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Building Economics And Life Cycle Costs Construction Essay

Paper Type: Free Essay Subject: Construction
Wordcount: 5404 words Published: 1st Jan 2015

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Economic understanding regarding building designs usually aim for steering building decisions to achieve for two situations: economic efficiency and/or cost effectiveness. For instance, a building design that, besides assuring to be profitable is promising to be more profitable than other available solutions, can be considered to be the economically efficient choice for an investor. Yet, a building decision that is considered cost-effective, guarantees, for instance, that a design solution with benefits equal or better to those of competing alternatives has lower costs. Cost-effectiveness is thus understood as a subset of economic efficiency; yet, both conditions can appear in one solution, but don’t have to. The use of optimization thus reflects the strategy of achieving specific economic goals. Consequently, by minimizing life-cycle costs or maximizing net benefits, an economic analysis is applied to determine the most cost-effective or the economic efficient choice respectively .


The reflection and analysis of life-cycle costs (LCC) is an economic evaluation technique that determines the total amount of cost of a product or project over time. Having in common that the role is to provide insight in future matters regarding all occurring costs, LCC assessment in business organizations today, serves mainly three purposes :

To be an effective engineering tool for use in design, planning and project execution

To be a design and engineering tool for environmental purposes

To be applied “proactively” in cost management.

A similar understanding applies to the building sector. With the increasing need to deliver economic solutions, developers, designers, planners, engineers and managers try to foresee, steer and control costs at all stages of a buildings life-cycle. By overseeing a building project’s inherent costs and directing attention toward its root causes, building projects can get useful decision support before, during and after its realization, performed on large and small buildings, on partial building elements, or on isolated building systems . Throughout the design, development and operation of building projects, LCC can thus be successfully used to compare alternatives to find the most cost effective solution .

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With the growing pressure of governments to hold companies responsible for the costs that their products generate to society and its environment, consumers are likely to benefit from the use of LCC assessment. Sustainable building strategies require foreseeing a reduction and control of significant LCC, such as energy costs for projected building designs. Consequently, organizations such as the National Institute for Building Science or the Whole System Integrative Process (WSIP, 2006) demand for early integration of cost related planning issues into the building design process. Eventually, future building designs that are less costly may also be considered better in terms of quality when all costs of a buildings life-cycle are adequately included. A strong commitment of building design is thus to enhance the practical value of buildings. While the value of products is defined as proportionate to the satisfaction of needs divided by the use of resources, its value is proportionate to quality divided by costs . Value-driven building designs therefore require being both: quality driven and cost conscious. In addition, probably the most important condition for resource optimization is appreciation of the built structure by its users: only buildings that are valued will achieve a long lifespan (Eberle, 2007).

Proactive cost management is understood as an effort to eliminate product costs before they occur, as opposed to reducing costs after they are incurred, which is considered reactive cost management . Expecting the design and planning of building projects to be proactive view is inevitable, since changes in the later planning and execution phases or even during building operation become more and more difficult to deal with. Especially during initial design stage, the consideration of LCC can help designers to make their decision-making process become more cost efficient . In reality, a proactive involvement of cost might not be the case. Essentially, comparisons or studies on the building design and its influence on the cost of building operations over the life of a building are barely explored during the early design phase. If of any concern, financial aspects during early stages of design are mainly focusing on preventing uncontrolled cost expansion of initial, predominantly construction costs. The possibility of actively integrating all LCC members during the early design stages remains difficult to achieve as current methods of sequential design and cost estimation make it hard to foresee the impact of investment and to reduce building operation costs to an extent that would change the perception of these capital costs. In addition, the implementation of such proactive cost management quite often incurs more costs up front, for instance for the extended amount of research and development that projects then require for. Such consequences, and with them the traditional view on cost management can easily challenge the implementation of proactive consideration of LCC assessment, where necessary time and funding for the early stages of design and planning appears insufficient . A consideration of proactive design understanding and its use of LCC assessment thus also involve necessary changes in terms of thinking, such as from a partial focus to holistic thinking (Eberle, 2010), from structure orientation to process orientation or from cost allocation to cost tracing .

Life Cycle Cost (LCC)

With emphasis on cost-effectiveness the consideration of life-cycle costs (LCC) is used to evaluate competing alternatives primarily on the basis of costs, allowing for choices for a given building, facility or system. The method is to compute the LCC for a particular course of action by summing all significant, time adjusted costs associated with it over the relevant period of time. The method of using LCC is thus applicable to building decisions that require for cost related decision-support, such as system modification, replacements or combinations of interdependent budgets, budget allocations, or lease or buy decisions. Yet, it is also applicable for the evaluation of competing building designs; suitable, when focusing on cost rather than benefits for two or more mutually exclusive project alternatives. Typically, the analysis or assessment of LCC includes all initial and future costs that are affected by the decision and excludes others that are not. The exclusion of costs is not necessarily required when their contribution can help to better understand the impact between cost consideration and the amount of improvement (Ruegg & Marshall, 1990).

LCC of building projects are often distinguished according to the building projects phase and are likely to be separated into initial (capital) cost, operational and post-operational costs Pushkar et al. (Pushkar, et al., 2005).

Figure 2.x: Life-cycle Costs of a building life cycle

The diagram in Figure 2.x illustrates the occurrence of different LCC members of the BVO model over growing operation time. It also demonstrates the increasing significance of continuous, operation costs over a project’s running time, as its percentage of the total expenditure steadily increases compared to the initial investments at the project commencement.

Net Present value (NPV)

Besides LCC considerations of evaluating building designs, economic understanding of monetary systems requires to foresee their change of value over time, due to inflation, its investment to generate future profit, or both. In the building sector, the most commonly used methods of LCC assessment are accounting systems, initially developed to determine the financial worth of an investment; they are as follows :

Simple payback: defined as the time taken for the return on an investment to repay the investment.

Net present value: defined as the sum of money that needs to be invested today to meet all future financial requirements as they arise throughout the life of the investment.

Internal rate of return: defined as the percentage earned on the amount of capital invested in each year of the life of the project after allowing for the repayment of the sum originally invested.

LCC analysis is commonly performed using present value currency representation. In the following, the use of net present value is explained more closely as it has been implemented in the BVO model as it complies with the decision to use LCC for the assessment of design and its use allows for appropriate representation of costs elements in reference to their timely occurrence.

The use and implementation of Net Present Value (NPV) models enables the adjustment of currency amounts in relation to their time of occurrence. It is thus a considerable measure when include costs elements of different time occurrences. The NPV is thus typically suggested to analyze the profitability of long term investments or projects, or the evaluation of available options (Dale, 1993). Essentially, it compares the value of money today to the value of that same amount in the future, taking inflation and returns into account. Among others, Ruegg (1990) defines the net present value as:


, where is the estimated cost in year t, d is the discount rate, and T is the period of analysis in years.

The NPV of a building project takes into account all the apparent variables acting upon a cash stream; it is thus sensitive to the reliability of future cash inflows that an investment or project will yield. If the NPV is positive, it should be accepted. However, if NPV is negative, the project should possibly be rejected because cash flows will also be negative.

Discount rate

The discount rate is a method of determining the time value of money. To prevent the value of investment eroding by the effects of inflation, the factor of inflation can be integrated into the discount rate, known as the net of inflation discount rate and calculated as :


For instance, if inflation is 5% per annum and interest is received at 10%, then:


Thus, to make the influence of the discount rate become realistic it requires for reliable input to foresee the appropriate adjustment of financial aspect of interest and inflation. Similar to the typically practiced modification of construction costs that are based of earlier cases, such modification is necessary for future costs to remain representative. The accuracy of predicting and adjusting the monetary value may appear, however, problematic with growing life-time estimations of a building, as long term predictions become increasingly vague.

Setting the study period

The consideration of a LCC study period is expected to relate to the following factors such as the investors and stakeholders projected time horizon, the anticipated life time of the building, project, etc., the decision whether to accept or reject the choice, or whether the perspective is individually private or public perspective oriented. For instance, an investor or project developer might only be interested in short term cost as it is intended in creating revenue from the sale of the finished building project, while a building owner or operator might rather focus on evaluation the operative cost of a building design and their involvement over the complete life-cycle. When considering the overall sustainability of a building project, the complete life-cycle must be considered and anticipated.

LCC assembly

Buildings LCC are categorized by the three phases that they go through during their life-cycle. They are the initial or capital cost (1) at the beginning of a building project that involve its planning, design and realization, the operational cost (2) occurring during the buildings active phase of use, and the post-operational cost (3) that assemble the costs at a building life’s end. Though the three life cycle phases for buildings are clearly defined, their transition at a specific point of time can be vague, for example a building might already be partly operating while other areas of the building are still under construction. Figure 2.x describes the three phases and their overlapping character of transition between them.

Figure 2.x: A buildings life-cycle phases

In addition, operational phases can be interrupted, or at least obstructed by renovation or refurbishment phases to ensure or reinstall a buildings quality and use. For instance, building developments of industrialized countries with a high demand on energy costs, suggest that a buildings life-cycle performance can be improved when taking a renovation period of 25-30 years with a constant improvement of the buildings insulation properties into account . Figure 2.x describes how the buildings life cycles can be extend through periodic renovations and/or refurbishments.

Figure 2.x: Extend a buildings operational phase through periodical renovations and refurbishments

Initial (Capital) Cost

The initial (capital) cost comprises all the costs necessary that ensure the building realization up to the moment of its active building use. Occurring costs are thus not only the construction of a building but also all related processes of project planning and development that are involved such as:

Land costs, such as costs for acquisitions and necessary preparation of land.

Professional fees, which apply for involvement of building planning professionals such as architect, engineer, lawyer, etc.

Construction Cost, encompass all cost for the erection of the building and installment of projected building systems

Commissioning Cost, comprising all cost applicable to certify necessary fulfillment of standards and requirements or the approval for building operations of building systems involved.

Promotional and sale cost, for informing the prospects about special discounts, sale, or schemes.

Funding costs, In general, price of obtaining equity capital

Management costs, comprising all cost necessary for the organizing and coordinating the activities of an enterprise in accordance with certain policies and in achievement of project realization.

Operational Cost

The operational phase encompasses all the cost necessary to utilize and use the building according to its original purpose. Operational cost are becoming more and more noticeable over the life cycle of a project; due to the long period of building use they can grow significantly bigger than initial costs (). For instance, when …

According to Ruegg and Marshall (1990), operational costs can be identified as:

Energy Costs, includes necessary fuel and all applicable energy costs

Operation and Maintenance Cost, includes non-fuel operation costs, such as management, cleaning, servicing, rates and taxes, sewerage, salvage, funding costs, routine maintenance, furnishings, supply … (check Ruegg)

Repair and Refurbishment Costs, includes appraisal of all foreseen and estimated cost for repair or replacements of building systems or elements during a buildings use.

Post-Operational Cost

Post-operational cost includes the collection of all cost necessary cost that may appear at a building end of use. Mostly due to economic needs or owner related circumstances the buildings operational use becomes infeasible and a variety of options require to be considered. Unlike industrial products, the end of a buildings life cycle does not necessarily determine the end of a buildings life but instead refers to the end of a buildings original determined use. A building can thus have more than one operational cycle, when through post-operational interventions a new cycle of building use can be created. Post-operational cost can thus be categorized as

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Renovations Cost, represent minor repairs and makeovers necessary to maintain or reinstall building quality and use.

Refurbishment Cost, include the cost necessary for major overhauls of buildings or building elements that otherwise result in obsolete building conditions. Refurbishment may also include the change of a buildings original use.

Demolition, Disassembly and Recycling Cost likely occur at the end of a building life cycle. While in typical product life cycle the terms represent individual strategies involving separate specifications and costs, contemporary building removals mostly include the three them associating to separate treatment of individual buildings elements. Moreover, a number of regained materials and building elements may even create cost reduction due to their existing value possible reuse or recycling purposes.

Sale, though the sale of a building does not essentially represent a cost per se, such case can occur when the new owner faces major difficulties for further use of the facility (i.e. due to contamination). Still, even if not a cost, the sale of a building can be used for LCC considerations, for instance if the sale of a building can be seen as a considerable reduction of buildings LCC due to the buildings inherited value.

LCC declaration

During a programming phase of building projects, cost estimations require to determine individual element of cost or benefits. To do such Tempelmans Plat (2001) points out that each demand and supply requires being determined in terms of quality, quantity, time and money. While quite often there is no or little basis of estimating future cost, estimations of future costs start by reflecting the current cost or benefit values as point of departure. Since cost estimations are subject to time related changes, costs or benefits require thought, whether to expect fundamental changes in the demand and supply of goods and services in question over time, or if considerable change of service or quality of goods are to be expected. If there is no sound basis to believe otherwise, it deems appropriate to assume that changes of prices will be approximately the same as prices in general (Ruegg & Marshall, 1990).

Still, the estimation of all cost elements usually poses a major difficulty due to their probabilistic nature and the distinctive character between individual costs elements. Common uncertainties for the prediction of long-life projects are: it’s life-cycles prediction, the interpretation of operation and maintenance costs, revenues and unforeseen or unpredictable factors that affect project economics. Since dealing with so many unknowns, it appears difficult to anticipate cost and benefit related developments. Existing methods of dealing with high risk exposure are best guess, relating to individual risk attitudes and risk adjustment through the introduction of methods using probability and statistics (Ruegg & Marshall, 1990).

The consideration of a LCC study period is expected to relate to the following factors such as the investors and stakeholders projected time horizon, the anticipated life time of the building, project, etc., the decision whether to accept or reject the choice, or whether the perspective is individually private or public perspective oriented. For instance, an investor or project developer might only be interested in short term cost as it is intended in creating revenue from the sale of the finished building project, while a building owner or operator might rather focus on evaluation the operative cost of a building design and their involvement over the complete life-cycle. When considering the overall sustainability of a building project, the complete life-cycle must be considered and anticipated.

Cost estimation during early design stages

During a schematic design phase of a building design, traditionally only construction costs are estimated. Such procedure comes with the disadvantage that long term costs that, if considered, may significantly influence design outcomes are usually not reflected. The practice of introducing operational and/or post operational costs thus require for designers specific estimation and understanding to prevent a decision-making and in a premature design situation. Since experiences of cost estimation for construction costs originate from knowledge gained during earlier comparable projects, a case-based oriented approach, such as suggested by Sowa and Hovestadt (2008), can also be used and practiced for other LCC members.

Because such estimation and declaration of costs generally requires for extensive experience, the use and creation of databases that allow for differentiation and declaration may not easily compensate for. Cost estimators usually have considerable experience gained through working in the building construction industry, estimating and monitoring building costs through all the stages realization stages of a project (NIBS, 2010). The estimation of cost thus not only require for skills such as a clear judgment and straightforward attitude, but for qualities such as awareness, uniformity, consistency, verification, documentation, evaluation, and analysis . Yet, with the growing complexity of building projects, it seems vital to have the cost estimations involved right from the very beginning to ensure that the project estimations reflect the decisions made. Especially during the early design stage, changes will require estimates to be prepared at different levels during the design process with increasing degrees of information provided. At any point of a design, not all portions of the design would be at the same level of completeness. Yet typical, such contingencies for the aforementioned will be reduced as more design documentation is produced (NIBS, 2010). For instance, the estimation of construction costs typically corresponds to the phases of the building design and development process in a top-down manner, meaning that cost estimates improve their precision and detailing with the progressing stages of design realization.

In addition, cost estimates usually try to comply with considered standards within the building industry. In the United States, for instance, a widely accepted system provided for cost estimates is the UniFormatâ„¢ or, for later planning stages the MasterFormatâ„¢ (CSI, 2011) system, which allows design teams to evaluate alternative building designs and systems. In Europe, cost estimates are usually practiced according to DIN regulations such as the DIN 276/277 for cost estimation and declaration of building designs (Fröhlich, 2007).

A building project’s first cost estimates can already appear during the architectural programming phase with the purpose to facilitate budgetary and feasibility determinations. Usually based on past information with adjustments made for specific project conditions such estimates are prepared to develop a project budget. At such level, design schemes normally do not yet exit, required data for cost appraisals are thus drawn from general functional description, schematic layout, and geographic location, building size expressed as floor-area, numbers of people, seats, cars, etc., and intended use. Respective estimates are thus based on costs per square units, and/or alternatively number of cars/rooms/seats, etc.

During the schematic design phase, the purpose of estimate is to create a more complete assessment that is typically based on a better definition of the scope of work. While also compared to earlier budgetary and feasibility determinations, an estimate at this level may be used to price various design schemes in order to see which scheme best fits the budget, or it may be used to price various design alternatives, or construction materials and methods for comparison. The more developed schematic design criteria such as a detailed building program, schematic drawings, sketches, renderings, diagrams, conceptual plans, elevations, sections and preliminary specifications are reflected. Available information is typically supplemented with descriptions of soil and geotechnical conditions, utility requirements, foundation requirements, construction type/size determinations, and any other information that may have an impact on the estimated construction cost. The goal at the end of schematic design is to have a design scheme, program, and estimate that can be contained within budget .

Net Benefits (NB)

LCC considerations are typically used to make cost-effective choices, as its technique is to compare alternatives competing primarily on the basis of costs (Ruegg & Marshall, 1990). Yet, if a building design is planned to generate revenue, a comparison of invested costs to its predicted returns can help to determine advantages between designs options. In such case, the method of calculating the net benefits (NB) of a building option is considered an applicable way of finding the most economically efficient choice among alternatives. In such case, the calculation of NB is achieved by subtracting the time-adjusted costs of an investment from its time-adjusted benefits (Ruegg and Marshall, 1990).

In relation to building-volume optimization, because the optimization of cost is generally expected to steer a building-volume design towards minimized volume/surface ratio, window/opening ratio and/or net surface areas, the integration of revenue considerations can help to justify the amount of indispensable volume reduction when practicing BVO. Similar to cost considerations, the estimation of buildings projected revenue can be established by floor-area declarations.

In addition, while a buildings annual income is expected to change depended on its market value over the span of a buildings life-cycle; the diagram in figure 2.x shows how a buildings generated income can be perceived as originating from a products marketing perspective, which consists of at least four stages of introduction, growth, maturity and decline .

Figure 2.x: A products marketing perspective over a life cycle. Source: König (2009)

The prediction of generating buildings revenue thus requires for understanding and forecasting these changes over a given period; its moments of rise and decline that strongly depend on a buildings perceived value and its decay due to intensity of use (elaborate further, see Koenig). Shown in Figure 2.x, when plotting a typical development of cost and revenue predictions the financial profitability of building occurs at point a, and becomes obsolete when the cost of become larger than the income generated. Such situation appears at operation time b with operation cost appearing higher than the income; at least at this point the buildings economic purpose becomes unsuccessful.

Figure 2.x Cost vs. Revenue. Source: König (2009)

When adapting a buildings foreseen lifecycle to this understanding, a buildings lifetime and the creation of revenue can be exceeded by interference of the maturity process through possible renovation or refurbishment measures. In Figure 2.x a buildings generated income during a foreseen life-cycle may thus be illustrated by separating the building operation period by new construction constructions phases that are required for the renovation and/or refurbishment of the building.

Figure 2.x: A buildings generated income extended through renovation and refurbishment top. Source: König (2009)

In reality, the periods between theses interventions very much vary from the owner’s intention to keep high-level building quality or the necessity to prevent a building from becoming obsolete or having higher operation costs that income. From an economic standpoint, interventions to improve the buildings ideally take place when profitability can be increased or maintained. For instance, König et al. (2009) suggest that, in an industrialized country, a replacement and improvement of buildings insulation performance should take place after a period of 20-30 years. Especially with the amount of operation costs strongly increasing due to continuously rising energy costs, the need for innovations and improvement for reducing buildings energy consumptions became highly prominent.

Finally, because a clear definition of a buildings income require for experiences of earlier comparable cases, the use of existing data are necessary to help predicting the revenue curve and the point of interventions for necessary building improvements. An optimization, particularly of passive resource oriented building improvement thus depends on well implemented predictions and assumptions of a buildings foreseen life-cycle and performances. Yet, when of a designer existing experience or the amount available data is not sufficient and/or its quality is questionable, the building-volume optimization process may clearly suffer from it.


The use of assessing life-cycle costs (LCC) is seen as tool that helps associating estimated costs over a projects foreseen life span. LCC of a building or a building system are defined as the total discounted amount of cost of owning, operating, maintaining and disposing over a defined period of time . The consideration to use life-cycle cost as an objective for the BVO model is based on its ability to include different building costs over a specified period, allowing for comparison and impact analysis between, for instance, initial and operational costs. The establishment of LCC as an objective for building performance optimization thus defines the primary BVO model goal. To be effective, the attempt of reducing overall building costs requires for a cost distribution that allows for effective declaration and activation of significant building elements during early architectural design stages. According to volume geometry, this can be building-volume surfaces as well as building floor-areas. With the possibility to link costs to selected areas, the model requires a wider variation of costs to be successful. Because early design stages mostly refer to estimated costs; cost distribution and specification is more likely to be based on users experience or existing available data originating from earlier comparable building design cases .

For the BVO model currently only initial and operational have been integrated because convincing and direct associations between post-operational costs and building elements at a buildings life’s end are hard to foresee and the available options appear diverse. Still, eventual costs for the renovation or refurbishment of buildings or building parts can be integrated as they are usually more common and estimations based on area declaration exist.

While the main aim of the BVO model lies in the improvement of the buildings geometry (volume of the building) and not in the building system that eventually operates it, the induced process is understood as to eliminate or reduce the amount of incurring cost of a projected design before they occur. Once a building-volume design is established, system considerations may then further reduce costs by means of using appropriate technology as practiced by engineers. As mentioned earlier, Eberle (2007) suggested that active and passive design features are responsive towards each other, thus the priority in the design process should aim for optimizing passive design features first as they do not require the use of additional resources. Because constant definitions already include premade assumptions and partial definitions on an incorporated system they should be chosen wisely as not to affect unrealistic results.

BVO design is thus understood proactive, as its primary intention is the improving passive design elements of the building-volume. Yet, the integration of LCC helps to understand significance of individual cost members and effectively use the diff


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