5
CONTROLLING LIFE-CYCLE COSTS OF OWNERSHIP

The preceding chapters have discussed a variety of general technical, institutional, and management factors and specific government practices that pose serious obstacles to effective life-cycle cost control. A strong and long-term commitment will be required to overcome these obstacles. This long-term commitment will be built through research and development, and professional education and training and by specific actions that each responsible agency can take.

The committee believes that commitment to life-cycle cost management begins with an understanding that a building's life-cycle is not strictly a series of sequential stages of planning, design, construction, and use. Changes in agency mission, new technology, and random events may define an economic life and lead to substantial new construction or changes in O&M requirements throughout a longer service life. The basic structure of the building may have, in effect, an indefinite service life, while such subsystems as roofs, mechanical equipment, electrical components, plumbing, and interiors may undergo frequent changes and replacements. Life-cycle cost analyses are most frequently used during the planning and preliminary design stages of a project—at the beginning of the project's economic life—but can be used throughout the life-cycle to direct operating and major repair decisions.

The committee's recommendations therefore deal with all aspects of the life-cycle. However, the committee recognizes that the commitment required for effective life-cycle cost management will be difficult to achieve. In the near term, setting guide criteria used in planning and design to limit life-cycle costs may be the only effective tool available to agency professionals.



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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings 5 CONTROLLING LIFE-CYCLE COSTS OF OWNERSHIP The preceding chapters have discussed a variety of general technical, institutional, and management factors and specific government practices that pose serious obstacles to effective life-cycle cost control. A strong and long-term commitment will be required to overcome these obstacles. This long-term commitment will be built through research and development, and professional education and training and by specific actions that each responsible agency can take. The committee believes that commitment to life-cycle cost management begins with an understanding that a building's life-cycle is not strictly a series of sequential stages of planning, design, construction, and use. Changes in agency mission, new technology, and random events may define an economic life and lead to substantial new construction or changes in O&M requirements throughout a longer service life. The basic structure of the building may have, in effect, an indefinite service life, while such subsystems as roofs, mechanical equipment, electrical components, plumbing, and interiors may undergo frequent changes and replacements. Life-cycle cost analyses are most frequently used during the planning and preliminary design stages of a project—at the beginning of the project's economic life—but can be used throughout the life-cycle to direct operating and major repair decisions. The committee's recommendations therefore deal with all aspects of the life-cycle. However, the committee recognizes that the commitment required for effective life-cycle cost management will be difficult to achieve. In the near term, setting guide criteria used in planning and design to limit life-cycle costs may be the only effective tool available to agency professionals.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings USING GUIDE CRITERIA32TO ACHIEVE LIFE-CYCLE COST CONTROL The life-cycle costs or future performance of some types of buildings are particularly sensitive to maintenance activities, environmental conditions (e.g., weather), or conditions of use. For example, a leaking roof on a building housing sensitive and costly electronic equipment may have more serious consequences than if the roof were sheltering a bulk storage warehouse. Similarly, neglect of caulking repair and consequent increases in energy use for heating a residential facility located in a temperate climate are likely to be less costly than such neglect would be in a subarctic setting. Failure to effectively execute the O&M practices implicit in design can sharply increase the costs of ownership or drastically reduce the facility's life-cycle performance. In view of the substantial institutional and management obstacles discussed in Chapters 3 and 4, the committee acknowledges that government agencies may justifiably set their guide criteria to reduce the needs for future maintenance or repair actions to avoid the risk of substantial growth in costs of ownership when these actions are not taken. However, the committee notes again that setting such criteria is likely to increase the total costs of ownership, compared to levels anticipated with effective life-cycle management. The committee therefore recommends that guide criteria not determined by requirements for life safety, public health, or mission success should be changed on a case-by-case basis, when such change is shown by life-cycle cost analyses to produce savings or to increase certainty that costs can be controlled throughout the service life. An anticipated increase in life-cycle cost to improve the certainty that future costs will be controllable (i.e., that projected life-cycle costs will be realized and not exceeded) will thereby be made a recognized factor in management decision making. The process of choosing to invest more in design and construction to enhance future control is, in turn, consistent with the committee's recommendations for broader action to control the cost of ownership throughout a building's service life. RECOMMENDATIONS FOR BROADER ACTION Minimizing life-cycle cost is the most efficient use of resources to achieve facilities needed to support agency missions and the public interest. The benefits of protection and improved productivity of the public's assets warrant the strong measures needed to overcome the obstacles to effective life-cycle cost management. 32   ''Guide criteria" is the term used by many federal agencies to describe their basic facilities requirements. In the private sector, equivalent requirements are typically found in local building codes and manuals of standard practices.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings Life-Cycle Cost Management as a Basic Policy Each agency should formally recognize life-cycle cost management as a basic and essential element of the agency's operating policies. All decisions about facilities must be made within the context of unavoidable uncertainties in what the future agency mission may be and inevitable limitations on capital and operating budgets. The future is unknown and agency missions may change. It may therefore seem impossible to achieve meaningful long-term control of costs of ownership throughout a facility's life-cycle. However, these uncertainties can be explicitly recognized. Applying the principles of life-cycle cost analysis and management with this recognition will improve both the quality of decision making and the efficiency of resource use. (See box.) Emphasis can be given to this policy by incorporating life-cycle costs and performance into federal design awards programs. Awards for facilities that have delivered 5 to 10 years of appropriate performance at low cost should recognize the entire life-cycle management team--planners, designers, constructors, and O&M personnel. These awards also will establish incentives for data collection to document life-cycle costs. As guidance to planners and designers who must conduct life-cycle cost analyses and make recommendations to decision makers, agencies should prepare annually updated assessments of the uncertainties and constraints that should be considered in making decisions about facilities. These assessments will be the basis for sensitivity testing or probabilistic methods of characterizing the uncertainty and risk with life-cycle cost analyses 33 and for conclusions based on these analyses. Operations, Maintenance, and Constant Improvement ". . . there is a major difference in ways of thinking about machines between us Japanese and Westerners. Westerners tend to think that production equipment is destined to deteriorate as time goes by. For us, though, the installation of a machine is just the beginning, and we strive to improve it so the machine's performance will get better. This improvement is not just the responsibility of engineering experts alone. People on the shop floor know the machine better than anyone else, and so they must cooperate with the engineers. This is the 'suggestion for improvement' system that we employ throughout our global operations." (Source: Tetsuo sakida, Honda Motor: The Men, the Management, the Machines, Kodansha International, Tokyo, 1982). 33   See Marshall (1988), for example.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings Explicit Design Alternatives In developing designs and management strategies for facilities, agencies should reguire their staff and consultants to undertake an explicit analysis of alternatives to explore opportunities for controlling life-cycle costs. Alternatives may be defined as variations on a principal theme or as distinctly different designs or strategies. However, consideration of alternatives is an essential element of life-cycle cost analysis. The consideration of alternatives is in many cases already performed and documented as part of value engineering or environmental impact studies, but these studies are often performed late in the design process. The committee recommends that the definition of alternatives should be initiated very early in the life-cycle. Documentation of alternatives and reasons for their development or rejection can be a useful resource to the people who will be responsible for subsequent maintenance or retrofitting and general life-cycle cost management. Designers should be compensated appropriately for the work required to develop well-documented design alternatives. Some agencies may choose to use staff or consultants to perform supplementary studies, outside the scope of the principal design contract, while other agencies will include the life-cycle economic analyses and documentation within the basic design scope. The former approach--life-cycle cost analysis as a separate service--is prevalent in both the private and public sectors. In either case, fees must be adequate to cover the work required and agency budgets should be established that ensure that life-cycle cost analysis is conducted. Value Engineering for Life-Cycle Cost Those agencies that use value engineering programs should assure that savings are achieved in expected life-cycle cost rather than construction cost only. The committee has noted the incentives that facility constructors participating in value engineering programs may have to reduce construction cost despite possible increases in future maintenance and repair. Agency staff and their consultants should assure that all value engineering proposals under such programs include a realistic analysis of life-cycle costs and should carefully review these proposals. Training of procurement and professional staff may be needed to facilitate clear understanding of the net impact that value engineering proposals may have on future agency expenses. The committee proposes that procurement procedures could include bidders' analyses of life-cycle cost as one of the factors for selection in those cases where the supplier may be held accountable throughout a defined

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings economic service life. Warranties or other financial arrangements may be considered to establish incentives for the supplier to control life-cycle cost.34 Life-Cycle Management Manuals Agencies should request that designers prepare a report that can serve as a life-cycle management guidebook for new or substantially renovated facilities. This document--in effect, an owner's manual--would present design decisions made to control life-cycle cost and subsequent operating consequences for each facility. Required future actions needed to assure that the life-cycle proceeds as planned would be explained. Procedures for monitoring condition and performance, as a basis for assuring that these important future actions have been taken and have been effective, would be included as well. The guidebook could be updated as necessary by construction and O&M personnel, throughout the facility's life-cycle, to show the life-cycle cost consequences of new systems and operating conditions. The guidebook would not necessarily be a traditional notebook or other printed document., rather it might be part of a computer-based information system. Such systems,35 sometimes termed "integrated data bases," are becoming practical as advances are made in the technologies of computer-aided design and drafting, database management, and artificial intelligence. The life-cycle management manual would be a precursor to complete building management systems, analogous to the pavement and bridge management systems discussed in Chapter 4. Education and Training Agencies should encourage exchange and cross-training of design and O&M management personnel to assure that members of each group have practical understanding of life-cycle cost management principles and how life- 34   Public facilities such as toll roads and water supply systems are already exposed to such incentives by the requirements that revenues cover costs. "Shared savings" programs--still an experimental practice, in which a private firm may invest to make changes in a government facility (e.g., for energy-efficient air conditioning equipment or hospital management) and be repaid from a share of the cost savings realized from those changes--would include such incentives. 35   The "Woods Hole workshops," a series of meetings sponsored by the Building Research Board from 1983 to 1987, defined many of the principles now being implemented to support integrated data bases. See, for example, Committee on Advanced Technology for Building Design and Engineering (1986).

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings cycle cost is controlled at all stages of a facility's service life . Personnel from each group should be included in the management team undertaking design, procurement, and subsequent operation and maintenance of each facility. Each cross-trained team should then be held responsible for life-cycle cost control. Continuity in team membership can improve team performance. The committee proposes that agencies also look beyond these needs for immediate training and seek to encourage professional education for life-cycle cost management. Support to professors in schools of architecture and engineering for research and development of courses and teaching materials on life-cycle cost management could yield substantial long-term benefits to government agencies and the public. Such support could be supplemented by working with professional organizations and accreditation boards to assure that life-cycle cost analysis and management principles are an integral part of the knowledge imparted to building professionals. Professional school accreditation organizations should include life-cycle cost principles as an evaluation factor in accreditation reviews. Life-Cycle Cost Management Systems Agencies should work cooperatively to establish life-cycle cost management systems. These systems should be suited to the specific types of facilities that each agency uses, but they should also foster exchange of relevant data to support analysis of life-cycle cost and performance of common subsystems (such as roofs, envelopes, and air conditioning and lighting systems). Development of these systems would draw on lessons learned in pavement and bridge management systems. Key elements of such systems are an adequate data base on life-cycle performance and cost and reliable tools to enable projection of life-cycle cost and performance of new designs and operating strategies. These systems should produce their information in forms useful for budgeting as well as technical decisions at all stages in a facility's life-cycle. Appendix D presents the committee's initial suggestions of what questions and decisions a building life-cycle cost management system might be designed to address. The committee recognizes that development of effective and comprehensive life-cycle cost management systems will take time. While a basic common framework for data collection and assembly might be adopted by federal agencies within a 12-to 18-month period, experience with highways indicates that development of an adequate data base would require 5 to 10 years. While the primary focus of these systems would be on management of individual facilities, early results might be useful in budgeting for management of large portfolios of similar buildings, such as those operated by the U.S. Department of Defense36 and the General Services Administration. Less data 36   The U.S. Department of Defense has in fact used this approach in justifying its requests to Congress for maintenance and repair funds.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings are needed to predict the percentage of a large inventory likely to require certain actions and the expected costs of failure to take action. These aggregate statistics can be useful in general planning, programming, and budgeting to achieve life-cycle cost control. High-Level Accountability Accountability for effective use of maintenance and repair funds and other actions that may invalidate prior decisions on facility life-cycle cost should be assigned at the highest levels in the agency. Because costs for facilities are typically a small part of the total expenses of government programs, effective life-cycle cost control is possible only when senior management are committed to its achievement. The senior management must be willing to forego opportunities either to divert funds to other uses by deferring maintenance or purchasing low-first-cost components or to take advantage of available funds by overinvesting in facilities. In government settings, senior management includes both legislative and executive bodies that may authorize new construction and fail to meet their implied commitment to future costs of ownership. Agency management must also be willing to present convincingly the principles of life-cycle management to officials who, in the absence of adequate information upon which to base a balanced decision, may be encouraged by popular opinion to make commitments that have lasting consequences for the costs of facilities. Wherever possible, agencies should establish facility endowments, sinking funds, or other formal financial mechanisms to assure adequate resources to implement previous life-cycle management decisions. While economic policy makers often discourage such earmarking of funds, these mechanisms are essential to the management of long-lived facilities in a setting characterized by responses to short-term issues. CONCLUSION: THE PAYOFFS The committee recognizes that implementing these recommendations will require significant investments of time, staff effort, and funds; however, substantial payoffs will result. The committee notes that the aggregate spending on construction of public buildings in 1989 exceeded $30 billion (U.S. Department of Commerce, 1990). Using common rules of thumb, the committee estimates that equivalent annual capital cost37 for this new construction would be about $400 million. 37   This is the equivalent annual spending which, over the facilities' service lives, has approximately the same present value as the construction cost. This is conceptually equivalent to the mortgage payments a homeowner might make.

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Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings Expenses for maintenance and repair might account for an additional $300 million to $600 million annually. Total annual spending for management of public buildings may then be about $0.7 billion to $1 billion.38 If development and application of life-cycle cost management principles can produce savings of only one-half of 1 percent of these amounts, the public's annual return on investment in research and development could easily exceed $3.5 million. Increases in productivity of activities housed in better-managed facilities could be even greater. The committee is therefore confident that the costs of implementing its recommendations will be repaid many times over in savings in the nation's costs of public facilities. References Committee on Advanced Technology for Building Design and Engineering, 1986, Report from the 1985 Workshop on Advanced Technology for Building Design and Engineering, Building Research Board, National Academy Press, Washington, D.C. Marshall, H. E., 1988, Techniques for Treating Uncertainty and Risk in Economic Evaluation of Building Investments, NIST Special Publication 757, U.S. Department of Commerce, U.S. Government Printing Office, Washington, D.C., September. U.S. Department of Commerce, 1990, Construction Review, vol. 36, no. 2, March/April. 38   This analysis reflects an implicit assumption that all public construction is undertaken to replace existing facilities (i.e., that there is no net expansion in the inventory of public buildings. If the inventory is not being effectively replaced or if the average age of facilities is changing significantly, the estimates may be low.