Whole life costing Flashcards
definition of whole life costing?
‘Consideration of all the Costs associated with a built asset throughout its lifespan.’
what is the concept of whole life costing?
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
what factors should be considered in whole life costing?
Location
Design
Cost to buy
Maintenance requirement
Space
Fuel/running costs
what do you look for when seeking the outcome of whole life costing?
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?
costs to be considered are split into 4 categories what are they?
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
undertaking a whole life cost can be difficult why?
(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(2) Obsolescence(outdated no longer in use) - can be hard to predict the future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
what must you do before whole life costing is carried out?
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?)
name a few lifespan components?
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
what are the project stages?
Project Inception
Design Stage
Procurement Stage
Construction Stage
Occupation
what happens to wlc during the project stages?
As we run through the stages of WLC the usefulness of carrying out a WLC exercise generally be less effective.
how does wlc impact each of the project stages?
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.
who uses whole life costing?
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.
are there methods of whole life costing?
YES
Simple
Discounting
Compounding
but no one method is used, all companies will have their own way based on their own requirements.
issues when weighing up WLC?
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
what are the conventional methods of investment appraisal techniques?
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
what are the discounting methods of investment appraisal techniques?
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.
what are the compounding methods of investment appraisal techniques?
Sinking fund:
Method by which an organisation can set aside money over time with which to carry out routine maintenance
advantages of WLC?
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
Disadvantages of WLC?
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
how is the pay back period worked out?
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
how is the average rate of return worked out?
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!!!
discounted method what factors need to be considered?
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
how do you work out the discounting method present value?
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.
explain NPV net present value?
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.
how do you work out the NPV?
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.
how is compounding calculated?
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
how do you calculate sinking funds?
Formulae: SF £1.00 = 1
[(1 + i)n - 1]
