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INTRODUCTION

Public buildings are assets needed to serve government purposes. The public is called upon to invest in these assets and pay the costs of their upkeep. Minimizing the total costs of ownership1 is the most efficient use of the public's resources to obtain the services these assets provide. Overcoming the economic, technical, and political obstacles to meaningful control of the total costs of public buildings will enhance productivity and the public's return on its investment.

Agencies' managers generally recognize the need for facilities that serve efficiently the purposes of government and seek ways to overcome obstacles to effective cost management. The sponsors of the Federal Construction Council (FCC)2 asked the Building Research Board (BRB) to undertake a study of the use of life-cycle cost analysis—a formal set of principles and procedures for considering total costs of ownership—for setting building design criteria. This document is the final report of that study.

1  

Italicized terms are defined in Appendix A.

2  

This study was requested and sponsored by the FCC, a group of 16 federal agencies with responsibilities and interests in construction and building research. These agencies have annual construction budgets totaling more than $7 billion.



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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings 1 INTRODUCTION Public buildings are assets needed to serve government purposes. The public is called upon to invest in these assets and pay the costs of their upkeep. Minimizing the total costs of ownership1 is the most efficient use of the public's resources to obtain the services these assets provide. Overcoming the economic, technical, and political obstacles to meaningful control of the total costs of public buildings will enhance productivity and the public's return on its investment. Agencies' managers generally recognize the need for facilities that serve efficiently the purposes of government and seek ways to overcome obstacles to effective cost management. The sponsors of the Federal Construction Council (FCC)2 asked the Building Research Board (BRB) to undertake a study of the use of life-cycle cost analysis—a formal set of principles and procedures for considering total costs of ownership—for setting building design criteria. This document is the final report of that study. 1   Italicized terms are defined in Appendix A. 2   This study was requested and sponsored by the FCC, a group of 16 federal agencies with responsibilities and interests in construction and building research. These agencies have annual construction budgets totaling more than $7 billion.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings The BRB established a committee3 of experts with broad expertise and experience to undertake this study and to recommend how agencies could improve their current practices. Meeting over the course of approximately 1 year, committee members discussed a variety of complex technical and management issues, drawing on their experience to assess the current state of knowledge and make the recommendations presented here. The committee's work was motivated by federal agencies, but the topic of study is relevant to architects and engineers, owners, and managers of all government buildings and other constructed facilities. To the extent that facilities are built and used by the same institution, the same concerns apply in the private sector as well. Buildings are an investment in the future, and substantial expenditures of funds for design and construction are made by a building's owner in anticipation of the shelter and services the building will provide to the people and activities it will house. Structures around the world demonstrate that the returns on such investment may continue for hundreds of years. Some public facilities provide centuries of service. West Front of the U.S. Capitol (Photo courtesy of Amman & Whitney) 3   Biographical sketches of the committee's members are presented in Appendix B.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings These returns are seldom achieved without continuing effort. Owners must make expenditures for labor and materials to operate and maintain a building, expenditures that continue until the building is demolished or abandoned. Structures around the world also demonstrate that failure to make these expenditures effectively can lead to premature deterioration or loss of services and damage to the facility, expose occupants to unsafe and unhealthy conditions, and impose additional costs on the building's users. Some materials and building systems are particularly durable and repay their higher initial costs with savings in future operating and maintenance (O&M) expenditures. Other materials or systems may be selected because their lower initial costs meet the limits of available construction budgets and, with proper use, are likely to deliver satisfactory service. Some design choices raise the cost of construction, operations, or both but also increase the service productivity or revenue received from the completed building. Designers and owners of buildings often recognize that there are such choices and trade-offs between initial construction costs and recurring O&M costs and that decisions about a building's design, construction, operation, and maintenance can be made—in principle—so that the building performs well over a specified period of time and the total of all costs incurred over that period will be minimized. 4 In practice, defining the design options and operating strategies that will lead to the lowest life-cycle cost is difficult and subject to uncertainties. The behavior of materials, and mechanical and electrical systems must be forecasted, along with the likely uses of the building and the environmental conditions to which it may be exposed. Financial and economic assumptions and the period of time over which the analysis is made will influence the results. Analysts have devised a variety of ways to deal with these uncertainties. However, a variety of factors may subvert effective action. Sometimes budget constraints impose pressures to reduce construction costs and lead in turn to design choices that raise O&M requirements. Similar pressures in the planning and design stages may underlie neglect to perform analyses and reduced effort to develop feasible alternatives that would save money in the long run. Sometimes O&M efforts may not achieve results envisioned in design because of later budgetary pressures, lack of staff understanding of the designer's intent, poor information, or human error. Fires, earthquakes, 4   This report is oriented primarily toward public facilities and gives only limited attention to the revenue-producing possibilities of facilities. The committee assumed that net revenues in excess of costs—that is, positive returns on the government's investment in facilities—are best attributed to the functional program or mission the facility supports. That is, the government does not undertake real estate development or facilities management as a business proposition, although the committee noted cases where agencies (e.g., the Postal Service and General Services Administration) are being encouraged to act as commercial developers.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings violent storms, or other unusual events may damage facilities. Unanticipated use of the building, changes of ownership, or financial conditions may alter the strategy that would minimize life-cycle cost. Because of these factors, facilities designers, builders, owners, and managers must continue working to control total costs of ownership throughout a facility's service life. Life-cycle cost analysis is typically used in planning and design, but the committee found that other opportunities for using life-cycle cost analysis lie beyond these early stages. The committee found, however, that the most difficult obstacles to controlling total costs of ownership are those raised by administrative procedures and managerial or political decisions driven by short-term gains. Budgeting processes that divorce capital and operating expenditures make it difficult to identify and manage total costs of ownership. Their limited tenure may encourage senior managers and elected officials to value immediate results over long-run efficiencies. Competing public demands for government action may push these officials to shift resources away from facilities needs and toward those issues that attract strong constituencies. These obstacles impose cost burdens on the public and must be overcome if the greatest return on the public's assets is to be achieved. The following chapters present the committee's assessment of the problems that federal agencies and others encounter in trying to construct buildings that yield effective service at low ownership costs and how life-cycle cost analysis may be used to help solve these problems. Chapter 2 briefly describes the underlying principles of life-cycle cost analysis as they relate to the real problems faced by facilities, designers and managers. Chapter 3 considers the substantial obstacles to effective application of the principles of life-cycle cost management in the institutional environment within which government agencies must operate. Chapter 4 reviews how government agencies are attempting to achieve life-cycle cost management and how lessons learned in highway pavement and bridge management could improve control of life-cycle cost of buildings. Chapter 5 presents the committee's recommendations for long-term and immediately implementable actions that federal agencies can take to achieve better control of life-cycle costs of their facilities. Several appendixes present additional background information: a glossary of terms (Appendix A), a brief review of the economic principles and procedures of life-cycle cost analysis (Appendix C), and a preliminary listing of the types of questions and decisions that a building life-cycle cost management system should be designed to address (Appendix D). This report is not intended to be a comprehensive discussion of the principles and state of the art of life-cycle cost analysis but rather a presentation of the reasoned views of a committee asked to give advice about a technical matter within the decidedly nontechnical context of how government facilities are planned, designed, constructed, operated, and, most importantly, used by people serving the ends of government.