hazards

1 Latham, M., Sir, (1994),Constructing the Team: Joint Review of Procurement and Contractual

Arrangements in the United Kingdom Construction Industry: Final Report, HMSO London


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associated with fumes and vapour when cork has to be resealed. In purely

capital cost terms, the selection of the materials referred to above may be more

expensive than their traditional counterparts.

The use of life cycle costing places initial capital cost in the context of future

maintenance expenditure, and helps justify decisions which have beneficial

health and safety implications.

2.2.1.5 THEPRIVATEFINANCEINITIATIVE(PFI)

The PFI is driven by a cash flow which is achieved by the private sector

provider delivering a service to the client. This service will include the

management of a building which should be heated, cooled, lighted, cleaned,

maintained, secured, insured and renovated. This cash flow should

sufficiently cover all costs and outgoings, leaving the provider with a surplus

or profit which should be commensurate with his risk exposure.

It is therefore critical that the provider accurately predicts the cost in use of the

service or the facility over its operational life so that he can calculate the cash

flows generated by the assets over the term of the contract. Such data is vital

so as to negotiate the complexities of the contract to both parties satisfaction.

To assist this process some suppliers give guaranteed long-term costs, e.g. for

lifts and kitchen equipment. By reducing costs over this term it should be

financially viable for the private sector to provide a service to the public sector

and to achieve an acceptable return.

Life cycle costs and their accurate prediction, control and reduction are critical

to the successful performance of a PFI deal.

2.2.1. ENERGYEFFICIENCYISSUES INRELATION TOBUILDINGPROJECTS

Studies by the Building Research Establishment through the BRECSU

(Building Research Energy Conservation Support Unit) Best Practice

Programme have found that energy consumed to heat, light and service

buildings accounts for almost half of the UKs energy bill, and there is

considerable scope to reduce it. Office buildings were found to have the

highest energy costs, especially prestigious, air conditioned property

(typically 20/m2

per year in 1991 compared to 15/m2

for the same bestpractice office).

There is common feeling that property overheads are too large, with energy

bills contributing significantly to the operating costs. Energy costs are

potentially one of the most controllable items of overheads and life cycle

costing can be used as a tool for predicting the benefits of investment in

energy efficiency. Typical investments for analysis would be economic

thickness of insulation, energy efficient services, building energy

management system installations, intelligent buildings, energy conscious

refurbishment of buildings and passive cooling techniques versus air

conditioned design. For example, a manufacturer can supply a light bulb some

ten times more expensive than a normal one, however, it lasts longer, uses less


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electricity and performs better. Similarly, condensing gas boilers can save

1020% of fossil fuel bills with pay back in five years.

It is also worth noting that oil is becoming increasingly harder to extract and

environmental concerns generally will increase in the very near future.

Sainsbury has been the first grocery retailer to produce an environmental

report and recognises that energy probably accounts for its single biggest

direct environmental impact. Significantly it is also the third largest

controllable cost in running a typical supermarket.

2.2.1.7 MECHANICAL ANDELECTRICALBUILDINGSERVICES

The increasing capital cost significance and complexity of M & E services has

resulted in greater cost emphasis during the early design stages. Such costing

is increasingly carried out by a specialist Quantity Surveyor so bringing

greater opportunity to focus on M & E life cycle costs which are a significant

proportion of a buildings cost in use, accounted for by the operation, energy

use and replacement costs associated with the M & E installations.

2.2.1.8 BUILDINGSUSTAINABILITY

If there is to be a conscious shift of opinion towards sustainable buildings i.e.

those which have a viable life expectancy beyond their initial designed use,

then there has to be a simultaneous re-examination of a buildings costs in use

or perhaps more correctly costs in uses.

Buildings have not been traditionally designed for anything beyond theirimmediate requirement. However, as more are being converted to alternative

uses it is probably only a matter of time before investors in property call for

properties to be constructed with a view to extending the buildings usable

life, e.g. conversion to house a growing less mobile and aged population. Such

consideration is more valid the shorter the predicted current building life, e.g.

some light industrial units for English Partnerships have been designed for a

ten-year life. Similarly, Hertfordshire County Council have housing and

nursing homes with a 20-year life expectancy.

Such a concept will require building layouts and structures to be more flexiblewith maintenance, re-servicing and conversion to alternative uses being

simplified and made more economical. A cost in use study at design stage may

justify larger bay sizes, raised flooring or greater storey heights to demonstrate

continual viability for future generations.

A cost in use study would explore the economics involved of using a building

for its notional design life and for its intended use in the usual way. However,

supplementary investigations would explore potential alternative uses for the

building and the conversion cost (and possibly the cost in use for a further

notional period). If sufficient consideration were to be given at the initial

design stage for potential future uses of a building, it could be used to

demonstrate the continued asset value of the property and go a considerable


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way to minimising the obsolescent properties which currently dominate

certain market sectors.

2.2.2 The Life Cycle Costing Calculation

INTRODUCTION

The calculation generally involves the appraisal of options, each option

having different capital and future costs. To determine and analyse the future

costs it is necessary to establish:

the building life;

the discount rate (which, expressed simply, is the difference between the

interest and inflation rate and is used to convert future payments to

present values);

the cost and frequency of future payments (at the component, elemental

or total building level as appropriate);

any tax implications (see 2.2.3).

2.2.2.1 THEBUILDINGLIFE

An essential element of life cycle costing is defining the life cycle period to be

adopted. An assessment must therefore be made of the life of the investment

building life.

Typically the relevant building life will be the period over which theorganisation, for whom the study is being conducted, will be expected to hold

an interest in the building, and would take into account the residual value.

At the end of the life of a building, the building (or component) and the land

will have a residual value. In the case of relatively short life cycles or high

value land, residual values can be very significant factors in determining the

optimum life cycle cost options. Residual values are briefly discussed in

Appendix A (and worked example 2.2.5.3 includes a residual value in the

calculation).

When the building life is assessed to be over 40 years, the precise life is notcritical for the purposes of life cycle costing (as discounting, explained below,

minimises the effect of such future payments). In cases where calculations are

based on a relatively short building life, say 20 years or less, the assessment of

the time horizons must be considered with special care.

Building life is influenced by obsolescence, the causes of which are

summarised in Appendix B.

2.2.2.2 THEDISCOUNTRATE

The life cycle cost technique is concerned with the assessment of the time

stream of costs and revenues that will flow throughout the life of a

construction project option.


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As money today has a different value from money tomorrow or money in

ten years time, a technique has to be adopted that will express future costs or

revenues in present values. The process of converting future money to

present money is called discounting.

Discounting involves establishing the discount rate to be used. In making the

decision on a discount rate for a particular project, some judgement will need

to be made about the degree of risk return (interest) and the likely levels of

future inflation rates.

Interest rates are particular to the client and the degree of risk. It is therefore

essential to involve the client (and his accountant if appropriate) in the process

and reach agreement on the discount rate to be used.

Economists, accountants and clients will all have different views about future

levels of inflation and interest rates. Some forecasters may take the view that

as different categories of cost inflate at different rates, these differences

should be taken into account in setting discount rates. These diversities of

view before the fact make it difficult to recommend any firm guidelines for

surveyors to adopt for selecting discount rates.

There are two main approaches to discounting:

(a) use a rate which implies inflation of future costs and values (in this case

future costs and values will be priced at todays prices);

(b) use a rate which requires an explicit treatment of inflation in relation to

future costs and values, (in this case future costs and values will be priced at

todays prices and adjusted by a factor to reflect future inflation).

It is suggested that it is easier to deal with the former situation where future

costs and values are assessed at current prices. Three approaches on the

selection of discount rates are given for guidance purposes and in each the

future costs are priced at current prices.

2.2.2.3 DISCOUNTRATEMETHODS

(a) Test Discount Rate

In the absence of better information it is recommended that a test discount rate

should be used.

This recommendation is based on the assumption that when inflation rates are

reasonably low, i.e. less than 15%, there is quite a stable relationship between

inflation and the bank base interest rate, implying a real discount rate of

between 4% and 5% (i.e. the interest rate is 4 to 5% greater than inflation). It

is recommended that in the circumstances, where no better information is


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available, a test discount rate of 4% is used. This method is often adopted in

the public sector where minimal risk associated with the investment is

assumed.

(b) No risk return discount rate

Investment in long-term Treasury Bonds can be assumed as having no risk,

and are a good reflection of the return to be expected on other investments

where there is no risk. Therefore the discount rate can be taken as the Treasury

Bond rate less an allowance for the expected rate of inflation. On this basis the

discount rate would be assessed as:

Treasury Bond rate of return 8%

Less

Inflation 5%

No risk return discount rate 3%

(c) Average risk premium discount rate

The average return on equities reflects the interest required on an average risk.

The excess of this rate of return over that expected from the above Treasury

Bonds can then be taken as the premium expected for the average risk. On this

basis the average risk premium could therefore be calculated as:

Average equity rate return 16%

LessTreasury Bond rate 8%

Average risk premium discount rate 8%

Therefore if construction is deemed to be half as risky as equities, the discount

rate for construction investment could be assessed as:

No risk return 3%

Construction premium risk (8% ) 4%

Average construction risk return discount rate 7%

(d) A further approach to establishing a discount rate is to analyse transactions

involving the sale of comparable properties, and to utilise the all risks yield

as the discount rate.

In the examples of the calculation of discount rates, concurrent interest and

inflation rates have been added and subtracted in order to clarify the

methodology. This is mathematically imprecise. The actual calculation will

need to be compounded.


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In the no risk return discount rate method, for example, the calculation

should be as follows:

Treasury Bond rate of return 8%Inflation rate 5%

Discount rate (i.e. Treasury Bond rate net of inflation

= 0.02857

= 2.857%

The same methodology should be adopted for actual calculations using other

methods. As an approximation however this may be ignored.

(e) In summary, the effect of future payments on an LCC calculation is in

inverse proportion to the level of discount rates i.e. the higher the discount rate

the less effect future payments have on the LCC calculation. For example, a

risk taking client is less likely to spend money on the building to reduce future

costs since he can use this money to get a higher return elsewhere.

Selection of a suitable discount rate is crucial as it can overwhelm all other

decisions.

Once the discount rate is established valuation tables can be used to convert

future payments to present value. For example, the present value of 100 to be

paid in five years time at a discount rate of 4% =

100 0.82192 (from valuation tables at 2.2.5.7 present value of 1) =82.19

Such conversion of future payments to present value provides a basis for

comparing alternative expenditures.

2.2.2.4 THECOST ANDFREQUENCY OFFUTUREPAYMENTS

The costs are generally dealt with using current prices (using the discount rate

to allow for inflation), with assumptions made regarding when payments will

occur in the future. 2.2.4 includes possible sources for such data.

Depending upon requirements, some calculations will be relatively

straightforward (see the option appraisal exercise for internal doors as shown

(1 = Treasury Bond rate)= 1

(1 + Inflation rate)

1.08= 1

1.05


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in the worked examples). However, all expenditure throughout the life of the

building could be included if the total building analysis were required.

The major categories of costs are: capital costs

financing costs

operation costs

annual maintenance costs

intermittent maintenance, replacement and alterations costs

occupancy costs

residual values and disposal costs.

An expanded check list of costs is given in Appendix C.

Estimates for these costs will be based upon assumptions about future events

and should be clearly stated. Indeed an additional advantage of life cycle

costing is that it requires design assumptions to be stated explicitly rather than

implied.

Although current costs are generally used, it is important that future cost

assessment should reflect any expected divergence of a specific cost from the

level of inflation allowed in the discount rate. For example, it would be unwise

to assume that market conditions would remain unchanged for any extended

period when tender levels for building work are very depressed. Some

allowance should therefore be made to adjust current building prices to more

normal market conditions when pricing future building work.

The level of detail used will be dictated by the availability of information and

the requirements of the client.

The following costs for each category should be considered and where

necessary established with the client.

(a) Capital costs include land, building, professional fees, furniture and

equipment, or permanent improvements thereto, which form assets for thebusiness to use in its operation, with an intended useful life of more than one

year. The significance of any tax benefits and grants should be established

with the client.

(b) Financing costs the method of funding the project should include, inter

alia, the cost effect of alternative sources of funds, the future flexibility of

funds in terms of amounts and sources, and gearing. Consideration should also

be given to

the accounting effect of capital employed;

construction period finance charges and long-term finance costs; and

the taxation implications of the various options.


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(c) Operation costs include estimates of rent, rates, energy costs, cleaning

costs, building related staffing costs and other staffing costs.

(d) Annual maintenance costs average maintenance costs are available but

once details of design are completed, a more relevant estimate can be

produced based on information obtained from manufacturers or maintenance

managers.

(e) Intermittent maintenance, replacement and alteration costs replacement

costs can be produced using normal cost estimating techniques.

In seeking a realistic assessment of the life of materials and components,

reference should be made to manufacturers, maintenance managers and other

sources of such data (as discussed in 2.2.4).

(f) Occupancy costs the cost of performing the function for which the

building is intended (e.g. producing motor vehicles). Occupancy costs are

distinguished from operation costs, as they relate to costs attributable to a

specific process undertaken by the client, which may change within the life of

the building. As an example, a car manufacturer may change to the production

of heavy goods vehicles. This would impact on his occupancy costs, whereas

his building related operation costs could be relatively unchanged. Some

clients might not require the surveyor to take these costs into account, as not

relating directly to the building.

(g) Residual values and disposal costs estimate of the resale value and thecost of disposing of the building, plant, land and other assets after the expiry

of the life cycle. Many buildings, particularly those with an open market

value will have a significant residual value. Care should be taken in assessing

this value as it can have a major effect on the life cycle costing calculations

(see Appendix A).

2.2.3 Tax Allowances, Incentives and Business Rates

INTRODUCTION

This Sub-section deals with the effect of taxation allowances and incentivesavailable for expenditure upon property and construction applicable in the

United Kingdom to date, during the life of the asset. A glossary of terms is

included in Appendix D.

Currently, legislation offers tax relief by allowing expenditure upon certain

assets to be depreciated, and to be offset against a private commercial

organisations taxable profits.

Tax relief is available on both capital and revenue expenditure. Capital costs

receive this relief by way of capital allowances which are deductible items

from the taxpayers taxation liability account. Maintenance costs are a charge

on the profit and loss account, which again reduces the tax payable.


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The significance of tax relief depends upon the amount of allowable

expenditure. This varies considerably, being dependent upon the type and

function of the asset, its design and sophistication (particularly in respect of

services) and whether or not the project is a new building or a refurbishment.

The impact of tax relief on the life cycle evaluation lessens proportionately

with the ratio of allowable expenditure to the total expenditure and the timing

of relief, which is dependent on the annual rate of taxation allowances. For

example, a new oil refinery will have a greater proportion of allowance than a

shop unit shell. It is also worth noting that capital allowances tend to be

greater on plant than on buildings, so making the use of efficient plant more

attractive than increasing the thermal efficiency of the building.

The impact of tax relief should be sensitively tested at the earliest possible

stage. A detailed estimate of the allowable expenditure should only be

prepared if tax relief is found to be significant.

2.2.3.1 The following example shows the net discounted cost, after tax relief, of

1,000 spent on differing types of expenditure.

2.2.3.2 TYPES OFALLOWANCES

The types of allowances and rates of depreciation often change.

Following the Finance Act 1985, capital allowances available that relate to

Real Property were as follows:

No relief

Where capital

allowances are

allowed on 50% of

capital expenditure

Where capital

allowances are

allowed on 100%

of capital

expenditure

Relief given

on

maintenance

100%

Expenditure 1,000 1,000 1,000 1,000

Tax relief assuming 35%

Corporation Tax

1111 222 350

Net discounted cost after

tax relief

1,000 889 778 650

1 i.e. 50% of 1,000 25% reducing balance 35% Corporation Tax with future allowances discounted at

10% per annum (a discounting calculation is required in order to establish the above figures).


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Allowable expenditure Timing or percentage per annum

Plant and machinery 25% (reducing balancing)

Industrial buildings 4% (straight line)

Agricultural buildings 4% (straight line)

Dredging 4% (straight line)Scientific research 100%

Cemeteries and crematoria Ratio based upon grave spaces used

Dwelling houses let on assured tenancies

only expenditure expended prior to

1 April 1987 4% (straight line)

Hotels 4% (straight line)

Enterprise zone building expenditure 100%

Mining and certain related construction works 40% plus a ratio based upon usable life

Subsequent to the Finance Act 1997 first year allowances were changed and at

the time of writing were still being finalised.

In certain circumstances allowances may be at a higher rate i.e. they relate to

specific incentives, certain assisted projects or expenditure relates to a

transitional period e.g. terms of the Finance Act 1984 (applicable until 31

March 1987).

Different types of allowances, initial, first year and writing down are

explained in the Glossary of Terms (Appendix D).

Straight line allowances are calculated as a percentage of original cost and at

4% the allowance is spread evenly over 25 years. A reducing balance

computation is achieved each year by first deducting all previous allowanceamounts from original cost and then applying the allowable percentage to the

balance, i.e. 25% in the first year, 25% of 75% in the second, and so on. While

the building itself may be subject to a 4% straight line allowance the plant and

machinery in the building will receive a 25% reducing balance.

It should be noted that the significant part of capital allowance relief on a 25%

reducing balance basis comes in the first five to seven years. This is included

in the above example where the tax relief amount is a product of the

incremental annual writing down allowance, discounted.

Regional development grants (or their Northern Ireland equivalent) may also

be available. These are not treated as taxable and may be disregarded when

assessing the capital cost upon which tax relief is calculated.

Currently the running and maintenance costs of an asset are deductible in full

(i.e. 100% allowance) against taxable profits in the year of expenditure.

2.2.3.3 VALUEADDEDTAX(VAT)

Capital allowances are given against the net capital cost to the taxpayer.

Therefore, as VAT is part of that capital cost, clients will incur differing

overall capital expenditure for the same item depending upon whether theycan or cannot recover, or recover only a proportion of, the VAT.


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2.2.3.4 CALCULATION OF THEEFFECT OFCAPITAL ANDREVENUEALLOWANCES

Before calculating the effect of taxation allowances, certain parameters need

to be ascertained:

(a) the Corporation Tax and allowances rate that will be current at the date of

construction of first use;

(b) the future Corporation Tax and allowance rate at the date of replacement;

(c) the Corporation Tax rate current at dates between date of construction of

first use and the date of replacement, against which revenue running costs can

be charged;

(d) whether the owner will be liable to tax during the period between the date

of construction or first use and the date of replacement, and if the owner will

have sufficient taxable profits to use the allowances generated in any one year.

(e) whether the items economic life will be shorter than the tax write down

period. This will either generate an added write down amount when it is

demolished, or if the item or building is to be sold at the end of its economic

life, its profit or loss on cost. These circumstances will generate a taxable

profit or loss on proceeds above or below the tax write down value and will

attract a balancing adjustment;

(f) the value of the balancing allowances, charges or taxable profits needs to

be considered against the relevant Corporation Tax rate;

(g) the impact of these adjustments therefore needs to be taken into account in

the life cycle costing assessment.

Caution is further necessary as there are specific restrictions. The recipient has

to prove to the Inland Revenue that he qualifies for allowances (i.e. the

entitlements are aimed at providing incentives for commercial organisations

and therefore expenditure upon residential property is largely excluded.

Entitlements are also restricted between connected persons).

2.2.3.5 DYNAMICS

The surveyor should therefore appreciate the variables and frequent changes

that occur in respect to the application of taxation allowances.

These arise because:

(a) the Government uses taxation to impose fiscal policy and influence the

economy and therefore statutes are introduced amending previous rates of

depreciation, regulations and entitlements;

(b) the interpretation of entitlement is affected by case law precedents.


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(c) the Inland Revenue practices and extra statutory concessions develop to

address specific issues or vagaries.

2.2.3.6 APPLICATIONS

Taxation allowances provide the opportunity for innovative funding

arrangements whereby the tax relief can be exported to a party who can

enjoy more benefit from the entitlement.

They also need to be advised during property transfers so the relevant

balancing adjustments can be calculated and the purchasers advised of their

proper entitlements.

2.2.3.7 WORKEDEXAMPLES

Worked example 2.2.5.3 summarises the effect of capital and revenue

allowances. Worked example 2.2.5.6 includes a detailed calculation of thecapital and revenue allowances.

Business Rates

Large plant and machinery regarded as an integral part of the building can

attract additional rates which can be influenced by design niceties (such as how

the plant is covered over). Expert advice should be sought in such a situation.

Further reading for taxation

Tolleys Capital Allowances, Tolley Publishing Co. Ltd generally published

annually.

Butterworths Yellow Tax Handbook, Butterworth & Co. (Publishers) Ltd

abstract of Statutes

Tax Statutes and Statutory Instruments, CCH Editions Ltd incorporating

extra statutory concessions

2.2.4 Data Sources

Lack of data in a suitable format for maintenance, replacement and energy

costs is said to be a significant reason for LCC rarely being carried out at

present. Notwithstanding this, Building Surveyors and Facility Managers will

often have valuable in-house data. Furthermore, professional judgement

should not be disregarded.

LCC calculations require information regarding the durability of

materials/components, and/or energy costs. Lack of such accurate data in a

suitable format may affect the credibility of the LCC calculation. However,

while historic data is useful, reality is dependent upon individual design,

installation and usage as well as technical development.


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Whilst the selection of data sources given in Appendix F is not

comprehensive, it gives an indication of the level of information available.

Trade literature which is a prime source of detailed information is not

included.

2.2.5 Worked Examples

INTRODUCTION

Life cycle costing can be used in numerous situations. The intention of this

Sub-section is to give the reader an appreciation of its application, as used by

surveyors in practice, and the relative complexities of associated calculations,

ranging from a simple elemental option appraisal to complex total building

analyses.

The examples follow in order of complexity, worked examples 2.2.5.1 and

2.2.5.2 will readily convey the principles of life cycle costing including

discounting. The remainder consider more detailed scenarios.

2.2.5.1 DESIGNOPTION: INTERNALDOORS

This example is kindly provided by Messrs Gardiner & Theobald, Chartered

Quantity Surveyors. The objective is to evaluate four comparative

specifications over a building life of 60 years using a discount rate of 4% (7%

interest rate less 3% inflation rate). The information is summarised in the table

below with an explanation of the calculation for option 1 detailed at (a) to (d)

below. Any tax implications are excluded.

(a) The present value for purchasing the doors is obviously the same as the

capital cost: 35,000

(b) For the annual running costs:

10.89/m2 20 m2 = 218

218 incurred every year for 60 years at 4% discount

= 218 22.6* = 4,927 present value

(c) For maintenance the present cost of 6,040 for new ironmongery andrepainting taking place in, say Year 12 at 4% discount

= 6,040 0.62459** = 3,773

(d) The replacement cost after 40 years

= 35,000 (present cost) 0.20828** = 7,290

The total present value of the capital cost, annual running cost,

maintenance and replacement costs

= 57,037 showing option 1 is the most expensive life cycle cost

* from valuation tables at 2.2.5.7 (years purchase or present value of 1

per period)

**from valuation tables at 2.2.5.7 (present value of 1)


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PROJECT:Life Cycle Model SHEET NUMBER: LCCM5ELEMENT: Internal Doors

Unit: 20 m2

PROJECT LIFE 60 YearsDiscount Rate 4.00% per annum

Discount Rate 4.00% per annum

(Interest Rate (7%), Inflation (3%))

COSTS

OPTION 1

Aluminium Glazed

OPTION 2

Hardwood GlazedVision Panels

OPTION 3

Softwood

OPTION 4

Metal

Finish Life40 Years

Finish Life30 Years

Finish Life20 Years

Finish Life30 Years

MaintenancePeriod4 Years




EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

Capital CostsAluminium Glazed 1750.00 m2 35,000 35,000Hardwood Glazed

Vision Panels 1000.00 m2 20,000 20,000

Softwood 700.00 m2

14,000 14,000Metal 850.00 m2 17,000 17,000Contingency

Total Year 1 Capital Costs 35,000 20,000 14,000 17,000

Annual Running CostsAluminium Glazed 10.89 m2 218 4,927Hardwood GlazedVision Panels 9.99 m2 200 4,520Softwood 5.90 m2 118 2,670Metal 17.99 m2 360 8,140

Total Annual Running Costs 13,068 4,927 11,988 4,520 7,080 2,670 21,588 8,140

Maintenance Year PresentCost

OPTION 1 Repaint 4 340 340 291

Repaint 8 340 340 248New ironmongery

Repaint 12 6,040 6,040 3,773Repaint 16 340 340 182Repaint 20 340 340 155

New ironmongeryRepaint 24 6,040 6,040 2,356Repaint 28 340 340 113Repaint 32 340 340 97


New ironmongeryRepaint 48 6,040 6,040 919Repaint 52 340 340 44

Repaint 56 340 340 38OPTION 2 Repaint 4 300 300 256






17/58

PART2, SECTION2


PROJECT:Life Cycle Model (continued SHEET NUMBER: LCCM5ELEMENT: Internal Doors

Unit: 20 m2

PROJECT LIFE 60 Years



(Interest Rate (7%), Inflation (3%))

COSTS

OPTION 1Aluminium Glazed

OPTION 2Hardwood Glazed

Vision Panels

OPTION 3Softwood

OPTION 4Metal

Finish Life40 Years

Finish Life30 Years

Finish Life20 Years

Finish Life30 Years





EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

Maintenance Year PresentCost

New ironmongeryRepaint 48 6,000 6,000 913Repaint 52 300 300 39

Repaint 56 300 300 33OPTION 3 Repaint 4 320 320 274




New ironmongeryRepaint 36 3,820 3,820 931Repaint 40 320 320 67Repaint 44 320 320 57

New ironmongery

Repaint 48 3,820 3,820 581Repaint 52 320 320 42Repaint 56 320 320 36

OPTION 4 Repaint 4 300 300 256Repaint 8 300 300 219Repaint 12 6,100 6,100 3,810Repaint 16 300 300 160Repaint 20 300 300 137Repaint 24 6,100 6,100 2,380Repaint 28 300 300 100Repaint 32 300 300 86Repaint 36 6,100 6,100 1,486Repaint 40 300 300 62Repaint 44 300 300 53Repaint 48 6,100 6,100 928Repaint 52 300 300 39

Repaint 56 300 300 33Replacement Year Present

Cost6,100 3,810

OPTION 1 40 35,000 35,000 7,290OPTION 2 30 20,000 20,000 6,166OPTION 3 20 14,000 14,000 6,389

40 14,000 14,000 2,916OPTION 4 30 17,000 17,000 5,241

Total Maintenance/Replacement Costs 62,560 17,109 47,000 15,776 46,480 15,917 44,400 14,993

Total Running Costs 75,628 22,037 58,988 20,297 53,560 18,586 65,988 23,132

Total Net Present Value of Life Cycle Costs 57,037 40,297 32,586 40,132


18/58

PART2, SECTION2


2.2.5.2 BUILDINGSERVICESDESIGNOPTION: AIRCONDITIONING ANDUNDERFLOOR

TRUNKING VERSUSHOTWATERHEATING ANDRINGMAINELECTRICS

This example is again provided by Messrs Gardiner & Theobald. The

objective is to evaluate the above options for a building of 3,000 m 2 floor area,

a life of 60 years and a discount rate of 4% (7% interest less 3% inflation). The

information is summarised overleaf with the methodology for the calculation

being exactly as that for the previous example. Any taxation implications are

excluded.


19/58

PART2, SECTION2


Element:ServicesUnit: 3,000 m2

PROJECT LIFE 60 YearsD iscount Rate 4% per annum

Discount Rate 4.00% per annum(Interest Rate (7%), Inflation (3%)

COSTS

OPTION 1Air ConditioningU/Floor Trunking

OPTION 2HW Heating &

Ring Main Electrics

OPTION 3 OPTION 4

Finish Life15 Years

Finish Life25 Years

Finish Life Finish Life



MaintenancePeriodYears

MaintenancePeriodYears

EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

EstimatedCost

PresentValue

Capital Cost

Air Conditioning U/Floor Trunking 250 m2 750,000 750,000

HW Heating & Ring Main Elec tri c 150 m2 450,000 450,000

Contingency 5% 37,500 22,500

Total Year 1 Capital Costs 787,500 472,500

Annual Running Costs

Air Conditioning U/Floor Trunking 25.00 m2 75,000 1,696,762

HW Heating & Ring Main Electric 5.00 m2 15,000 339,352

Total Annual Costs 4,500,000 1,696,762 900,000 339,352

Maintenance Year Present

Cost

OPTION 1 5 5,000 5,000 4,110

Overhall Equipment 10 5,000 5,000 3,378






Overhall Equipment 40 5,000 5,000 1,041Overhall Equipment 45 5,000 5,000 856

Overhall Equipment 50 5,000 5,000 704

Overhall Equipment 55 5,000 5,000 578

OPTION 2 7 2,000 2,000 1,520

Genearl repaint/repair 14 2,000 2,000 1,155

Genearl repaint/repair 21 2,000 2,000 878






OPTION 3

OPTION 4

Replacement Year Present Cost

OPTION 1 15 600,000 600,000 333,159

30 600,000 600,000 184,991

45 600,000 600,000 102,719

OPTION 2 25 300,000 300,000 112,535

50 300,000 300,000 42,214

OPTION 3

OPTION 4

Tota l Maintenance/Replacement C osts 1,855,000 641 ,278 616,000 160,375

Total Running Costs 6,355,000 2,338,040 1,516,000 499,728

Total Net Present Value of Life

Cycle Cost 3,125,540 972,228


20/58

PART2, SECTION2


2.2.5.3 MAINTENANCEOPTION: WITH/WITHOUTCLEANINGGANTRY

This example is kindly provided by Gerald Hall.

The following figure compares two options, firstly to provide the cleaning

gantry and secondly to omit the gantry. The capital cost and costs associated

with anticipated maintenance were calculated by using normal cost estimating

techniques.

Assumed criteria:

Building Life 25 years

VAT assumed to remain at current levels with the client

being an end user under VAT rules 17.5%

Gantry capital cost 30,000 The gantry will have a residual value 2,000

Capital cost for opening lights in lieu of gantry 5,000

Discount rate (assuming the interest rate will average 11%

over 25 years and the inflation rate 6%) 5%

Corporation Tax 33%

Taxation Calculation

The capital cost for plant and machinery receives a 25% reducing balance.

Maintenance and running costs receive 100% allowance.

Year 1 with gantry calculation:

Capital 35,250 25% 33% = 2,908

Maintenance 881 33% = 291

3,199

Year 2 with gantry calculation:

Capital 35,250 less 25% 25% 33% = 2,181

Maintenance 881 33% = 2912,472

The methodology applies for the rest of the 25 years as summarised overleaf.

The client initially considered that the gantry would pay for itself due to

savings in maintenance and cleaning cost.

However:

with gantry investment 36,510 present value

without gantry investment 26,447 present value


21/58

PART2, SECTION2


COMPARATIVECOMPONENTLIFE

CYCLECOSTING

CLIENT:

PROJECTTITLE:RetailDevelopment/ShoppingMall

JOBNO:

OPTION:Cleaningwithgantrycurta

inwallingtonewfacace

Year

Costs

TOTAL

VAT17.5

%

TOTAL

incVAT

Lesstax

allowance

NETTOTAL

Presentvalue

of 1

@5

%

PRESENT

VALUE

CUMULATIVE

PRESENT

VALUE

Capital

Financing

Operation

Maintenance

Occupacy

Disposal/

residualva

lue

Annual

Intermittent

0

30,0

00

30,0

00

5,2

50

35,2

50

0

35,2

50

1.0

00

35,2

50

35,2

50

1

750

750

131

881

3

,199

(2,3

18)

0.9

52

(2,2

07)

33,0

43

2

750

750

131

881

2

,472

(1,5

91)

0.9

07

(1,4

43)

31,6

00

3

750

250

1,0

00

175

1,1

75

2

,024

(849)

0.8

64

(733)

30,8

66

4

750

750

131

881

1

,518

(637)

0.8

23

(524)

30,3

43

5

750

750

131

881

1

,211

(330)

0.7

84

(258)

30,0

84

6

750

1,7

50

2,5

00

438

2,9

38

1

,660

1,2

78

0.7

46

953

31,0

37

7

750

750

131

881

808

73

0.7

11

52

31,0

89

8

750

750

131

881

679

202

0.6

77

137

31,2

26

9

750

250

1,0

00

175

1,1

75

679

496

0.6

45

320

31,5

46

10

750

750

131

881

509

372

0.6

14

229

31,7

75

11

750

750

131

881

454

427

0.5

85

250

32,0

24

12

750

1,7

50

2,5

00

438

2,9

38

1

,092

1,8

46

0.5

57

1,0

28

33,0

52

13

750

750

131

881

383

498

0.5

30

264

33,3

16

14

750

750

131

881

360

521

0.5

05

263

33,5

80

15

750

250

1,0

00

175

1,1

75

440

735

0.4

81

354

33,9

33

16

750

750

131

881

330

551

0.4

58

253

34,1

86

17

750

750

131

881

320

561

0.4

36

245

34,4

31

18

750

1,7

50

2,5

00

438

2,9

38

991

1,9

47

0.4

16

809

35,2

39

19

750

750

131

881

307

574

0.3

96

227

35,4

67

20

750

750

131

881

303

578

0.3

77

218

35,6

85

21

750

250

1,0

00

175

1,1

75

397

778

0.3

59

279

35,9

64

22

750

750

131

881

298

583

0.3

42

199

36,1

63

23

750

750

131

881

296

585

0.3

26

191

36,3

54

24

750

1,7

50

2,5

00

438

2,9

38

973

1,9

65

0.3

10

609

36,9

63

25

750

(2,0

00)

(1,2

50)

131

(1,1

19)

311

(1,4

30)

0.2

95

(422)

36,5

41

TOTALPRESENTVALUEATENDOFINVESTMENTLIFE

36,5

41


22/58

PART2, SECTION2


CO

MPARATIVECOMPONENTLIFE

CYCLECOSTING

(continuationo

ftable

onp

age2

1)

FORE

CASTERSASSUMPTIONS

1

Th

ecapitalcostincludesallowancesfor

preliminariesandassociatedbuilders

work.

2

Detailsofthemaintenancerequirement

sandcostestimatescanbeprovided

up

onrequest.

3

Th

elifecyclecostingisbasedonanagreedinvestmentlifeof25years.

4

ItisassumedthatVATwillremainataro

und17.5%andtheclientistheend

us

erunderVATrules.

5

Th

erearedisposalcostadvantageswiththisoption.

6

Capitalcostasplantandmachinerywith100%taxallowance

i.e.1styear

2,908

7

Maintenanceandrunningcostswith100%allowanceie1styear

291

total

3,199

8

Taxationallowancesaresubjecttonegotiationandagreement.

9

Discountrate:

(i)Interestrate11%averag

eover25years;

(ii)Inflationrate7%averageover25years;

(1+11%)

(1+7%)1100%=5%dis

countrate.


23/58

COMPARATIVECOMPONENTLIFE

CYCLECOSTING

CLIENT:

PROJECTTITLE:RetailDevelopment/ShoppingMall

JOBNO:

OPTION:Cleaningwithgantry

curta

inwallingtonewf

acace

Year

Costs

TOTAL

VAT17.5

%

TOTAL

incVAT

Lesstax

allowance

NETTOTAL

Presentvalue

of 1

@5

%

PRESENT

VALUE

CUMULATIVE

PRESENT

VALUE

Capital

Financing

Operation

Maintenance

Occupacy

Disposal/

residualva

lue

Annual

Intermittent

0

5,0

00

5,0

00

875

5,8

75

0

5,8

75

1.0

00

5.8

75

5,8

75

1

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.9

52

1,1

24

6,9

99

2

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.9

07

1,0

71

8,0

70

3

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.8

64

1,0

20

9,0

90

4

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.8

23

971

10,0

61

5

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.7

84

925

10,9

86

6

1,5

00

1,5

00

3,0

00

263

3,5

25

1

,163

2,3

62

0.7

46

1,7

63

12,7

49

7

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.7

11

839

13,5

87

8

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.6

77

799

14,3

86

9

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.6

45

761

15,1

47

10

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.6

14

725

15,8

72

11

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.5

85

690

16,5

62

12

1,5

00

6,5

00

1,1

38

7,6

38

2

,521

5,1

17

0.5

57

2,8

49

19,4

11

13

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.5

30

626

20,0

37

14

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.5

05

596

20,6

34

15

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.4

81

568

21,2

02

16

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.4

58

541

21,7

42

17

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.4

36

515

22,2

57

18

1,5

00

1,5

00

3,0

00

525

3,5

25

1

,163

2,3

62

0.4

16

981

23,2

39

19

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.3

96

467

23,7

06

20

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.3

77

445

24,1

51

21

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.3

59

424

24,5

75

22

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.3

42

404

24,9

78

23

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.3

26

384

25,3

63

24

1,5

00

1,5

00

3,0

00

263

3,5

25

1

,163

2,3

62

0.3

10

732

26,0

95

25

1,5

00

1,5

00

263

1,7

63

582

1,1

81

0.2

95

349

26,4

44

TOTALPRESENTVALUEATENDOFINVESTMENTLIFE

26,4

44


24/58

PART2, SECTION2


CO

MPARATIVECOMPONENTLIFE

CYCLECOSTING

(continuationo

ftable

onp

age2

3)

FORE

CASTERSASSUMPTIONS

1

Th

ecapitalcostincludesallowancesforopeninglightsnowrequired,without

ca

pitalallowances.

2

Detailsofthemaintenancerequirement

sandcostestimatescanbeprovided

up

onrequest.

3

Th

elifecyclecostingisbasedonanagreedinvestmentlifeof25years.

4

ItisassumedthatVATwillremainataro

und17.5%andtheclientistheend

us

erunderVATrules.

5

Th

erearedisposalcostadvantageswiththisoption.

6

Capitalcostasplantandmachinerywith100%taxallowanceNIL

7

Maintenanceandrunningcostswith100%allowance.

8

Taxationallowancesaresubjecttonegotiationandagreement.

9

Discountrate:

(i)Interestrate11%averag

eover25years;

(ii)Inflationrate7%averageover25years;

(1+11%)

(1+7%)1100%=5%dis

countrate.


25/58

PART2, SECTION2

The SurveyorsConstruction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 25

2.2.5.4 HOUSINGSINKINGFUND(BASED UPON COSTED PLANNED MAINTENANCE)

(a) Background

This example is kindly provided by Ian Sloan of Armour Construction

Consultants.

Housing Associations and Co-operatives in Scotland generally request that

their investment/sinking fund requirements are prepared in accordance with

the Scottish Federation of Housing Associations (SFHA) Planned

Maintenance and Repairs (Revised), Guidance Booklet No 3 published in

January 1997.

There are various ways of presenting the data. One method widely accepted is

shown below, on two spreadsheets, a Planned Maintenance Programme, and a

costedPlanned Maintenance Programme which establishes in this case the

present value of future costs.

The spreadsheets can be fine tuned to meet specific client requirements. In

due course they can be adapted to allow historical information to be fed into

the programme, which then allows actual costs and maintenance periods

incurred to form the basis of the life cycle costs, thereby providing a more

accurate projection.

(b) Brief

The client needed to establish the capital to be invested for a new build

housing project to cover all maintenance and repairs for the next 60 years. The

discount rate is 6%.

An example of the calculation shown overleaf is:

Year 15, total maintenance and repair expenditure at current prices

= 9,013

9,013 0.41726* = 3,761

i.e. 3,761 would have to be invested now for 15 years at 6% compound

interest in order to meet the costs in Year 15 of 9,013. In summary 24,942would have to be invested now at 6% to cover all maintenance and repairs for

the next 60 years.

The data could also be presented as an annual sinking fund e.g. the amount to

be investedfor eachof 15 years at 6% compound interest in order to meet the

costs in Year 15 of 9,013 is:

9,013 0.04296** = 387

* from valuation tables at 2.2.5.7 (present value of 1)

** from valuation tables at 2.2.5.7 (annual sinking fund)


26/58

PART2, SECTION2

Page 26 Part 2, Section 2 (4/99) Effective from 1/6/99 The SurveyorsConstruction Handbook

PLANNEDMAINTENANCEPROGRAMME

KEY

=

Inspec

t/Cons

ider

=

Inspec

tand

Remedy

T=

Testun

til

=

Inspec

t&

EXAMPLE

=

Renewal

/Rep

lacemen

t

=

untilReplacemen

t

replacemen

t

=

Decora

te

DatePrinted

02/12/98

Cumulative

CODE

ELEMENT

SUB-ELEMENT

COMPONENT

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2930

Cost

STRUC-

TURE

1.1

STRUCTURE

1.1.1.Roofs

Timber

0

1.1.2.Floors

Timber

0

1.1.3.Openings

Concrete/Brick

0

1.2

STAIRS

1.2.1.Stairs

Timber

0

1.2.2.Handrailsetc

Timber

0

EXT

FABRIC

2.1

ROOF

2.1.1.RoofTilesetc

ConcreteTiles

0

2.1.2.Flashings

Lead

0

2.1.3.Guttersetc

UPVC

0

2.2

EXTERNALWALLS

2.2.1.Walls

FacingBrick

0

2.2.2.Rendering

0

2.2.3.Ventilation

0

2.3

WINDOWS

2.3.1.WindowOp

Timber/Glass

0

2.3.2.Pointing

0

2.3.3.Painting

0

2.3.4.Ironmongery

0

2.4

EXTERNALDOORS

2.4.1.DoorOperation

Timber/Metal

0

2.4.2.Pointing

0

2.4.3.Painting

0

2.4.4.Ironmongery

0

INT

FABRIC

3.1

INTERNALWALLS

3.1.1.Walls&Opens

Brick/pboard

0

3.1.2.WallTiling

Ceramic

3.2

CEILINGS

3.2.1.Ceilings

Plasterboard

0

3.3

FLOORS

3.3.1.Flooring

Timber/Vinyl

0

3.3.2.Skirtings

Timber

0

3.4

DOORS

3.4.1.DoorOperation

Timber

0

3.4.2.Ironmongery

0

FITTS

FURN

4.1

FITTINGS&FURNISH

4.1.1.KitchenUnits

Units/Worktops

0

4.1.2.Grabrailsetc

0

SERVICES

5.1

SANITARYAPPLIANCES

5.1.1.Sanitaryware

Wcs,b

aths

,whbs

0

5.2

SERVICESEQUIPMENT

5.2.1.Kitchensinks

Stainlesssteel

0

5.3

WATERSUPPLY

5.3.1.Waterstorage

0

5.3.2.

Waterpipesetc

T

T

T

T

T

T

0

5.3.3.

Insulation

0

5.4.1.

INTERNALDRAINAGE

5.4.2.1.Pipes&Fittns

T

T

T

T

T

T

0

5.4.2.

DISPOSALINST

5.4.1.1.

Pipes&Fittns

T

T

T

T

T

T

0

5.5

HEATSOURCE

5.5.1.Radiators/fires

T

T

T

T

0

5.6

HEATSYSTEM

5.6.1.Boilers/equipment

0

5.7

VENTILATION

5.7.1.Fansetc

0


27/58

PART2, SECTION2


PLANNEDMAINTENANCEPROGRAMME

KEY

=

Inspec

t/Cons

ider

=

Inspec

tand

Remedy

T=

Testun

til

=

Inspec

t&

EXAMPLE(Con

tinue

d)

=

Renewal

/Rep

lacemen

t

=

untilReplacemen

t

replacemen

t

=

Decora

te

DatePrinted

02/12/98

Cumulative

CODE

ELEMENT

SUB-ELEMENT

COMPONENT

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2930

Cost

SER-

VICES

5.8

ELECTRICALINST

5.8.1.Powerandlightin

g

0

5.8.2.Switchgear

0

5.8.3.ExternalLighting

CloseLight

0

5.9

GASINSTALLATION

5.9.1.

Equipment&supply

T

T

T

T

T

0

5.10

LIFTINSTALLATION

0

5.11

PROTECTIVEINST

5.11

.1.T

Vsystemetc

T

T

T

0

5.11

.2.S

mokedetectors

0

5.1.2

COMMUNICATION

5.12

.1.D

oorentry

0

5.12

.2Telephones

T

T

T

T

0

EXT

WORKS

6.1.1

LANDSCAPING

6.1.1.1.Roads,footpaths

0

6.1.1.2.Grass/planting

0

6.1.2

BOUNDARIES&

ENCLOSURES

6.1.2.1.

Fencesandgate

s

0

6.1.2.2.

Wallsetc

0

6.1.2.3.

Clothespoles

0

6.2

DRAINAGE

6.2.1.

Pipes&fittings

0

6.2.2.

Manholesetc

0

6.3

EXTERNALSERVICES

6.3.1.

Ducts&cables

0

6.4

OUTBUILDINGS

6.4.1.

Binstores/platts

0

COSTIN,0

00sof

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.00

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.00


28/58


29/58

PART2, SECTION2


PLANN

EDMAINTENANCEPROGRAMME(COSTED)(Con

tinue

d)

EXAMP

LE

DatePrinted

02/12/98

Years

Cumulative

CODE

ELEMENT

SUB-ELEMENT

COMPONENT

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

25

26

27

28

29

30

Cost

SER-

VICES

5.8.2.Switchgear

inc

inc

inc

inc

inc

inc

0

5.8.3.ExternalLighting

CloseLight

inc

100

inc

100

inc

inc

200

5.9

Gasinstallation

5.9.1.

Equipment&supply

25

25

25

25

25

25

150

5.1

0

Liftinstallation

0

5.1

1

Protectiveinst

5.1

1.1.

TVsystemetc

25

150

25

150

25

150

525

5.1

1.2.

Smokedetectors

10

10

10

10

75

10

10

10

10

75

10

10

10

10

75

10

10

101

0

75

10

10

10

10

75

10

10

10

10

75

690

5.1.2

Communication

5.1

2.1.

Doorentry

n/a

n/a

n/a

n/a

n/a

n/an

/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/an/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

0

5.1

2.2.

Telephones

10

10

100

10

10

100

240

0

EXT

WORKS

6.1.1

Landscaping

6.1.1.1.

Roads,

footpath

s

50

50

50

50

50

50

50

50

50

50

50

50

50

50

500

50

50

505

0

50

50

50

50

50

50

50

50

50

50

500

2,4

00

6.1.1.2.

Grass/planting

100

100

100

100

100

1001

00

100

100

100

100

100

100

100

100

100

100

100100

100

100

100

100

100

100

100

100

100

100

750

3,6

50

6.1.2

Boundaries&Enclosures

6.1.2.1.

Fencesandgat

es

10

10

500

10

10

500

10

10

500

10

10

500

10

10

300010

10

5001

0

10

500

10

10

500

10

10

500

10

10

3000

10,2

00

6.1.2.2.

Wallsetc

50

50

50

50

50

50

300

6.1.2.3.

Clothespoles

40

40

40

40

200

40

40

40

40

750

1,2

70

6.2

Drainage

6.2.1.

Pipes&fittings

100

100

100

100

100

500

1,0

00

6.2.2.

Manholesetc

inc

inc

inc

inc

inc

inc

0

6.3

Externalservices

6.3.1.

Ducts&cables

25

25

25

25

25

400

525

6.4

Outbuildings

6.4.1.

Binstores/platts

50

50

50

50

50

500

750

TOTALCOSTPERYEAR

518

5181208518144812085

18518120840685181208518518901351851812085188673104851851812081448518120851851815460

57,9

02

(Yrs1

30)

PRESENTVALUE

489

461101441010828523

44325715227227360024322937612041924231712704308144136298337114251101

96

2692

21241

Yrs1

30)

(atdiscountrateof6%)

RepeatYears

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

484

9

50

51

52

53

54

55

56

57

58

59

6

0(Yrs31

60)

CurrentCostperyr

518

5181208518144812085

18518120840685181208518518901351851812085188673104851851812081448518120851851815460

57902

115804

(Currentcost)

PresentValue

85

80

177

71

188

148

60

57

124

395

48

105

42

40

655

36

33

743

0

471

54

25

24

52

59

20

44

18

17

469

3701

24942

(PresentValue)


30/58

PART2, SECTION2


2.2.5.5 CENTRALISATION OFOFFICESSTUDY

(a) Brief

This example is kindly provided by Gerald Hall.

The client wished to investigate a centralisation (of offices) strategy as a

means to improve business efficiency in an increasingly competitive market.

The offices were originally spread out over three main sites.

Three options were identified:

do nothing, although this would require repair and refurbishment of the

existing offices;

centralise at location A and construct additional new offices;

centralise at location B and construct additional new offices;

(b) Capital Costs

These were calculated using traditional cost estimating and included cyclical

capital costs. The distinction between cyclical capital costs and cyclical

maintenance costs is often vague, those costs in excess of 10,000 are

included in the capital cost element under the assumption they would be part

of the capital cost programme.

Relocation costs (labour and plant required to transport office equipment,

stores, machinery, compound materials and stationery items) are included

under Year 0 on the assumption they would be complete within 12 months and

a contingency for new furniture included.

(c) Revenue Costs

fuel: the energy manager provided existing costs which were used as the

basis for the new proposal;

water costs were excluded (the client was a water company);

maintenance costs under 10,000;

rates were not provided by the client by the deadline and are therefore

excluded;

cleaning costs are based on existing cleaning costs and judgement;

security costs are based on existing security costs and judgement;

operation costs for this client included waste removal, water coolers,sanitary hire, mail collections, fire prevention, telephones, hygiene,

insurances. Again this was based on existing client data plus judgement.

Even with constant staff numbers these costs reduce with centralisation;

staffing costs were excluded as they would remain constant.

(d) Capital Income

Options 2 and 3 will free up existing space for sale and rent which are included

as a deduction against expenditure.

(e) Discount Rates

In accordance with the client guidelines the investment horizon is 40 years and

the discount rate 8%.


31/58

PART2, SECTION2


(f) Tax Implications

Tax allowances have been excluded on the basis that this study is a minor part

of the overall company business and assumptions are not appropriate.

However it is worth noting that:

Value Added Tax on all capital costs would affect the financial benefits

of options 2 and 3 which require considerable capital expenditure;

Capital Allowances would help support options 2 and 3.

(g) Renewal and Refurbishment Costs

General building refurbishment has been allowed in ten-year cycles; electrical

and mechanical plant replaced after 20 years with a refurbishment after ten

years or mid-life; felt roofs replaced after 20 years; profiled metal decking,

windows and doors after 30 years. All costs are calculated using traditionalcost estimating and included as present costs.

(h) Cost Comparison

The detailed calculation is summarised over for option 2 which is the most

cost effective over 40 years.

Year 0 Expenditure Year 40 Net Present Value

Option 1 203,000 1,960,950

Option 2 1,164,900 1,607,896

Option 3 1,262,100 1,843,068

(i) Sensitivity Analysis

An analysis of different discount rates and time frame confirm option 2 as the

most favourable.

Discount Life Cycle Option 1 Option 2 Option 3

Rates

6% 0 287,900 1,164,900 1,262,100

6% 20 1,859,000 1,593,000 1,826,1006% 40 2,444,420 1,762,522 2,047,091

8% 0 287,900 1,164,900 1,262,1008% 20 1,614,000 1,515,000 1,721,100

8% 40 1,960,950 1,607,896 1,843,068

10% 0 287,900 1,164,900 1,262,100

10% 20 1,423,000 1,451,000 1,638,10010% 40 1,632,562 1,506,721 1,709,146


32/58

PART2, SECTION2


CLIENT

WATERCOMPANYLIMITED

JOBTITLE

CENTRALISATIONOFAREAOFFICESTUDY

JOBNO

3985

DATE

29thMARCH1996

YEAR(SEPT1996)

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

TotalValue

000

000

Capi

talCos

ts Building

Wor

ks

1176

0

0

0

0

0

0

0

0

0

190

0

0

0

0

0

0

0

0

0

300

0

0

0

0

0

0

0

0

0

393

0

0

0

0

0

0

0

0

0

310

2,369

Reloca

tion

Costs

15.5

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

16

Furn

iture

8.5

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

9

Value

1200

0

0

0

0

0

0

0

0

0

190

0

0

0

0

0

0

0

0

0

300

0

0

0

0

0

0

0

0

0

393

0

0

0

0

0

0

0

0

0

310

2,393

Capi

talIncome A

nnua

lRen

tal

-7.5

-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5

-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5

-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5

-7.5

-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5

-7.5

-308

Land

Sale

-55

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

-55

Value-6

2.5

-7.5

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8

-8-8

-8

-363

Revenue

Costs

Fuel

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.41.4

1.4

57

Water

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Maintenance

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

12

1212

12

492

Rates

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Cleaning

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.7

1.71.7

1.7

70

Security

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.1

7.17.1

7.1

291

Operat

ion

Costs

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.2

5.25.2

5.2

213

Staf

fCos

ts

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Value

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.427.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

27.4

1,123

Net

Cash

Flow

1164

.9

19.9

19.9

19.9

19.9

19.9

19.9

19.919.9

19.9

209.919.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9

319.919.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9

412.919.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9

19.9329.9

0

Presen

tValueof

1@

8%

1

0.930.860.790.740.680.630.5

80.54

0.5

0.460.43

0.40.370.340.320.290.270.250.23

0.21

0.20.180.170.160.150.140.130.12

0.11

0.10.090.090.080.070.070.060.060.050.05

0.05

NETPRES

ENTVALUE

1165

18

17

16

15

14

13

12

11

10

97

9

8

7

7

6

6

5

5

5

69

4

4

3

3

3

3

2

2

2

41

2

2

2

1

1

1

1

1

1

15

1608

EXPENDIT

URE

NVP=1,607,896


33/58

PART2, SECTION2


2.2.5.6 TOTALBUILDINGOPTION: DEMOLISH ANDREBUILD VERSUSREFURBISHMENT

(a) Brief

The life cycle cost appraisal is to evaluate the life cycle cost effects of the

following options:

demolish existing building and rebuild to the clients specific

requirements incorporatingall-airair conditioning systems;

refurbish the existing building to meet, as far as practicable, the clients

requirements, re-using existing systems wherever possible.

The appraisal is to include all taxation implications for comparative purposes.

VAT is to be included as the client is VAT-exempt.

The following costs are to be excluded:

costs associated with the purchase of land;

financing charges associated with the redevelopment;

costs associated with the removal and temporary re-housing of staff

during the construction period;

occupancy costs;

residual values of land or buildings.

(b) Discount Rate

The building is in owner-occupation and the clients accountants have advised

the use of a long-term government stock interest rate of 7%.

The client has been advised that an inflation rate of 3% is a reasonable

assessment.

The discount rate calculation is as follows

[(1.07)1] 100 = 3.88%

[(1.03)1]

The client has agreed that the discount rate can be rounded to 4%.

(c) Building Life

It has been agreed with the client to use a 20-year life cycle.

(d) Description of Existing Building

Late 1950s office block of multi-storey framed construction with curtain wall

cladding to front and rear. Solid party walls to both sides. Single-storey

concrete basement.

(e) Description of Existing Engineering Services

Gas-fired low pressure hot water boiler situated in basement serving perimeter

convector system with warm air ventilation to central parts of the

Documents

part 2 section 2