Life-Cycle Cost Analysis for Buildings Is Easier Than You Thought, page 01

Life-Cycle Cost Analysis for Buildings Is Easier Than You Thought

Introduction

Life-cycle cost analysis is a method of determining the entire cost of a structure, product, or component over its expected useful life. The cost of operating, maintaining, and using the item is added to the purchase price. For items that last longer than a couple of years, this is a more realistic way of evaluating cost than simply looking at the purchase price. Conducting a life-cycle cost analysis isn't as difficult as it appears. This report explains why and how to conduct life-cycle cost analyses and includes information on using software tools that reduce the difficulty of performing lifecycle cost analyses.

Don't confuse life-cycle cost analyses with life-cycle assessments. Life-cycle assessments are used to evaluate the environmental costs associated with a product, process, structure, or activity. They identify energy and materials used and wastes released to the environment. Life-cycle assessments are explained in more detail in the "Life-Cycle Assessments Can Help You Make Sustainable Choices" section of this report.

Life-Cycle Cost Analysis for Forest Service Buildings Is Smart Business

Because funding is limited, Forest ServiceService, U.S. Department of Agriculture, designers and facilities managers traditionally have focused on minimizing the initial cost of a structure. Unfortunately, this practice often has produced inefficient, short-lived structures with unnecessarily high operation and maintenance costs. Over the life of a building, operation and maintenance cost more than initial construction (figure 1). This is true both for new construction and for major replacement and improvement projects, so it makes sense to include operation and maintenance when evaluating cost effectiveness.

Pie chart of the Contruction costs and the Operation and maintenance costs.
Figure 1—Over 30 years, the cost of operation and
maintenance for buildings is more than the initial
construction cost; how much more depends on
the building type and location.

The 2006 study "Re-examining the Costs and Value Ratios of Owning and Occupying Buildings" by Graham Ive found the cost of operation and maintenance of office buildings to be about one and a half times the cost of initial construction. Other estimates put the cost of operation and maintenance at up to five times the cost of initial construction. Spending less over the long haul on buildings means you can spend more on the Forest Service mission.

The largest expenditures over time for office buildings are the salaries and benefits for the employees who work there. This cost can be many times the cost of the building. For example, at the Missoula Technology and Development Center, salaries run around $16,400 a day. In less than 2 years after the new MTDC building was occupied in 2003, the amount paid to the employees who work there had exceeded the initial cost of construction of about $113 per square foot. Over 30 years, salaries and benefits will be about 18 times the initial cost of construction (figure 2). Because employee productivity is affected by the quality of the space where they work, employee productivity could be considered the single most important factor when evaluating the long-term cost effectiveness of any building design.

Pie chart of the Intitial construction cost, Operation and maintenance costs, and Employee salary and benefit costs.
Figure 2—Over 30 years, the costs of employee salaries
and benefits dwarf both the original construction cost
and the operation and maintenance cost of the office
building where they work.

Life-cycle cost analysis (LCCA) is the tool that can tell you whether it makes economic sense to invest in a particular building component or system or whether one building design will be more cost effective over time than another. LCCA is particularly useful for comparing the costs of several options for equipment, systems, or buildings so you can make smart choices for a particular situation. For instance, an LCCA can help you determine whether it would be more cost effective to replace deteriorating window-mounted air conditioners in an office with new window-mounted air conditioners, a refrigerated central air conditioning system, or a ground-source cooling system. The answer may be different depending on climate, energy costs, and whether you plan to keep the building indefinitely or dispose of it in a few years. LCCA can account for all those variables and more.

Life-Cycle Cost Analysis Is Required for Forest Service Buildings

Not only is it smart to use LCCA rather than just considering initial cost when evaluating design, lease, and purchase options, it's also required.

Forest Service Handbook 7309.11, section 23.4—Standards for Economic Analysis (http://www.fs.fed.us/im/directives/fsh/7309.11/7309.11_20.doc)
Executive Order No. 13327, Federal Real Property Asset Management (http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2004/pdf/04-2773.pdf or http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_BASIC&contentId=16911&noc=T)
Executive Order No. 13423, Strengthening Federal Environmental, Energy, and Transportation Management (http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/07-374.pdf or http://www.gsa.gov/Portal/gsa/ep/contentView.do?P=MTL&contentId=22395&contentType=GSA_BASIC)
The Energy Conservation Standards for New Federal Commercial and Multi-Family High-Rise Residential Buildings and New Federal Low-Rise Residential Buildings (http://edocket.access.gpo.gov/2007/E7-24615.htm)

Basic Life-Cycle Cost Analysis Calculation

LCCA is a well-defined procedure for estimating the overall costs of project alternatives. It is commonly accepted throughout the business and engineering community. Basically, LCCA consists of adding all the initial and ongoing costs of the structure, product, or component over the time you expect to be using it, subtracting the value you can get out of it at the end of that time, and adjusting for inflation.

A lot of information must be assembled and manipulated to accomplish a life-cycle cost analysis, but the basic formula is fairly straightforward. ASTM International, originally known as the American Society for Testing and Materials, develops and publishes technical standards for materials, products, systems, and services. ASTM standard E917- 02 "Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems" (http://webstore.ansi.org/RecordDetail.aspx?sku=ASTM+E917-05) is the standard industry procedure for analyzing life-cycle costs.

More detailed information about applying LCCA to Federal projects is contained in the National Institute of Standards and Technology Handbook 135, Life-Cycle Costing Manual (http://www.bfrl.nist.gov/oae/publications/handbooks/135.pdf).

Two factors make it difficult to use the formula for large projects:

A lot of information has to be assembled and manipulated.
All costs must be adjusted for inflation.

The term "present value" in the formula describes costs that have been adjusted for inflation, or "discounted." The emphasis on present value is important when considering expensive structures or components that function for many decades, because inflation can influence affordability. It's usually not worth calculating present value when analyzing the life-cycle costs of small or short-lived structures, products, or components.

Office of Management and Budget Circular A-94 (http://www.whitehouse.gov/omb/circulars/a094/a094.html) provides the guidelines and discount rates that must be used when determining present value for life-cycle cost analysis on major Federal projects. Circular A-94 requires that life-cycle cost analysis be calculated in terms of "net present value." Net present value is computed by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the discounted costs from the discounted benefits. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement.

The LCCA formula works for all projects, large or small. It is much easier to calculate the life-cycle cost of a window air conditioner than of a large laboratory building. The next two sections explain how to use a modified formula to analyze simple items such as window air conditioners and how to use software to analyze complex items such as a laboratory or office building.

Basic Formula for Calculating Life-Cycle Cost

The formula for calculating life-cycle cost is:

LCC = I + Repl - Res + E + W + OM&R + O

LCC: Total life-cycle cost in present value (PV) dollars of a given alternative
I: Initial cost
Repl: PV capital replacement costs
Res: PV residual value (resale value, salvage value) less disposal costs
L: Desired useful life in years of the building or system
E: Total energy cost (PV)
W: Total water costs (PV)
OM&R: Total operating, maintenance, and repair costs (PV)
O: Total other costs, if any—contract administration costs, financing costs, employee salaries and benefits, and so forth (PV)

Life-Cycle Cost Analysis Works for Small Decisions

Life-cycle cost comparisons for building components or equipment (figure 3) can be accomplished relatively easily if there are no significant financing costs or differences in procurement costs among the options.

The following information is needed for a simple lifecycle cost analysis:

The initial cost of each system.
The expected life of each system (usually years).
The expected average yearly maintenance, operation, and repair costs of each system.
Maintenance and repair costs that occur only every several years, averaged over the time between occurrences.
Operation, including fuel, electricity, and water use costs as well as ongoing costs such as operator wages, regular cleaning or restocking, etc.
Any salvage or other residual value you will get out of the system when you have finished using it in this application.

Assembling this information can be a challenge. If the information isn't available in the manufacturer's literature or easily available records, you may need to call the manufacturer or supplier or ask knowledgeable people what their experience has been. The reliability of the results depends directly on the quality of the input. If you have enough experience with the system, you may be able to get close enough using estimated operation and maintenance costs.

Photo of the assistant ranger's house at the Bessy Ranger Station.
Figure 3—Life-cycle cost analysis works well for small
decisions such as finding the most cost-effective
replacement for the air conditioning system at
the assistant ranger's house at the Bessey Ranger
Station (Nebraska National Forest in the
Rocky Mountain Region).

Choose a time period for the analysis and figure the cost for each system over that time period. The easiest time period to use is the shorter of:

The number of years the most durable system is expected to last
The number of years you expect to use the structure

Simple Formula for Calculating Life-Cycle Cost

Once you assemble all the information and choose your time period, plug the information for each of the systems into this formula:

LCC = I + Repl - Res + L (OM&R)

I = Initial cost (the easy part)
Repl = Replacement cost for any system that isn't expected to last the full time period. The replacement cost may need to be proportioned. For example, if the selected time period is 20 years, but the system will only last 15 years, you will need to include a replacement cost that is one-third of the full replacement cost. This is because two-thirds of the expected life of the replacement system will occur after the end of the time period you've chosen. Don't proportion the cost if the time period you select is the life of the structure, because once the structure’s gone, you get no extra years of service from the system.
Res = Any remaining value you can recover at the end of the time period. If you can’t sell it or trade it, there’s none.
L = The time period you have chosen for the analysis.
OM&R = The yearly average operating, maintenance, and repair costs (including fuel and utility costs).

In case your memory of high school algebra is a little fuzzy, remember to multiply L times OM&R first, then add and subtract the factors in the order the equation is written. The result for each system is its life-cycle cost (LCC). You can compare the life-cycle costs of the different systems to learn which system is most cost effective over the time period you have chosen.

Life-Cycle Cost Analysis Works for Big Decisions

An LCCA that evaluates large systems or whole buildings usually considers so much information that assembling and tracking all of it becomes a major undertaking. Adding to the complexity, LCCA normally is used to compare the cost of several alternative designs of buildings and building systems (figure 4). Fortunately, several public domain programs and many proprietary programs are available to help with LCCA.

Photo of two employees standing next to office cubicles at the Shoal Creek District Office.
Figure 4—Comparing the life-cycle cost of several
alternative designs often leads to selection of more
durable and energy-efficient designs, such as the
design for the Shoal Creek District Office (National
Forests in Alabama, Southern Region).

The guidelines and discount rates in OMB Circular A-94 must be used for determining present value for life-cycle cost analysis on Forest Service projects. This report only provides information on public domain software with free download that complies with A-94 requirements and includes A-94 discount rates. Software tools that meet these criteria include:

eVALUator, developed by Energy Design Resources
Building Life-cycle Cost (BLCC), developed by the National Institute of Standards and Technology (NIST)

Both of these software tools were evaluated by using data to build a 1,400 square-foot single family residence with both contractor standard construction and sustainable design options for a 25-year analysis period. The sustainable design version of this house was built in Missoula, MT, in 2003 (figure 5). Evaluation of the sustainable design option was based on actual costs of materials and actual consumption of water, electricity, and natural gas. Estimated costs of materials and consumption of water, electricity, and natural gas were used for the contractor standard construction option. Actual utility rates and financing costs were used for both options. Identical information was used for each software tool. Both software programs returned roughly equivalent information. They both showed life-cycle cost savings over 25 years of around $29,000, simple payback in about 10 years, and adjusted internal rate of return of around 11 percent for the sustainable design option. You can see the results in the "Example LCCA Reports" section at the end of this document.

Photo of a single family home that is surrounded by trees and shrubs.
Figure 5—Public domain software tools were used to conduct
life-cycle cost analyses on this 1,400 square-foot single
family home. The results are given in the "Example LCCA
Reports" section.

Both computer programs require that the user have enough knowledge of building design and performance to recognize the factors that will be important to get an accurate result. This should not be a problem for experienced engineers and architects, but might present problems for others. As with the basic LCCA formula explained above, initial cost, expected useful life, average yearly operation, maintenance, and repair costs; expected major component life and replacement costs; and salvage or other residual value must be determined. As explained in the "Other Software Tools for Life-Cycle Cost Analysis" section, other software tools are available to help calculate these costs, particularly the energy costs of different components.

The basic features, advantages, and limiting factors of the eVALUator and Building Life-Cycle Cost (BLCC) programs are explained below.

Based on the comparison and use of both of these programs, eVALUator would be better for most Forest Service life-cycle cost analyses, especially those for less complex buildings. It's quick, it's easy, it's accurate, and it provides enough information to enable informed decisions. For projects where more detailed information on energy use or financing is needed, BLCC would be better.

eVALUator

The eVALUator is a Microsoft Windows-based program that was developed to calculate the life-cycle benefits of investments that improve building design. It analyzes the financial benefits of buildings that reduce energy cost, raise employee productivity, and enhance users' satisfaction. eVALUator software is available at http://www.energydesignresources.com/Resources/SoftwareTools/eVALUator.aspx. Before downloading the software, most Forest Service employees will need to get temporary administrative rights to install new software by going to http://gadgets.ds.fs.fed.us/EUTools/ad_promote.asp and following the instructions.

Advantages

eVALUator allows lots of flexibility and an unlimited range of building life. It allows occupant productivity, loan rate and term, discount rate, and capitalization rate inputs.
It's easy and quick to input the information needed for analysis.
It allows using different inflation rate assumptions for general costs, electricity costs, natural gas costs, operation and maintenance costs, capital purchase, and lease income.
It automatically performs an uncertainty analysis and expresses bottom-line numbers with an associated "uncertainty band."
Reports are straightforward, easy to configure for side-by-side comparison of alternatives, and easy to read. A sample eVALUator comparative analysis is included in the "Example Life-Cycle Cost Analysis Reports" section at the end of this report.

Limiting Factors

The reports are not very detailed.
When you try to install this program, it tells you it's downloading to a certain folder on the "C" drive, but it actually hides the executable (.exe) file in C:\Documents and Settings\(your shortname)\Local Settings\Temp\, and names it "setup.exe."
The program was created in 2000, so it tries to install old versions of some software that the program needs to run—Forest Service users will almost certainly have newer versions on their computers already, so they must be careful to keep the newer versions when queried during setup. If the newer versions are not retained, the older versions will overwrite them and foul up other applications. The eVALUator program will work just fine with the newer versions.
No residential uses are among the drop-down menu for building types, but "Other" works just fine.
Lots of drop-down menu locations are available for California. Although the only choice outside California is "national average," the program works fine for facilities in the rest of the country.

Building Life-Cycle Cost

The Building Life-Cycle Cost (BLCC) program was designed to analyze energy and water savings, but it can accommodate any life-cycle cost analysis. The latest version of BLCC—BLCC5—is programmed in Java with an XML file format. The user's guide is part of the BLCC5 Help system. BLCC 5.3-07 contains the following modules:

Federal Energy Management Program (FEMP) Analysis, Energy Project—For energy and water conservation and renewable energy projects under the FEMP rules based on 10 Code of Federal Regulations 436.
Federal Analysis, Financed Project—For Federal projects financed through Energy Savings Performance Contracts (ESPC) or Utility Energy Services Contracts (UESC) as authorized by Executive Order No. 13123 (June 1999).
OMB Analysis—For projects subject to OMB Circular A-94 for Federal Government construction projects that are not related to energy and are not water resource projects.
Three programs with special features specifically required by the U.S. Department of Defense.

BLCC software is available at http://www1.eere.energy.gov/femp/information/download_blcc.html. Before downloading the software, most Forest Service employees will need to get temporary administrative rights to install new software by going to http://gadgets.ds.fs.fed.us/EUTools/ad_promote.asp and following the instructions. BLCC 5.3- 08 became available just before this report was printed. It contains updated energy price indexes and discount factors, but is otherwise the same as BLCC 5.3-07.

Advantages

This program is very flexible. It allows you to consider as much or as little detail as you need for the level of analysis and for the building size and type.
It appears to be the standard, at least for Federal Government work.
It calculates life-cycle costs, net savings, savings-to-investment ratio, adjusted internal rate of return, and payback for any alternative relative to a base case.
Reports provide good detail on payback time, energy consumption (in dollars, kilowatt hours, therms, and British thermal units), and emissions. A sample BLCC comparative analysis is included in the "Example LCCA Reports" section at the end of this report.
Reports are straightforward, easy to read, and easy to set up.

Limiting Factors

Life-cycle costs can't be computed for longer than 25 years.
The financing information for the "Federal Analysis, Financed Project" option must be entered in a format that is not intuitive to people who aren't normally involved in financial calculations.
Employee productivity is not a component of this software.

Other Software Tools for Life-Cycle Cost Analysis

Software tools are available that can support or supplement LCCA. Most of these programs concentrate on energy efficiency and will perform a limited LCCA for energy use. The data from these programs can be entered into eVALUator or BLCC to produce more accurate life-cycle cost comparisons.

Options for heating, ventilating, air conditioning, windows, insulation, lighting, shading, appliances, office equipment, water heating, building orientation, and roofing can be evaluated with software tools. Unfortunately, no single tool covers everything. An alphabetical list, brief summaries, and Web addresses of many of these software tools are available in the "Life-Cycle Cost Analysis Software" section at the end of this report.

The Northern Region has developed a spreadsheet for calculating life cycle costs. Forest Service and Bureau of Land Management employees can access the spreadsheet at http://fsweb.mtdc.wo.fs.fed.us/toolbox/fmp/documents/lcca.xls.