3
OBSTACLES TO LIFE-CYCLE COST CONTROL

The idea that life-cycle costs can be controlled and minimized has wide appeal, but life-cycle cost analysis has not been consistently applied in the design and management of buildings. A variety of factors associated with the methodology limit acceptance and practical application of the principles and procedures of analysis.

DATA AND PROCEDURAL OBSTACLES

The analysis procedures themselves present a number of problems that discourage use of life-cycle cost. One of the most difficult problems is the shortage of reliable information on historical costs and performance, which is needed for accurate estimation of costs.

First, buildings are dissimilar, located in different areas, built at different times, and operated by a variety of owners and their agents. Cost data are therefore difficult to collect and analyze. Second, there is no institutional mechanism—beyond the federal government and federal buildings—for pulling together data from many sources. 14 Third, accounting systems used by

14  

Organizations such as the Building Owners and Managers Association and the American Society for Heating, Refrigerating, and Air-Conditioning Engineers assemble data on aggregate operating costs of major types of buildings or major building subsystems. The U.S. Army Corps of Engineers Construction Engineering Research Laboratory's past efforts to assemble such



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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings 3 OBSTACLES TO LIFE-CYCLE COST CONTROL The idea that life-cycle costs can be controlled and minimized has wide appeal, but life-cycle cost analysis has not been consistently applied in the design and management of buildings. A variety of factors associated with the methodology limit acceptance and practical application of the principles and procedures of analysis. DATA AND PROCEDURAL OBSTACLES The analysis procedures themselves present a number of problems that discourage use of life-cycle cost. One of the most difficult problems is the shortage of reliable information on historical costs and performance, which is needed for accurate estimation of costs. First, buildings are dissimilar, located in different areas, built at different times, and operated by a variety of owners and their agents. Cost data are therefore difficult to collect and analyze. Second, there is no institutional mechanism—beyond the federal government and federal buildings—for pulling together data from many sources. 14 Third, accounting systems used by 14   Organizations such as the Building Owners and Managers Association and the American Society for Heating, Refrigerating, and Air-Conditioning Engineers assemble data on aggregate operating costs of major types of buildings or major building subsystems. The U.S. Army Corps of Engineers Construction Engineering Research Laboratory's past efforts to assemble such

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings building managers and contractors seldom make it possible to identify accurately the costs of maintenance and repair of specific components (e.g., the roof) of single buildings. Another problem with analysis procedures, closely associated with lack of information is the uncertainty inherent in any forecast of future costs and performance. How a building and its functional subsystems behave—over the course of a 25-to 30-year service life—depends on the building's design and construction, the weather, the buildings' users and operators, and variations in materials. Predictions can be made only in probabilistic terms, and the chances of being right are greater when data upon which to base the predictions are adequate, valid, and timely. If data are lacking and the chances of being wrong are consequently large, life-cycle cost estimates cannot contribute most, effectively to improving the chances of making good design and operations decisions. A third problem is that the assumptions reflected in selection of parameters used in the life-cycle cost analysis—such as economic life and discount rate—may or may not reflect well the conditions that actually occur in the future. The results of the life-cycle cost analysis depend on these assumptions, and different assumptions could indicate that a different course of action should be taken. (See box.) Outguessing the Future "Sensitivity analysis" is the term used to refer to asking "what if . . ." questions about life-cycle costs. "What if electric power costs double; would we still be better off using heat pumps?" ''If the roof that uses a low-maintenance but somewhat more expensive new material must be replaced after only 10 years rather than 15, is the extra construction cost still justified?" Mathematicians, economists, and other speak of a "robust" solution as one that remains the best answer when the assumptions change. Life-cycle cost analysis should be used to help develop robust designs and operating strategies—ones that are likely to be an efficient use of the owner's limited resources for any reasonably likely future conditions. Finally, the level of effort required in analysis increases rapidly as the number and range of alternatives increase. The ability of an analyst to find a lower life-cycle cost alternative is limited by the funds and time available for analysis. INSTITUTIONAL OBSTACLES The institutional context of building design and operating decision making raises substantial obstacles to the use of life-cycle cost analysis to successfully manage the costs of ownership. Some of these obstacles arise from the unique     data underlie life-cycle cost analysis models now being developed.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings conditions of decision making in the public sector, while others are common to both private and public sectors. First, changes in a building's use, commercialization of new technology, and external economic forces or government policies may alter radically the future conditions that a building faces. In such cases a revised life-cycle cost analysis might indicate that different design or operating decisions would have been preferred. Sometimes a building may be sold or demolished and replaced with a more appropriate facility, and it may seem that the effort required to conduct life-cycle cost analysis was wasted. Some critics use such reasoning to argue that there is not enough time, money, or trained people to perform life-cycle cost analysis on a routine basis. When funds are available only for certain types of cost and not for others (e.g., for new construction but not for maintenance), or when government policies intended to achieve ends unrelated to the facility encourage the use of certain technologies or design options, an agency's decisions may not be made to minimize life-cycle costs of ownership. For example, a local or state government using funding available from a higher-level government agency to construct a public facility may seek to maximize construction costs in order to save on its own future maintenance expenses. Programs to foster energy savings or enhancement of educational facilities may encourage replacement or renovation of heating systems or school buildings sooner than would otherwise have occurred. In these cases the energy efficiency or modern schools may be purchased at higher total life-cycle costs than would otherwise have been necessary. Most facilities have long service lives compared to the lifetime of agency missions and legislated programs. This makes it inevitable that these facilities will encounter changes in use or introduction of new technologies. When changes occur, investments made in a building to save on future costs may appear, in hindsight, to have been wasted. This appearance then is seen by some as a basic flaw in life-cycle cost analysis. The problem may be more acutely felt in the public sector because government cannot easily realize the benefits of historic value, prime location, or architectural merit that may bring higher rents and offset costs in the private sector.15 The failure of many jurisdictions to link capital and operating expenditures within a multiyear budgeting framework also poses an obstacle to life-cycle cost control. Legislative bodies sometimes seem unaware (or disinclined to acknowledge) that authorization to construct a facility commits the jurisdiction to many years of operations and maintenance (O&M) expenditures and that reductions in initial costs may raise future expenses. Total life-cycle costs may then be higher than might have been necessary because no provision is 15   The National Aeronautics and Space Administration faces an extreme example of this problem when it must construct complex and specialized facilities to house new space missions. The agency sometimes makes design choices aimed specifically at achieving a limited service life, matched to its current mission.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings made in the budgeting and appropriations process for these future expenses or for initial spending to minimize them. A more general obstacle is the desire of many decision makers to minimize their initial investment in a building. This desire may spring from an effort to increase return on investment, to meet budgetary restrictions, or both. Because the relationships of design choices and O&M costs are poorly documented, and also because O&M costs are problems for the future, it is often difficult for designers to argue persuasively in favor of designs that will raise today's construction costs to achieve lower O&M costs tomorrow, even if total life-cycle costs can be lowered. Durability and low maintenance costs have characterized Washington's Dulles International Airport. (Photo courtesy of Ammann & Whitney) Federal agencies may encounter this obstacle with particular frequency because of the way in which value engineering is practiced and applied in construction contracts. Contractors are often encouraged to review a building's design and propose ways to reduce costs with no loss of conformance to agency design criteria. The successful contractor is compensated for his or her effort by a sharing of apparent savings. 16 16   For example, the contractor may receive 30 percent of the reduction in the contract cost attributed to the value engineering changes.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings Contractors typically have no interest in a building's O&M activities and little concern for their future costs. It is the agency's and designer's responsibility to demonstrate that apparent savings in construction cost will be more than offset by increased O&M effort. When agencies are faced with severe budgetary pressures, it becomes increasingly difficult to hold firmly to design decisions that are not supported by solid technical data and guaranteed future savings. MANAGEMENT OBSTACLES Once a particular design or operating strategy has been selected—with its anticipated life-cycle costs—there are management obstacles that may lead to growth of ownership costs during the facility's service life. Some of these obstacles arise from a failure to maintain management commitment to the course of action implied in the initial strategic decision. (See box next page.) Probably the most serious of these obstacles is the tendency toward deferral of maintenance efforts, which leads to premature deterioration and failure of building components, accelerating increases in costs for repair or renewal, and potential threats to safety and health. Because the relationships of maintenance effort to building performance and other costs of ownership are often difficult to demonstrate, professionals responsible for O&M activity often find their budgets to be below what they feel are adequate levels.17 Further, government agencies typically maintain a strict separation of responsibilities and budgets for construction versus operations and maintenance, so that managers responsible for one activity have little incentive to use their own resources to achieve savings in the other area.18 Another serious obstacle is the lack of accepted industry standards for describing operational performance of all building components. The committee noted that there is relatively little feedback of information from buildings in service to new designs, which might yield a reliable basis for estimating how maintenance effort influences service life of many building components. The consensus-of-experience basis of the great majority of design criteria used in building does not typically consider life-cycle performance, and one review of the situation identified only a single criteria-developing organization that does 17   Another committee of the Building Research Board (BRB) asserted that, in the absence of better information, annual facilities maintenance expenditures should be budgeted at 2 to 4 percent of current facilities replacement cost to avoid growth of a backlog of maintenance requirements (BRB, 1990). 18   Several members of the committee observed that federal agencies may be better than most state or municipal government agencies in overcoming this obstacle but that it does exist at the federal level.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings Politics, Management Psychology and Failure of Life-Cycle Cost Practical achievement the low life-cycle cost by balancing expenditures for construction, operation, and maintenance often fails in the face of political reality and the motivations of those who control the budgets. "If it ain't broke, don't fix it" is one management principle that leads to the failure. New York City "saved" millions of dollars over a period of years by neglecting maintenance of its highway bridges, until resulting structural deterioration forced closure of the Williamsburg Bridge and disrupted of commuters and businesses. Part of the reason for neglect was that the city pays most of the cost maintenance while state and federal funds were available for a large proportion of major new construction and reconstruction. Another source of failure to achieve low life-cycle cost is the argument that it makes sense to neglect regular maintenance, accept the deterioration of the faciltity's performance, and in a few years rehabilitate to fix the problems. This argument neglects the adverse influence that deteriorating facilities can have on the productivity of those who use the facilities. Data to demonstrate this influence are sparse but striking: Economist studying irrigation in Pakistan found that moderate increases in maintenance spending (about 10 percent) had substantial net benefit in increased agricultural production in the irrigated areas. Others studying the consequences of "building-related illness" (e.g., respiratory and stress-related problems) estimate that billions of dollars may be the lost in absenteeism and lost productivity by U.S. business due to poor maintenance or efforts to save energy costs through performance of heating and air conditioning systems. Finally, there is the inevitable preference of those in authority for new construction over maintenance, a preference that has some sound theoretical bases. Given a choice between a durable, long-lived project and one designed for earlier rehabilitation, economic analysis shows that voters, politicians, and senior managers appreciate that the durable investment commits the government more firmly to a course of action that the proponents find desirable. Planning for higher maintenance effort or early rehabilitation gives opportunities for future voters or managers to alter this commitment, while the added expense of extending the commitment through marginally greater first costs relatively inconsequential, once the basic decision to build has been made. (Source: M. A. Chaudhry and M. Ali, "Economic Returns to Operation and Maintenance Expenditure in Different Components of the Irrigation System in Pakistan", ODI/IIMI Irrigation Management Network Paper 89/1d, Overseas Development Institute London, June 1989; J. E. Woods, "Cost Avoidance and Productivity in Owning and Operating Buildings,'' in Occupational Medicine. State of the Art Reviews, Vol. 4, No. 4, Hanley & Belfus, Philadelphia, Oct.–Dec. 1989; A. Glazer, "Politics and the Choice of Durability," The American Economic Review, Vol. 79, No. 5, December 1989). so.19 Designers and professionals responsible for adopting design criteria thus must effectively break new ground to set generic criteria to foster lower life-cycle costs. 19   The American Society for Heating, Refrigerating, and Air Conditioning Engineers Standard 90.2, "Energy Efficient Design of New Low-Rise Residential Buildings," specifies insulation values for the envelope of a building. Development of this standard required several years (Underwood, 1988).

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings References BRB (Building Research Board), 1990, Committing to the Costs of Ownership: Maintenance and Repair of Public Buildings, National Academy Press, Washington, D.C. 1990. Underwood, J. M., 1988, Use of Life-Cycle Costing in the Development of Standards, masters thesis, Naval Postgraduate School, Monterey, Calif., December.

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