CONSTRUCTION ECONOMICS

IS BUILDING IS AN ASSET?

As we know people need building as their basic need. Mainly, the purpose of a building is to shelter. The basic function of a building is to provide structurally sound and environmentally controlled spaces and protect occupants and contents from the elements of nature such as rain, snow and wildlife. Physical of building life starts with a build or construct, occupy, maintain, refurbish and after 50-60 years the building will be demolished. According to (Donnelly, 2015), the average life span of a conventionally built building (masonry and wood) is about 120 years. But for modernist buildings (reinforced concrete and glass curtain wall) it’s half that: 60 years.

Figure 1 shows the physical building life

A building can be one of the asset property for the owner. Therefore, it is important to know the asset life cycle. The processes involved throughout the life span of an asset including design, commissioning, operating, maintaining, repairing, modifying, replacing and disposal as shown in Figure 2.

Figure 2 shows the process of the life span of an asset

LIFE CYCLE COST 

This is the cost of an asset, or its part throughout its cycle life while fulfilling the performance requirements. There are different terms used in the literature today such as “cost in use”, “life cycle costs(LCC)”, “whole life costing (WLC)” and “whole life appraisal (WLA)” (Flanagan & Jewell, 2005).

Life cycle cost in construction projects is a process of economic decision analysis, which helps taking decisions on investments in new construction. These decisions on investments are analysed for the payback over the life of the investment. The life cycle costing technique helps to reduce the overall cost of a project by selecting best alternative designs and components to minimize the cost not only at the time of construction but also the over the full life of the project (Mishra, 2014). The life cycle cost approach should be adopted during the following stage:

Figure 3 shows the stage of LCC approach

For the design stage, the designer should evaluate various option in the design in order to access their economic impact throughout the project’s life. Next, under contractual and procurement arrangements, manufacturers and suppliers are encouraged to supply good materials and components which ensure the lowest initial cost irrespective of their future cost in use. For the main stage which is known as the construction stage, the contractor can benefit from adopting a life cycle costing approach to the purchase, lease or hire of the construction plant and equipment. Professional input to the scrutiny of the design by construction manager in the context of manufacture and construction in the way that the project will assemble at site. Last but not least, this stage will review the cost attribute to maintenance at a frequent interval. 

According to (Mishra, 2014), the life cycle costing simply does not consider the least cost of construction, but it considers a mechanism to determine which alternatives offer the largest economic advantage by considering costs and benefit that occur throughout the life of the project from the initial concept of the project to its construction and its useful life to the time it is ready for replacement. It helps the project designers to select the best alternative for the given project.

Figure 4 shows the LCC of construction projects

Based on Figure 4, we can see that the life cycle cost of construction starts with resource extraction, manufacturing, on-site construction, occupancy and maintenance, demolition and lastly recycling. Project designers will use the best alternative in every stage. For instance, the maintenance cost of the services, the designer will choose the suitable services that suit the use of the building with affordable maintenance fees. They will compare the services before they decide which services they will use. For instance, air-conditioning A have a higher initial cost but lower in running cost which is the maintenance cost. But air-conditioning B has a lower initial cost but higher in maintenance cost. These elements need to be considered by the designers. Even though the initial price is a bit pricey and the maintenance cost is lower for air-conditioning A. But they need to calculate in 10 years later. Is it the same with the air-conditioning B price in a total of the overall cost (Figure 5) for 10 years? May refer to example 3.

By comparing the life cycle costs of various design configurations, LCC 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 “payback” 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.

Figure 5 shows the breakdown of total costs

INDICATOR ESTIMATING ANALYSIS IN LCC

There is 4 indicator estimating analysis in LCC. It applying “Method of Valuation” which are Net Present Value (NPV), Amount of RM1 Table (A), Amount of RM1 Per Annum Table (PV) and Present Value of RM1 Per Annum or Year Purchase Table Method of Valuation (YP). These 4 indicators LCC estimating are based on Method of Valuation in Estate Management Field.

• NPV is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present.
•  PV is the present value of RM1 shows how much should be invested today to get the value of RM1 at the end of n years at an interest rate of i per cent per annum.
• Amount of RM1 Table is total capital at the end of the period of n years if invested at an interest rate i per cent per annum in the initial year.
• YP is the present value of RM1 per year (Buy Year) shows the present value of RM1 per annum for n years with interest rate i% per annum.

Example 1

Example 1 shows the capital must be invested today to get the amount of capital in 8 years at some amount of interest.

EXAMPLES 2:

Example 2

Example 2 shows the present value of the expenditure based on some amount of interest. The client spends RM87,000.00 each year for the maintenance cost for 8 years. So, at 8.7% of interest, the present value of expenditure will be RM486.939.

EXAMPLES 3: 

Information for example 3

Based on the information given, in considering the choice for two (2) types of air conditioning for an office building. The contractor is required to analyze and recommend the most appropriates air conditioning for an office building.

Example 3

Based on the comparison, I as the contractor would choose type A. Even though the grand total of the type A is a bit higher than B but it is consisting of maintenance cost. Maintenance plays a vital role for the air-conditioning system in office building as it will operate every day and it will achieve human comfort. The maintenance cost for every 4 years also a bit affordable. Besides, the initial cost for type A is affordable compared to type B.

List of references:

1. Life-Cycle Cost Analysis (LCCA) | WBDG - Whole Building Design Guide. (n.d.). Retrieved July 13, 2020, from https://www.wbdg.org/resources/life-cycle-cost-analysis-lcca
2. Life Cycle Cost in Construction Projects and Time Value of Money. (n.d.). Retrieved July 13, 2020, from https://theconstructor.org/construction/life-cycle-cost-in-construction-projects/8632/
3. The life expectancy of buildings |. (n.d.). Retrieved July 13, 2020, from https://brandondonnelly.com/2015/09/06/the-life-expectancy-of-buildings/
4. Lecture notes by Dr. Wan Suhaila (LIFE CYCLE COST)