Whole life costing

Question 1

definition of whole life costing?

Answer 1

‘Consideration of all the Costs associated with a built asset throughout its lifespan.’

Question 2

what is the concept of whole life costing?

Answer 2

the client used to only be interested in the actual construction costs

energy than started to become more expensive and that lead to clients becoming concerned about the occupational and running costs of their buildings

Question 3

what factors should be considered in whole life costing?

Answer 3

Location

Design

Cost to buy

Maintenance requirement

Space

Fuel/running costs

Question 4

what do you look for when seeking the outcome of whole life costing?

Answer 4

value for money.

is the project worth undertaking and offers an evaluation of alternative solutions…

an example:
Would you put solar panels on your rental house to reduce your fuel bills this year?
The answers will depend on several factors such as:
Is the Client the proposed end user of the building?
Is the building to be leased or sold?
What is the desired lifespan of the building?
What is the expected occupancy of the building?
What are the user patterns expected to be?
How will these questions affect the clients decisions?

Question 5

costs to be considered are split into 4 categories what are they?

Answer 5

Initial costs:
Design
Procurement
construction

Future costs:
alteration
demolition
recycling

Future costs in use:
running- redecoration, cleaning planned maintenance
repairs- faulty equipment, end of component life
replacements- due to incorrect initial component, unavailability of certain components no longer manufactured

Inflation:
time value of money
energy costs

Question 6

undertaking a whole life cost can be difficult why?

Answer 6

(1) Maintenance - Will routine maintenance be carried out?
(2) Obsolescence(outdated no longer in use) - can be hard to predict the future
(3) Component Life span - need to choose the right ones
(4) Technical Life - physical durability of properties
(5) Economic Life - physical durability of properties

Question 7

what must you do before whole life costing is carried out?

Answer 7

Must decide on the proposed life-span of the building before whole life can be carried out.

(1) Fashion Related Life Span - high street shop- require a refit to extend life (3 years?)
(2) Economic Life Span - major refurbishment to extend life ( 60 years?)
(3) Final Obsolescence - building becomes dangerous –end of life ( 100 years?)

Question 8

name a few lifespan components?

Answer 8

Technological - Advances render building unfit for purpose

Functional - Building no longer required for original use

Economic - business cost objectives can be realised in a better way

Social - change in the needs of society

Legal - Building fails to meet current legislation e.g. fire regulations

Aesthetic - Style of the structure has become unfashionable

Question 9

what are the project stages?

Answer 9

Project Inception

Design Stage

Procurement Stage

Construction Stage

Occupation

Question 10

what happens to wlc during the project stages?

Answer 10

As we run through the stages of WLC the usefulness of carrying out a WLC exercise generally be less effective.

Question 11

how does wlc impact each of the project stages?

Answer 11

Project Inception - expected ownership affects use - link back to the question of who will own, required lifespan etc?

MOST EFFECTIVE AT DESIGN STAGE:
- Most effective when used at this stage. to assess impact of design through the life of the project.

Procurement stage - Tendency to use lowest initial bid with no consideration of costs in use or whole Life Costs.

Construction Stage - Main Contractor could use WLC in their procurement of plant.

Occupation - Needs to be continually updated as usage, occupation, maintenance plan changes. Also useful to consider when a component is nearing the end of its life and for energy conservation; e.g. Changing a boiler which still works well due to the cost/environmental benefits of doing so.

Question 12

who uses whole life costing?

Answer 12

used by local authorities

but best clients that it used most for private finance initiative and public private partnerships

Heavily used for PFI as there is a cost implication to the consortium for the replacement and running costs of the built asset. therefore they are far more likely to consider WLC.

Question 13

are there methods of whole life costing?

Answer 13

YES

Simple
Discounting
Compounding

but no one method is used, all companies will have their own way based on their own requirements.

Question 14

issues when weighing up WLC?

Answer 14

Not comparing like for like

How do you cost out fuel?

Costs in the future versus costs now

Differing life span

Number of variable factors

Question 15

what are the conventional methods of investment appraisal techniques?

Answer 15

payback period:
a simple process whereby the Development Cost is compared to the inward rental /sale costs – how many years until we break-even

Average Rate of Return: Ratio of % profit earned over the lifespan of the project

Question 16

what are the discounting methods of investment appraisal techniques?

Answer 16

Present Value:
A sum of money required at some time in the future, discounted to today’s value.

Net Present Value:
Forecast returns from the project are discounted back to the period of initial outlay

Internal Rate of Return:
The rate of return, where the discount rate makes the NPV of a particular investment zero.

Question 17

what are the compounding methods of investment appraisal techniques?

Answer 17

Sinking fund:

Method by which an organisation can set aside money over time with which to carry out routine maintenance

Question 18

advantages of WLC?

Answer 18

Encourages Communication between stakeholders

Provides clear costings for build and occupation of building

Allows for informed decisions

Enables ‘Best Value’ to be achieved

Promotes realistic budgeting

Provides figures for future benchmarking

Adds real value

Question 19

Disadvantages of WLC?

Answer 19

Running costs cannot be fully calculated

The client is often not the end user so maintenance charges will fall to the purchaser

The cost of maintenance is guesswork often based on user not what is required

Repairs are often caused by faulty materials or workmanship - how can this be forecast?

Interest rates cannot be predicted with certainty

Lack of historical data

Question 20

how is the pay back period worked out?

Answer 20

initial cost of project divided by annual earnings

initial cost of project £40,000 and annual earnings is £10,000

therefore 4 years till project makes profit

Question 21

how is the average rate of return worked out?

Answer 21

Ratio of Average Profit Earned to Initial Capital Invested:
Profit can be either net or gross, an average of what is made over the project lifespan or the first year profit

Capital can be the

• initial investment sum
• or an average of all outlay over the lifetime of the project

ADD UP ALL THE INCOME AND DIVIDE BY THE YEARS TO FIND OUT THE ARR average and then divide the number by capital cost and times by 100 to give you percentage

look at picture on PHONE!!!

Question 22

discounted method what factors need to be considered?

Answer 22

A sum of money received some time in the future will always be worth less than a sum of money received today dependent on:

The length of time involved

Future Risk

Probable Interest Rates

Discount Rate or Discounting Factor takes this into account
Government recommends a discount rate

Question 23

how do you work out the discounting method present value?

Answer 23

Formulae: PV = 1
(1 + i)n
Where i = interest rate and n = time (years)

so you have the original pound divided by (the pound+interest) times by the amount of years.

Question 24

explain NPV net present value?

Answer 24

Total Value at today’s date

Well known method of financial appraisal. Forecast returns from the project are discounted back to the period of initial outlay.

Useful for comparing various long term projects.

Theoretically all projects with a NPV greater than 0 are viable.

Widely used in WLC.

Question 25

how do you work out the NPV?

Answer 25

find the present value of the pound each year and times that amount by yearly cash flow and add them all up and if above 0 will be viable.

Question 26

how is compounding calculated?

Answer 26

Simple Compounding: £100.00 invested today at a rate of 6% interest will be worth £106.00 in a year.

Complex Compounding: if re-invested at the same rate the following will happen:
End of year 1 £100.00 @ 6% £106.00
End of year 2 £106.00 @ 6%£112.36
end of year 3 £112.36 @ 6% £119.10

Question 27

how do you calculate sinking funds?

Answer 27

Formulae: SF £1.00 = 1

[(1 + i)n - 1]