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7/25/2019 part 2 section 2
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PART TWO: CONSTRUCTION DESIGN & ECONOMICS
SECTION 2: LIFE CYCLE COSTING
Introduction
It is becoming increasingly important that investment appraisal uses a whole
life approach in a more systematic way than at present. Major construction
clients are now insisting upon an analysis of life cycle costs and not just
capital costs.
The life cycle cost (LCC) of an asset is defined as the present value of the total
cost of that asset over its operating life (including initial capital cost,
occupation costs, operating costs and the cost or benefit of the eventual
disposal of the asset at the end of its life).
Life cycle cost techniques can be used, for example, to:
evaluate design options at the elemental or component level;
evaluate total building options, for example refurbishment versus new
build;
determine optimum maintenance strategies;
analyse relocation strategies; and
determine sinking fund requirements to finance planned maintenance
programmes.
Worked examples for the above are included in 2.2.5.
The objective of this Section is to inform chartered surveyors of the increasing
need to adopt life cycle costing (2.2.1) and to introduce them to the techniques
and their application.
2.2.1 The Client Context
2.2.1.1 Following the recession of the early 1990s construction clients are generally
more streamlined and competitive and some recognise that their ongoing
property costs may provide them with the business edge they need. There is
therefore increased attention to life cycle costing. The following Sub-sections
expand on this trend by covering recent changes in the industry and their
effect on LCC.
2.2.1.2 VALUEENGINEERING
Value engineering involves preparing structured option appraisals during the
design process so demonstrating value for money for clients. Its use is
I
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increasing and with it comes the opportunity and need for LCC to be part of
the options appraisal criteria.
2.2.1.3 THE
LATHAM
REPORT
Sir Michael Lathams report Constructing the Team1, calls for a 30% real
reduction in construction costs. This statement includes life cycle costs. The
report also strongly advocates the need to build right first time in which
environment life cycle cost calculations (involving assumptions about future
maintenance) have more credibility.
2.2.1.4 CONSTRUCTION(DESIGN ANDMANAGEMENT) REGULATIONS1994
The Construction (Design and Management) Regulations 1994 place a
specific duty upon clients and their designers to consider the potential hazards
associated with the construction process during design, and furthermore to
consider the health and safety implications of maintaining the structure whencomplete. Such increased focus on maintenance may therefore encourage
greater consideration of maintenance costs. This principle is enshrined in
Regulation 13(2)(a)(i) and (ii) which states:
(2) Every designer shall:
(a) ensure that any design he prepares and which he is aware will be
used for the purposes of construction work includes among the
design considerations adequate regard to the need:
(i) to avoid foreseeable risks to the health and safety of any
person at work carrying out construction work or
cleaning work in or on the structure at any time, or of
any person who may be affected by the work of such a
person at work,
(ii) to combat at source risks to the health and safety of any
person at work carrying out construction work or
cleaning work in or on the structure at any time, or of
any person who may be affected by the work of such a
person at work.
It follows that the selection of materials for certain elements of a structure that
may involve maintenance, (particularly where access to those elements
involves working at height), complies with the spirit of Regulation 13. For
example, the selection of PVCu window frames with easy clean hinges
involves limited maintenance and allows cleaning from the inside. Similarly
marble flooring is cheaper than cork tiles over a 60-year period and while the
decision to use marble is economically sound it also removes health hazards
1 Latham, M., Sir, (1994),Constructing the Team: Joint Review of Procurement and Contractual
Arrangements in the United Kingdom Construction Industry: Final Report, HMSO London
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associated with fumes and vapour when cork has to be resealed. In purely
capital cost terms, the selection of the materials referred to above may be more
expensive than their traditional counterparts.
The use of life cycle costing places initial capital cost in the context of future
maintenance expenditure, and helps justify decisions which have beneficial
health and safety implications.
2.2.1.5 THEPRIVATEFINANCEINITIATIVE(PFI)
The PFI is driven by a cash flow which is achieved by the private sector
provider delivering a service to the client. This service will include the
management of a building which should be heated, cooled, lighted, cleaned,
maintained, secured, insured and renovated. This cash flow should
sufficiently cover all costs and outgoings, leaving the provider with a surplus
or profit which should be commensurate with his risk exposure.
It is therefore critical that the provider accurately predicts the cost in use of the
service or the facility over its operational life so that he can calculate the cash
flows generated by the assets over the term of the contract. Such data is vital
so as to negotiate the complexities of the contract to both parties satisfaction.
To assist this process some suppliers give guaranteed long-term costs, e.g. for
lifts and kitchen equipment. By reducing costs over this term it should be
financially viable for the private sector to provide a service to the public sector
and to achieve an acceptable return.
Life cycle costs and their accurate prediction, control and reduction are critical
to the successful performance of a PFI deal.
2.2.1. ENERGYEFFICIENCYISSUES INRELATION TOBUILDINGPROJECTS
Studies by the Building Research Establishment through the BRECSU
(Building Research Energy Conservation Support Unit) Best Practice
Programme have found that energy consumed to heat, light and service
buildings accounts for almost half of the UKs energy bill, and there is
considerable scope to reduce it. Office buildings were found to have the
highest energy costs, especially prestigious, air conditioned property
(typically 20/m2
per year in 1991 compared to 15/m2
for the same bestpractice office).
There is common feeling that property overheads are too large, with energy
bills contributing significantly to the operating costs. Energy costs are
potentially one of the most controllable items of overheads and life cycle
costing can be used as a tool for predicting the benefits of investment in
energy efficiency. Typical investments for analysis would be economic
thickness of insulation, energy efficient services, building energy
management system installations, intelligent buildings, energy conscious
refurbishment of buildings and passive cooling techniques versus air
conditioned design. For example, a manufacturer can supply a light bulb some
ten times more expensive than a normal one, however, it lasts longer, uses less
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electricity and performs better. Similarly, condensing gas boilers can save
1020% of fossil fuel bills with pay back in five years.
It is also worth noting that oil is becoming increasingly harder to extract and
environmental concerns generally will increase in the very near future.
Sainsbury has been the first grocery retailer to produce an environmental
report and recognises that energy probably accounts for its single biggest
direct environmental impact. Significantly it is also the third largest
controllable cost in running a typical supermarket.
2.2.1.7 MECHANICAL ANDELECTRICALBUILDINGSERVICES
The increasing capital cost significance and complexity of M & E services has
resulted in greater cost emphasis during the early design stages. Such costing
is increasingly carried out by a specialist Quantity Surveyor so bringing
greater opportunity to focus on M & E life cycle costs which are a significant
proportion of a buildings cost in use, accounted for by the operation, energy
use and replacement costs associated with the M & E installations.
2.2.1.8 BUILDINGSUSTAINABILITY
If there is to be a conscious shift of opinion towards sustainable buildings i.e.
those which have a viable life expectancy beyond their initial designed use,
then there has to be a simultaneous re-examination of a buildings costs in use
or perhaps more correctly costs in uses.
Buildings have not been traditionally designed for anything beyond theirimmediate requirement. However, as more are being converted to alternative
uses it is probably only a matter of time before investors in property call for
properties to be constructed with a view to extending the buildings usable
life, e.g. conversion to house a growing less mobile and aged population. Such
consideration is more valid the shorter the predicted current building life, e.g.
some light industrial units for English Partnerships have been designed for a
ten-year life. Similarly, Hertfordshire County Council have housing and
nursing homes with a 20-year life expectancy.
Such a concept will require building layouts and structures to be more flexiblewith maintenance, re-servicing and conversion to alternative uses being
simplified and made more economical. A cost in use study at design stage may
justify larger bay sizes, raised flooring or greater storey heights to demonstrate
continual viability for future generations.
A cost in use study would explore the economics involved of using a building
for its notional design life and for its intended use in the usual way. However,
supplementary investigations would explore potential alternative uses for the
building and the conversion cost (and possibly the cost in use for a further
notional period). If sufficient consideration were to be given at the initial
design stage for potential future uses of a building, it could be used to
demonstrate the continued asset value of the property and go a considerable
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way to minimising the obsolescent properties which currently dominate
certain market sectors.
2.2.2 The Life Cycle Costing Calculation
INTRODUCTION
The calculation generally involves the appraisal of options, each option
having different capital and future costs. To determine and analyse the future
costs it is necessary to establish:
the building life;
the discount rate (which, expressed simply, is the difference between the
interest and inflation rate and is used to convert future payments to
present values);
the cost and frequency of future payments (at the component, elemental
or total building level as appropriate);
any tax implications (see 2.2.3).
2.2.2.1 THEBUILDINGLIFE
An essential element of life cycle costing is defining the life cycle period to be
adopted. An assessment must therefore be made of the life of the investment
building life.
Typically the relevant building life will be the period over which theorganisation, for whom the study is being conducted, will be expected to hold
an interest in the building, and would take into account the residual value.
At the end of the life of a building, the building (or component) and the land
will have a residual value. In the case of relatively short life cycles or high
value land, residual values can be very significant factors in determining the
optimum life cycle cost options. Residual values are briefly discussed in
Appendix A (and worked example 2.2.5.3 includes a residual value in the
calculation).
When the building life is assessed to be over 40 years, the precise life is notcritical for the purposes of life cycle costing (as discounting, explained below,
minimises the effect of such future payments). In cases where calculations are
based on a relatively short building life, say 20 years or less, the assessment of
the time horizons must be considered with special care.
Building life is influenced by obsolescence, the causes of which are
summarised in Appendix B.
2.2.2.2 THEDISCOUNTRATE
The life cycle cost technique is concerned with the assessment of the time
stream of costs and revenues that will flow throughout the life of a
construction project option.
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As money today has a different value from money tomorrow or money in
ten years time, a technique has to be adopted that will express future costs or
revenues in present values. The process of converting future money to
present money is called discounting.
Discounting involves establishing the discount rate to be used. In making the
decision on a discount rate for a particular project, some judgement will need
to be made about the degree of risk return (interest) and the likely levels of
future inflation rates.
Interest rates are particular to the client and the degree of risk. It is therefore
essential to involve the client (and his accountant if appropriate) in the process
and reach agreement on the discount rate to be used.
Economists, accountants and clients will all have different views about future
levels of inflation and interest rates. Some forecasters may take the view that
as different categories of cost inflate at different rates, these differences
should be taken into account in setting discount rates. These diversities of
view before the fact make it difficult to recommend any firm guidelines for
surveyors to adopt for selecting discount rates.
There are two main approaches to discounting:
(a) use a rate which implies inflation of future costs and values (in this case
future costs and values will be priced at todays prices);
(b) use a rate which requires an explicit treatment of inflation in relation to
future costs and values, (in this case future costs and values will be priced at
todays prices and adjusted by a factor to reflect future inflation).
It is suggested that it is easier to deal with the former situation where future
costs and values are assessed at current prices. Three approaches on the
selection of discount rates are given for guidance purposes and in each the
future costs are priced at current prices.
2.2.2.3 DISCOUNTRATEMETHODS
(a) Test Discount Rate
In the absence of better information it is recommended that a test discount rate
should be used.
This recommendation is based on the assumption that when inflation rates are
reasonably low, i.e. less than 15%, there is quite a stable relationship between
inflation and the bank base interest rate, implying a real discount rate of
between 4% and 5% (i.e. the interest rate is 4 to 5% greater than inflation). It
is recommended that in the circumstances, where no better information is
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available, a test discount rate of 4% is used. This method is often adopted in
the public sector where minimal risk associated with the investment is
assumed.
(b) No risk return discount rate
Investment in long-term Treasury Bonds can be assumed as having no risk,
and are a good reflection of the return to be expected on other investments
where there is no risk. Therefore the discount rate can be taken as the Treasury
Bond rate less an allowance for the expected rate of inflation. On this basis the
discount rate would be assessed as:
Treasury Bond rate of return 8%
Less
Inflation 5%
No risk return discount rate 3%
(c) Average risk premium discount rate
The average return on equities reflects the interest required on an average risk.
The excess of this rate of return over that expected from the above Treasury
Bonds can then be taken as the premium expected for the average risk. On this
basis the average risk premium could therefore be calculated as:
Average equity rate return 16%
LessTreasury Bond rate 8%
Average risk premium discount rate 8%
Therefore if construction is deemed to be half as risky as equities, the discount
rate for construction investment could be assessed as:
No risk return 3%
Construction premium risk (8% ) 4%
Average construction risk return discount rate 7%
(d) A further approach to establishing a discount rate is to analyse transactions
involving the sale of comparable properties, and to utilise the all risks yield
as the discount rate.
In the examples of the calculation of discount rates, concurrent interest and
inflation rates have been added and subtracted in order to clarify the
methodology. This is mathematically imprecise. The actual calculation will
need to be compounded.
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In the no risk return discount rate method, for example, the calculation
should be as follows:
Treasury Bond rate of return 8%Inflation rate 5%
Discount rate (i.e. Treasury Bond rate net of inflation
= 0.02857
= 2.857%
The same methodology should be adopted for actual calculations using other
methods. As an approximation however this may be ignored.
(e) In summary, the effect of future payments on an LCC calculation is in
inverse proportion to the level of discount rates i.e. the higher the discount rate
the less effect future payments have on the LCC calculation. For example, a
risk taking client is less likely to spend money on the building to reduce future
costs since he can use this money to get a higher return elsewhere.
Selection of a suitable discount rate is crucial as it can overwhelm all other
decisions.
Once the discount rate is established valuation tables can be used to convert
future payments to present value. For example, the present value of 100 to be
paid in five years time at a discount rate of 4% =
100 0.82192 (from valuation tables at 2.2.5.7 present value of 1) =82.19
Such conversion of future payments to present value provides a basis for
comparing alternative expenditures.
2.2.2.4 THECOST ANDFREQUENCY OFFUTUREPAYMENTS
The costs are generally dealt with using current prices (using the discount rate
to allow for inflation), with assumptions made regarding when payments will
occur in the future. 2.2.4 includes possible sources for such data.
Depending upon requirements, some calculations will be relatively
straightforward (see the option appraisal exercise for internal doors as shown
(1 = Treasury Bond rate)= 1
(1 + Inflation rate)
1.08= 1
1.05
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in the worked examples). However, all expenditure throughout the life of the
building could be included if the total building analysis were required.
The major categories of costs are: capital costs
financing costs
operation costs
annual maintenance costs
intermittent maintenance, replacement and alterations costs
occupancy costs
residual values and disposal costs.
An expanded check list of costs is given in Appendix C.
Estimates for these costs will be based upon assumptions about future events
and should be clearly stated. Indeed an additional advantage of life cycle
costing is that it requires design assumptions to be stated explicitly rather than
implied.
Although current costs are generally used, it is important that future cost
assessment should reflect any expected divergence of a specific cost from the
level of inflation allowed in the discount rate. For example, it would be unwise
to assume that market conditions would remain unchanged for any extended
period when tender levels for building work are very depressed. Some
allowance should therefore be made to adjust current building prices to more
normal market conditions when pricing future building work.
The level of detail used will be dictated by the availability of information and
the requirements of the client.
The following costs for each category should be considered and where
necessary established with the client.
(a) Capital costs include land, building, professional fees, furniture and
equipment, or permanent improvements thereto, which form assets for thebusiness to use in its operation, with an intended useful life of more than one
year. The significance of any tax benefits and grants should be established
with the client.
(b) Financing costs the method of funding the project should include, inter
alia, the cost effect of alternative sources of funds, the future flexibility of
funds in terms of amounts and sources, and gearing. Consideration should also
be given to
the accounting effect of capital employed;
construction period finance charges and long-term finance costs; and
the taxation implications of the various options.
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(c) Operation costs include estimates of rent, rates, energy costs, cleaning
costs, building related staffing costs and other staffing costs.
(d) Annual maintenance costs average maintenance costs are available but
once details of design are completed, a more relevant estimate can be
produced based on information obtained from manufacturers or maintenance
managers.
(e) Intermittent maintenance, replacement and alteration costs replacement
costs can be produced using normal cost estimating techniques.
In seeking a realistic assessment of the life of materials and components,
reference should be made to manufacturers, maintenance managers and other
sources of such data (as discussed in 2.2.4).
(f) Occupancy costs the cost of performing the function for which the
building is intended (e.g. producing motor vehicles). Occupancy costs are
distinguished from operation costs, as they relate to costs attributable to a
specific process undertaken by the client, which may change within the life of
the building. As an example, a car manufacturer may change to the production
of heavy goods vehicles. This would impact on his occupancy costs, whereas
his building related operation costs could be relatively unchanged. Some
clients might not require the surveyor to take these costs into account, as not
relating directly to the building.
(g) Residual values and disposal costs estimate of the resale value and thecost of disposing of the building, plant, land and other assets after the expiry
of the life cycle. Many buildings, particularly those with an open market
value will have a significant residual value. Care should be taken in assessing
this value as it can have a major effect on the life cycle costing calculations
(see Appendix A).
2.2.3 Tax Allowances, Incentives and Business Rates
INTRODUCTION
This Sub-section deals with the effect of taxation allowances and incentivesavailable for expenditure upon property and construction applicable in the
United Kingdom to date, during the life of the asset. A glossary of terms is
included in Appendix D.
Currently, legislation offers tax relief by allowing expenditure upon certain
assets to be depreciated, and to be offset against a private commercial
organisations taxable profits.
Tax relief is available on both capital and revenue expenditure. Capital costs
receive this relief by way of capital allowances which are deductible items
from the taxpayers taxation liability account. Maintenance costs are a charge
on the profit and loss account, which again reduces the tax payable.
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The significance of tax relief depends upon the amount of allowable
expenditure. This varies considerably, being dependent upon the type and
function of the asset, its design and sophistication (particularly in respect of
services) and whether or not the project is a new building or a refurbishment.
The impact of tax relief on the life cycle evaluation lessens proportionately
with the ratio of allowable expenditure to the total expenditure and the timing
of relief, which is dependent on the annual rate of taxation allowances. For
example, a new oil refinery will have a greater proportion of allowance than a
shop unit shell. It is also worth noting that capital allowances tend to be
greater on plant than on buildings, so making the use of efficient plant more
attractive than increasing the thermal efficiency of the building.
The impact of tax relief should be sensitively tested at the earliest possible
stage. A detailed estimate of the allowable expenditure should only be
prepared if tax relief is found to be significant.
2.2.3.1 The following example shows the net discounted cost, after tax relief, of
1,000 spent on differing types of expenditure.
2.2.3.2 TYPES OFALLOWANCES
The types of allowances and rates of depreciation often change.
Following the Finance Act 1985, capital allowances available that relate to
Real Property were as follows:
No relief
Where capital
allowances are
allowed on 50% of
capital expenditure
Where capital
allowances are
allowed on 100%
of capital
expenditure
Relief given
on
maintenance
100%
Expenditure 1,000 1,000 1,000 1,000
Tax relief assuming 35%
Corporation Tax
1111 222 350
Net discounted cost after
tax relief
1,000 889 778 650
1 i.e. 50% of 1,000 25% reducing balance 35% Corporation Tax with future allowances discounted at
10% per annum (a discounting calculation is required in order to establish the above figures).
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Allowable expenditure Timing or percentage per annum
Plant and machinery 25% (reducing balancing)
Industrial buildings 4% (straight line)
Agricultural buildings 4% (straight line)
Dredging 4% (straight line)Scientific research 100%
Cemeteries and crematoria Ratio based upon grave spaces used
Dwelling houses let on assured tenancies
only expenditure expended prior to
1 April 1987 4% (straight line)
Hotels 4% (straight line)
Enterprise zone building expenditure 100%
Mining and certain related construction works 40% plus a ratio based upon usable life
Subsequent to the Finance Act 1997 first year allowances were changed and at
the time of writing were still being finalised.
In certain circumstances allowances may be at a higher rate i.e. they relate to
specific incentives, certain assisted projects or expenditure relates to a
transitional period e.g. terms of the Finance Act 1984 (applicable until 31
March 1987).
Different types of allowances, initial, first year and writing down are
explained in the Glossary of Terms (Appendix D).
Straight line allowances are calculated as a percentage of original cost and at
4% the allowance is spread evenly over 25 years. A reducing balance
computation is achieved each year by first deducting all previous allowanceamounts from original cost and then applying the allowable percentage to the
balance, i.e. 25% in the first year, 25% of 75% in the second, and so on. While
the building itself may be subject to a 4% straight line allowance the plant and
machinery in the building will receive a 25% reducing balance.
It should be noted that the significant part of capital allowance relief on a 25%
reducing balance basis comes in the first five to seven years. This is included
in the above example where the tax relief amount is a product of the
incremental annual writing down allowance, discounted.
Regional development grants (or their Northern Ireland equivalent) may also
be available. These are not treated as taxable and may be disregarded when
assessing the capital cost upon which tax relief is calculated.
Currently the running and maintenance costs of an asset are deductible in full
(i.e. 100% allowance) against taxable profits in the year of expenditure.
2.2.3.3 VALUEADDEDTAX(VAT)
Capital allowances are given against the net capital cost to the taxpayer.
Therefore, as VAT is part of that capital cost, clients will incur differing
overall capital expenditure for the same item depending upon whether theycan or cannot recover, or recover only a proportion of, the VAT.
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2.2.3.4 CALCULATION OF THEEFFECT OFCAPITAL ANDREVENUEALLOWANCES
Before calculating the effect of taxation allowances, certain parameters need
to be ascertained:
(a) the Corporation Tax and allowances rate that will be current at the date of
construction of first use;
(b) the future Corporation Tax and allowance rate at the date of replacement;
(c) the Corporation Tax rate current at dates between date of construction of
first use and the date of replacement, against which revenue running costs can
be charged;
(d) whether the owner will be liable to tax during the period between the date
of construction or first use and the date of replacement, and if the owner will
have sufficient taxable profits to use the allowances generated in any one year.
(e) whether the items economic life will be shorter than the tax write down
period. This will either generate an added write down amount when it is
demolished, or if the item or building is to be sold at the end of its economic
life, its profit or loss on cost. These circumstances will generate a taxable
profit or loss on proceeds above or below the tax write down value and will
attract a balancing adjustment;
(f) the value of the balancing allowances, charges or taxable profits needs to
be considered against the relevant Corporation Tax rate;
(g) the impact of these adjustments therefore needs to be taken into account in
the life cycle costing assessment.
Caution is further necessary as there are specific restrictions. The recipient has
to prove to the Inland Revenue that he qualifies for allowances (i.e. the
entitlements are aimed at providing incentives for commercial organisations
and therefore expenditure upon residential property is largely excluded.
Entitlements are also restricted between connected persons).
2.2.3.5 DYNAMICS
The surveyor should therefore appreciate the variables and frequent changes
that occur in respect to the application of taxation allowances.
These arise because:
(a) the Government uses taxation to impose fiscal policy and influence the
economy and therefore statutes are introduced amending previous rates of
depreciation, regulations and entitlements;
(b) the interpretation of entitlement is affected by case law precedents.
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(c) the Inland Revenue practices and extra statutory concessions develop to
address specific issues or vagaries.
2.2.3.6 APPLICATIONS
Taxation allowances provide the opportunity for innovative funding
arrangements whereby the tax relief can be exported to a party who can
enjoy more benefit from the entitlement.
They also need to be advised during property transfers so the relevant
balancing adjustments can be calculated and the purchasers advised of their
proper entitlements.
2.2.3.7 WORKEDEXAMPLES
Worked example 2.2.5.3 summarises the effect of capital and revenue
allowances. Worked example 2.2.5.6 includes a detailed calculation of thecapital and revenue allowances.
Business Rates
Large plant and machinery regarded as an integral part of the building can
attract additional rates which can be influenced by design niceties (such as how
the plant is covered over). Expert advice should be sought in such a situation.
Further reading for taxation
Tolleys Capital Allowances, Tolley Publishing Co. Ltd generally published
annually.
Butterworths Yellow Tax Handbook, Butterworth & Co. (Publishers) Ltd
abstract of Statutes
Tax Statutes and Statutory Instruments, CCH Editions Ltd incorporating
extra statutory concessions
2.2.4 Data Sources
Lack of data in a suitable format for maintenance, replacement and energy
costs is said to be a significant reason for LCC rarely being carried out at
present. Notwithstanding this, Building Surveyors and Facility Managers will
often have valuable in-house data. Furthermore, professional judgement
should not be disregarded.
LCC calculations require information regarding the durability of
materials/components, and/or energy costs. Lack of such accurate data in a
suitable format may affect the credibility of the LCC calculation. However,
while historic data is useful, reality is dependent upon individual design,
installation and usage as well as technical development.
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Whilst the selection of data sources given in Appendix F is not
comprehensive, it gives an indication of the level of information available.
Trade literature which is a prime source of detailed information is not
included.
2.2.5 Worked Examples
INTRODUCTION
Life cycle costing can be used in numerous situations. The intention of this
Sub-section is to give the reader an appreciation of its application, as used by
surveyors in practice, and the relative complexities of associated calculations,
ranging from a simple elemental option appraisal to complex total building
analyses.
The examples follow in order of complexity, worked examples 2.2.5.1 and
2.2.5.2 will readily convey the principles of life cycle costing including
discounting. The remainder consider more detailed scenarios.
2.2.5.1 DESIGNOPTION: INTERNALDOORS
This example is kindly provided by Messrs Gardiner & Theobald, Chartered
Quantity Surveyors. The objective is to evaluate four comparative
specifications over a building life of 60 years using a discount rate of 4% (7%
interest rate less 3% inflation rate). The information is summarised in the table
below with an explanation of the calculation for option 1 detailed at (a) to (d)
below. Any tax implications are excluded.
(a) The present value for purchasing the doors is obviously the same as the
capital cost: 35,000
(b) For the annual running costs:
10.89/m2 20 m2 = 218
218 incurred every year for 60 years at 4% discount
= 218 22.6* = 4,927 present value
(c) For maintenance the present cost of 6,040 for new ironmongery andrepainting taking place in, say Year 12 at 4% discount
= 6,040 0.62459** = 3,773
(d) The replacement cost after 40 years
= 35,000 (present cost) 0.20828** = 7,290
The total present value of the capital cost, annual running cost,
maintenance and replacement costs
= 57,037 showing option 1 is the most expensive life cycle cost
* from valuation tables at 2.2.5.7 (years purchase or present value of 1
per period)
**from valuation tables at 2.2.5.7 (present value of 1)
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PROJECT:Life Cycle Model SHEET NUMBER: LCCM5ELEMENT: Internal Doors
Unit: 20 m2
PROJECT LIFE 60 YearsDiscount Rate 4.00% per annum
Discount Rate 4.00% per annum
(Interest Rate (7%), Inflation (3%))
COSTS
OPTION 1
Aluminium Glazed
OPTION 2
Hardwood GlazedVision Panels
OPTION 3
Softwood
OPTION 4
Metal
Finish Life40 Years
Finish Life30 Years
Finish Life20 Years
Finish Life30 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
Capital CostsAluminium Glazed 1750.00 m2 35,000 35,000Hardwood Glazed
Vision Panels 1000.00 m2 20,000 20,000
Softwood 700.00 m2
14,000 14,000Metal 850.00 m2 17,000 17,000Contingency
Total Year 1 Capital Costs 35,000 20,000 14,000 17,000
Annual Running CostsAluminium Glazed 10.89 m2 218 4,927Hardwood GlazedVision Panels 9.99 m2 200 4,520Softwood 5.90 m2 118 2,670Metal 17.99 m2 360 8,140
Total Annual Running Costs 13,068 4,927 11,988 4,520 7,080 2,670 21,588 8,140
Maintenance Year PresentCost
OPTION 1 Repaint 4 340 340 291
Repaint 8 340 340 248New ironmongery
Repaint 12 6,040 6,040 3,773Repaint 16 340 340 182Repaint 20 340 340 155
New ironmongeryRepaint 24 6,040 6,040 2,356Repaint 28 340 340 113Repaint 32 340 340 97
New ironmongeryRepaint 36 6,040 6,040 1,472Repaint 40 340 340 71Repaint 44 340 340 61
New ironmongeryRepaint 48 6,040 6,040 919Repaint 52 340 340 44
Repaint 56 340 340 38OPTION 2 Repaint 4 300 300 256
Repaint 8 300 300 219New ironmongery
Repaint 12 6,000 6,000 3,748Repaint 16 300 300 160Repaint 20 300 300 137
New ironmongeryRepaint 24 6,000 6,000 2,341Repaint 28 300 300 100Repaint 32 300 300 86
New ironmongeryRepaint 36 6,000 6,000 1,462Repaint 40 300 300 62Repaint 44 300 300 53
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PROJECT:Life Cycle Model (continued SHEET NUMBER: LCCM5ELEMENT: Internal Doors
Unit: 20 m2
PROJECT LIFE 60 Years
Discount Rate 4.00% per annum
Discount Rate 4.00% per annum
(Interest Rate (7%), Inflation (3%))
COSTS
OPTION 1Aluminium Glazed
OPTION 2Hardwood Glazed
Vision Panels
OPTION 3Softwood
OPTION 4Metal
Finish Life40 Years
Finish Life30 Years
Finish Life20 Years
Finish Life30 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
MaintenancePeriod4 Years
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
Maintenance Year PresentCost
New ironmongeryRepaint 48 6,000 6,000 913Repaint 52 300 300 39
Repaint 56 300 300 33OPTION 3 Repaint 4 320 320 274
Repaint 8 320 320 234New ironmongery
Repaint 12 3,820 3,820 2,386Repaint 16 320 320 171Repaint 20 320 320 146
New ironmongeryRepaint 24 3,820 3,820 1,490Repaint 28 320 320 107Repaint 32 320 320 91
New ironmongeryRepaint 36 3,820 3,820 931Repaint 40 320 320 67Repaint 44 320 320 57
New ironmongery
Repaint 48 3,820 3,820 581Repaint 52 320 320 42Repaint 56 320 320 36
OPTION 4 Repaint 4 300 300 256Repaint 8 300 300 219Repaint 12 6,100 6,100 3,810Repaint 16 300 300 160Repaint 20 300 300 137Repaint 24 6,100 6,100 2,380Repaint 28 300 300 100Repaint 32 300 300 86Repaint 36 6,100 6,100 1,486Repaint 40 300 300 62Repaint 44 300 300 53Repaint 48 6,100 6,100 928Repaint 52 300 300 39
Repaint 56 300 300 33Replacement Year Present
Cost6,100 3,810
OPTION 1 40 35,000 35,000 7,290OPTION 2 30 20,000 20,000 6,166OPTION 3 20 14,000 14,000 6,389
40 14,000 14,000 2,916OPTION 4 30 17,000 17,000 5,241
Total Maintenance/Replacement Costs 62,560 17,109 47,000 15,776 46,480 15,917 44,400 14,993
Total Running Costs 75,628 22,037 58,988 20,297 53,560 18,586 65,988 23,132
Total Net Present Value of Life Cycle Costs 57,037 40,297 32,586 40,132
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2.2.5.2 BUILDINGSERVICESDESIGNOPTION: AIRCONDITIONING ANDUNDERFLOOR
TRUNKING VERSUSHOTWATERHEATING ANDRINGMAINELECTRICS
This example is again provided by Messrs Gardiner & Theobald. The
objective is to evaluate the above options for a building of 3,000 m 2 floor area,
a life of 60 years and a discount rate of 4% (7% interest less 3% inflation). The
information is summarised overleaf with the methodology for the calculation
being exactly as that for the previous example. Any taxation implications are
excluded.
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Element:ServicesUnit: 3,000 m2
PROJECT LIFE 60 YearsD iscount Rate 4% per annum
Discount Rate 4.00% per annum(Interest Rate (7%), Inflation (3%)
COSTS
OPTION 1Air ConditioningU/Floor Trunking
OPTION 2HW Heating &
Ring Main Electrics
OPTION 3 OPTION 4
Finish Life15 Years
Finish Life25 Years
Finish Life Finish Life
MaintenancePeriod5 Years
MaintenancePeriod7 Years
MaintenancePeriodYears
MaintenancePeriodYears
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
EstimatedCost
PresentValue
Capital Cost
Air Conditioning U/Floor Trunking 250 m2 750,000 750,000
HW Heating & Ring Main Elec tri c 150 m2 450,000 450,000
Contingency 5% 37,500 22,500
Total Year 1 Capital Costs 787,500 472,500
Annual Running Costs
Air Conditioning U/Floor Trunking 25.00 m2 75,000 1,696,762
HW Heating & Ring Main Electric 5.00 m2 15,000 339,352
Total Annual Costs 4,500,000 1,696,762 900,000 339,352
Maintenance Year Present
Cost
OPTION 1 5 5,000 5,000 4,110
Overhall Equipment 10 5,000 5,000 3,378
Overhall Equipment 15 5,000 5,000 2,776
Overhall Equipment 20 5,000 5,000 2,282
Overhall Equipment 25 5,000 5,000 1,876
Overhall Equipment 30 5,000 5,000 1,542
Overhall Equipment 35 5,000 5,000 1,267
Overhall Equipment 40 5,000 5,000 1,041Overhall Equipment 45 5,000 5,000 856
Overhall Equipment 50 5,000 5,000 704
Overhall Equipment 55 5,000 5,000 578
OPTION 2 7 2,000 2,000 1,520
Genearl repaint/repair 14 2,000 2,000 1,155
Genearl repaint/repair 21 2,000 2,000 878
Genearl repaint/repair 28 2,000 2,000 667
Genearl repaint/repair 35 2,000 2,000 507
Genearl repaint/repair 42 2,000 2,000 385
Genearl repaint/repair 49 2,000 2,000 293
Genearl repaint/repair 56 2,000 2,000 222
OPTION 3
OPTION 4
Replacement Year Present Cost
OPTION 1 15 600,000 600,000 333,159
30 600,000 600,000 184,991
45 600,000 600,000 102,719
OPTION 2 25 300,000 300,000 112,535
50 300,000 300,000 42,214
OPTION 3
OPTION 4
Tota l Maintenance/Replacement C osts 1,855,000 641 ,278 616,000 160,375
Total Running Costs 6,355,000 2,338,040 1,516,000 499,728
Total Net Present Value of Life
Cycle Cost 3,125,540 972,228
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2.2.5.3 MAINTENANCEOPTION: WITH/WITHOUTCLEANINGGANTRY
This example is kindly provided by Gerald Hall.
The following figure compares two options, firstly to provide the cleaning
gantry and secondly to omit the gantry. The capital cost and costs associated
with anticipated maintenance were calculated by using normal cost estimating
techniques.
Assumed criteria:
Building Life 25 years
VAT assumed to remain at current levels with the client
being an end user under VAT rules 17.5%
Gantry capital cost 30,000 The gantry will have a residual value 2,000
Capital cost for opening lights in lieu of gantry 5,000
Discount rate (assuming the interest rate will average 11%
over 25 years and the inflation rate 6%) 5%
Corporation Tax 33%
Taxation Calculation
The capital cost for plant and machinery receives a 25% reducing balance.
Maintenance and running costs receive 100% allowance.
Year 1 with gantry calculation:
Capital 35,250 25% 33% = 2,908
Maintenance 881 33% = 291
3,199
Year 2 with gantry calculation:
Capital 35,250 less 25% 25% 33% = 2,181
Maintenance 881 33% = 2912,472
The methodology applies for the rest of the 25 years as summarised overleaf.
The client initially considered that the gantry would pay for itself due to
savings in maintenance and cleaning cost.
However:
with gantry investment 36,510 present value
without gantry investment 26,447 present value
7/25/2019 part 2 section 2
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The Surveyors Construction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 21
COMPARATIVECOMPONENTLIFE
CYCLECOSTING
CLIENT:
PROJECTTITLE:RetailDevelopment/ShoppingMall
JOBNO:
OPTION:Cleaningwithgantrycurta
inwallingtonewfacace
Year
Costs
TOTAL
VAT17.5
%
TOTAL
incVAT
Lesstax
allowance
NETTOTAL
Presentvalue
of 1
@5
%
PRESENT
VALUE
CUMULATIVE
PRESENT
VALUE
Capital
Financing
Operation
Maintenance
Occupacy
Disposal/
residualva
lue
Annual
Intermittent
0
30,0
00
30,0
00
5,2
50
35,2
50
0
35,2
50
1.0
00
35,2
50
35,2
50
1
750
750
131
881
3
,199
(2,3
18)
0.9
52
(2,2
07)
33,0
43
2
750
750
131
881
2
,472
(1,5
91)
0.9
07
(1,4
43)
31,6
00
3
750
250
1,0
00
175
1,1
75
2
,024
(849)
0.8
64
(733)
30,8
66
4
750
750
131
881
1
,518
(637)
0.8
23
(524)
30,3
43
5
750
750
131
881
1
,211
(330)
0.7
84
(258)
30,0
84
6
750
1,7
50
2,5
00
438
2,9
38
1
,660
1,2
78
0.7
46
953
31,0
37
7
750
750
131
881
808
73
0.7
11
52
31,0
89
8
750
750
131
881
679
202
0.6
77
137
31,2
26
9
750
250
1,0
00
175
1,1
75
679
496
0.6
45
320
31,5
46
10
750
750
131
881
509
372
0.6
14
229
31,7
75
11
750
750
131
881
454
427
0.5
85
250
32,0
24
12
750
1,7
50
2,5
00
438
2,9
38
1
,092
1,8
46
0.5
57
1,0
28
33,0
52
13
750
750
131
881
383
498
0.5
30
264
33,3
16
14
750
750
131
881
360
521
0.5
05
263
33,5
80
15
750
250
1,0
00
175
1,1
75
440
735
0.4
81
354
33,9
33
16
750
750
131
881
330
551
0.4
58
253
34,1
86
17
750
750
131
881
320
561
0.4
36
245
34,4
31
18
750
1,7
50
2,5
00
438
2,9
38
991
1,9
47
0.4
16
809
35,2
39
19
750
750
131
881
307
574
0.3
96
227
35,4
67
20
750
750
131
881
303
578
0.3
77
218
35,6
85
21
750
250
1,0
00
175
1,1
75
397
778
0.3
59
279
35,9
64
22
750
750
131
881
298
583
0.3
42
199
36,1
63
23
750
750
131
881
296
585
0.3
26
191
36,3
54
24
750
1,7
50
2,5
00
438
2,9
38
973
1,9
65
0.3
10
609
36,9
63
25
750
(2,0
00)
(1,2
50)
131
(1,1
19)
311
(1,4
30)
0.2
95
(422)
36,5
41
TOTALPRESENTVALUEATENDOFINVESTMENTLIFE
36,5
41
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CO
MPARATIVECOMPONENTLIFE
CYCLECOSTING
(continuationo
ftable
onp
age2
1)
FORE
CASTERSASSUMPTIONS
1
Th
ecapitalcostincludesallowancesfor
preliminariesandassociatedbuilders
work.
2
Detailsofthemaintenancerequirement
sandcostestimatescanbeprovided
up
onrequest.
3
Th
elifecyclecostingisbasedonanagreedinvestmentlifeof25years.
4
ItisassumedthatVATwillremainataro
und17.5%andtheclientistheend
us
erunderVATrules.
5
Th
erearedisposalcostadvantageswiththisoption.
6
Capitalcostasplantandmachinerywith100%taxallowance
i.e.1styear
2,908
7
Maintenanceandrunningcostswith100%allowanceie1styear
291
total
3,199
8
Taxationallowancesaresubjecttonegotiationandagreement.
9
Discountrate:
(i)Interestrate11%averag
eover25years;
(ii)Inflationrate7%averageover25years;
(1+11%)
(1+7%)1100%=5%dis
countrate.
7/25/2019 part 2 section 2
23/58
COMPARATIVECOMPONENTLIFE
CYCLECOSTING
CLIENT:
PROJECTTITLE:RetailDevelopment/ShoppingMall
JOBNO:
OPTION:Cleaningwithgantry
curta
inwallingtonewf
acace
Year
Costs
TOTAL
VAT17.5
%
TOTAL
incVAT
Lesstax
allowance
NETTOTAL
Presentvalue
of 1
@5
%
PRESENT
VALUE
CUMULATIVE
PRESENT
VALUE
Capital
Financing
Operation
Maintenance
Occupacy
Disposal/
residualva
lue
Annual
Intermittent
0
5,0
00
5,0
00
875
5,8
75
0
5,8
75
1.0
00
5.8
75
5,8
75
1
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.9
52
1,1
24
6,9
99
2
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.9
07
1,0
71
8,0
70
3
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.8
64
1,0
20
9,0
90
4
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.8
23
971
10,0
61
5
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.7
84
925
10,9
86
6
1,5
00
1,5
00
3,0
00
263
3,5
25
1
,163
2,3
62
0.7
46
1,7
63
12,7
49
7
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.7
11
839
13,5
87
8
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.6
77
799
14,3
86
9
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.6
45
761
15,1
47
10
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.6
14
725
15,8
72
11
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.5
85
690
16,5
62
12
1,5
00
6,5
00
1,1
38
7,6
38
2
,521
5,1
17
0.5
57
2,8
49
19,4
11
13
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.5
30
626
20,0
37
14
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.5
05
596
20,6
34
15
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.4
81
568
21,2
02
16
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.4
58
541
21,7
42
17
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.4
36
515
22,2
57
18
1,5
00
1,5
00
3,0
00
525
3,5
25
1
,163
2,3
62
0.4
16
981
23,2
39
19
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.3
96
467
23,7
06
20
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.3
77
445
24,1
51
21
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.3
59
424
24,5
75
22
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.3
42
404
24,9
78
23
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.3
26
384
25,3
63
24
1,5
00
1,5
00
3,0
00
263
3,5
25
1
,163
2,3
62
0.3
10
732
26,0
95
25
1,5
00
1,5
00
263
1,7
63
582
1,1
81
0.2
95
349
26,4
44
TOTALPRESENTVALUEATENDOFINVESTMENTLIFE
26,4
44
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CO
MPARATIVECOMPONENTLIFE
CYCLECOSTING
(continuationo
ftable
onp
age2
3)
FORE
CASTERSASSUMPTIONS
1
Th
ecapitalcostincludesallowancesforopeninglightsnowrequired,without
ca
pitalallowances.
2
Detailsofthemaintenancerequirement
sandcostestimatescanbeprovided
up
onrequest.
3
Th
elifecyclecostingisbasedonanagreedinvestmentlifeof25years.
4
ItisassumedthatVATwillremainataro
und17.5%andtheclientistheend
us
erunderVATrules.
5
Th
erearedisposalcostadvantageswiththisoption.
6
Capitalcostasplantandmachinerywith100%taxallowanceNIL
7
Maintenanceandrunningcostswith100%allowance.
8
Taxationallowancesaresubjecttonegotiationandagreement.
9
Discountrate:
(i)Interestrate11%averag
eover25years;
(ii)Inflationrate7%averageover25years;
(1+11%)
(1+7%)1100%=5%dis
countrate.
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2.2.5.4 HOUSINGSINKINGFUND(BASED UPON COSTED PLANNED MAINTENANCE)
(a) Background
This example is kindly provided by Ian Sloan of Armour Construction
Consultants.
Housing Associations and Co-operatives in Scotland generally request that
their investment/sinking fund requirements are prepared in accordance with
the Scottish Federation of Housing Associations (SFHA) Planned
Maintenance and Repairs (Revised), Guidance Booklet No 3 published in
January 1997.
There are various ways of presenting the data. One method widely accepted is
shown below, on two spreadsheets, a Planned Maintenance Programme, and a
costedPlanned Maintenance Programme which establishes in this case the
present value of future costs.
The spreadsheets can be fine tuned to meet specific client requirements. In
due course they can be adapted to allow historical information to be fed into
the programme, which then allows actual costs and maintenance periods
incurred to form the basis of the life cycle costs, thereby providing a more
accurate projection.
(b) Brief
The client needed to establish the capital to be invested for a new build
housing project to cover all maintenance and repairs for the next 60 years. The
discount rate is 6%.
An example of the calculation shown overleaf is:
Year 15, total maintenance and repair expenditure at current prices
= 9,013
9,013 0.41726* = 3,761
i.e. 3,761 would have to be invested now for 15 years at 6% compound
interest in order to meet the costs in Year 15 of 9,013. In summary 24,942would have to be invested now at 6% to cover all maintenance and repairs for
the next 60 years.
The data could also be presented as an annual sinking fund e.g. the amount to
be investedfor eachof 15 years at 6% compound interest in order to meet the
costs in Year 15 of 9,013 is:
9,013 0.04296** = 387
* from valuation tables at 2.2.5.7 (present value of 1)
** from valuation tables at 2.2.5.7 (annual sinking fund)
7/25/2019 part 2 section 2
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PART2, SECTION2
Page 26 Part 2, Section 2 (4/99) Effective from 1/6/99 The SurveyorsConstruction Handbook
PLANNEDMAINTENANCEPROGRAMME
KEY
=
Inspec
t/Cons
ider
=
Inspec
tand
Remedy
T=
Testun
til
=
Inspec
t&
EXAMPLE
=
Renewal
/Rep
lacemen
t
=
untilReplacemen
t
replacemen
t
=
Decora
te
DatePrinted
02/12/98
Cumulative
CODE
ELEMENT
SUB-ELEMENT
COMPONENT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2930
Cost
STRUC-
TURE
1.1
STRUCTURE
1.1.1.Roofs
Timber
0
1.1.2.Floors
Timber
0
1.1.3.Openings
Concrete/Brick
0
1.2
STAIRS
1.2.1.Stairs
Timber
0
1.2.2.Handrailsetc
Timber
0
EXT
FABRIC
2.1
ROOF
2.1.1.RoofTilesetc
ConcreteTiles
0
2.1.2.Flashings
Lead
0
2.1.3.Guttersetc
UPVC
0
2.2
EXTERNALWALLS
2.2.1.Walls
FacingBrick
0
2.2.2.Rendering
0
2.2.3.Ventilation
0
2.3
WINDOWS
2.3.1.WindowOp
Timber/Glass
0
2.3.2.Pointing
0
2.3.3.Painting
0
2.3.4.Ironmongery
0
2.4
EXTERNALDOORS
2.4.1.DoorOperation
Timber/Metal
0
2.4.2.Pointing
0
2.4.3.Painting
0
2.4.4.Ironmongery
0
INT
FABRIC
3.1
INTERNALWALLS
3.1.1.Walls&Opens
Brick/pboard
0
3.1.2.WallTiling
Ceramic
3.2
CEILINGS
3.2.1.Ceilings
Plasterboard
0
3.3
FLOORS
3.3.1.Flooring
Timber/Vinyl
0
3.3.2.Skirtings
Timber
0
3.4
DOORS
3.4.1.DoorOperation
Timber
0
3.4.2.Ironmongery
0
FITTS
FURN
4.1
FITTINGS&FURNISH
4.1.1.KitchenUnits
Units/Worktops
0
4.1.2.Grabrailsetc
0
SERVICES
5.1
SANITARYAPPLIANCES
5.1.1.Sanitaryware
Wcs,b
aths
,whbs
0
5.2
SERVICESEQUIPMENT
5.2.1.Kitchensinks
Stainlesssteel
0
5.3
WATERSUPPLY
5.3.1.Waterstorage
0
5.3.2.
Waterpipesetc
T
T
T
T
T
T
0
5.3.3.
Insulation
0
5.4.1.
INTERNALDRAINAGE
5.4.2.1.Pipes&Fittns
T
T
T
T
T
T
0
5.4.2.
DISPOSALINST
5.4.1.1.
Pipes&Fittns
T
T
T
T
T
T
0
5.5
HEATSOURCE
5.5.1.Radiators/fires
T
T
T
T
0
5.6
HEATSYSTEM
5.6.1.Boilers/equipment
0
5.7
VENTILATION
5.7.1.Fansetc
0
7/25/2019 part 2 section 2
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PART2, SECTION2
The SurveyorsConstruction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 27
PLANNEDMAINTENANCEPROGRAMME
KEY
=
Inspec
t/Cons
ider
=
Inspec
tand
Remedy
T=
Testun
til
=
Inspec
t&
EXAMPLE(Con
tinue
d)
=
Renewal
/Rep
lacemen
t
=
untilReplacemen
t
replacemen
t
=
Decora
te
DatePrinted
02/12/98
Cumulative
CODE
ELEMENT
SUB-ELEMENT
COMPONENT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2930
Cost
SER-
VICES
5.8
ELECTRICALINST
5.8.1.Powerandlightin
g
0
5.8.2.Switchgear
0
5.8.3.ExternalLighting
CloseLight
0
5.9
GASINSTALLATION
5.9.1.
Equipment&supply
T
T
T
T
T
0
5.10
LIFTINSTALLATION
0
5.11
PROTECTIVEINST
5.11
.1.T
Vsystemetc
T
T
T
0
5.11
.2.S
mokedetectors
0
5.1.2
COMMUNICATION
5.12
.1.D
oorentry
0
5.12
.2Telephones
T
T
T
T
0
EXT
WORKS
6.1.1
LANDSCAPING
6.1.1.1.Roads,footpaths
0
6.1.1.2.Grass/planting
0
6.1.2
BOUNDARIES&
ENCLOSURES
6.1.2.1.
Fencesandgate
s
0
6.1.2.2.
Wallsetc
0
6.1.2.3.
Clothespoles
0
6.2
DRAINAGE
6.2.1.
Pipes&fittings
0
6.2.2.
Manholesetc
0
6.3
EXTERNALSERVICES
6.3.1.
Ducts&cables
0
6.4
OUTBUILDINGS
6.4.1.
Binstores/platts
0
COSTIN,0
00sof
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.00
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.0
0
0.00
7/25/2019 part 2 section 2
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PART2, SECTION2
The SurveyorsConstruction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 29
PLANN
EDMAINTENANCEPROGRAMME(COSTED)(Con
tinue
d)
EXAMP
LE
DatePrinted
02/12/98
Years
Cumulative
CODE
ELEMENT
SUB-ELEMENT
COMPONENT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1819
20
21
22
23
24
25
26
27
28
29
30
Cost
SER-
VICES
5.8.2.Switchgear
inc
inc
inc
inc
inc
inc
0
5.8.3.ExternalLighting
CloseLight
inc
100
inc
100
inc
inc
200
5.9
Gasinstallation
5.9.1.
Equipment&supply
25
25
25
25
25
25
150
5.1
0
Liftinstallation
0
5.1
1
Protectiveinst
5.1
1.1.
TVsystemetc
25
150
25
150
25
150
525
5.1
1.2.
Smokedetectors
10
10
10
10
75
10
10
10
10
75
10
10
10
10
75
10
10
101
0
75
10
10
10
10
75
10
10
10
10
75
690
5.1.2
Communication
5.1
2.1.
Doorentry
n/a
n/a
n/a
n/a
n/a
n/an
/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/an/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
0
5.1
2.2.
Telephones
10
10
100
10
10
100
240
0
EXT
WORKS
6.1.1
Landscaping
6.1.1.1.
Roads,
footpath
s
50
50
50
50
50
50
50
50
50
50
50
50
50
50
500
50
50
505
0
50
50
50
50
50
50
50
50
50
50
500
2,4
00
6.1.1.2.
Grass/planting
100
100
100
100
100
1001
00
100
100
100
100
100
100
100
100
100
100
100100
100
100
100
100
100
100
100
100
100
100
750
3,6
50
6.1.2
Boundaries&Enclosures
6.1.2.1.
Fencesandgat
es
10
10
500
10
10
500
10
10
500
10
10
500
10
10
300010
10
5001
0
10
500
10
10
500
10
10
500
10
10
3000
10,2
00
6.1.2.2.
Wallsetc
50
50
50
50
50
50
300
6.1.2.3.
Clothespoles
40
40
40
40
200
40
40
40
40
750
1,2
70
6.2
Drainage
6.2.1.
Pipes&fittings
100
100
100
100
100
500
1,0
00
6.2.2.
Manholesetc
inc
inc
inc
inc
inc
inc
0
6.3
Externalservices
6.3.1.
Ducts&cables
25
25
25
25
25
400
525
6.4
Outbuildings
6.4.1.
Binstores/platts
50
50
50
50
50
500
750
TOTALCOSTPERYEAR
518
5181208518144812085
18518120840685181208518518901351851812085188673104851851812081448518120851851815460
57,9
02
(Yrs1
30)
PRESENTVALUE
489
461101441010828523
44325715227227360024322937612041924231712704308144136298337114251101
96
2692
21241
Yrs1
30)
(atdiscountrateof6%)
RepeatYears
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
484
9
50
51
52
53
54
55
56
57
58
59
6
0(Yrs31
60)
CurrentCostperyr
518
5181208518144812085
18518120840685181208518518901351851812085188673104851851812081448518120851851815460
57902
115804
(Currentcost)
PresentValue
85
80
177
71
188
148
60
57
124
395
48
105
42
40
655
36
33
743
0
471
54
25
24
52
59
20
44
18
17
469
3701
24942
(PresentValue)
7/25/2019 part 2 section 2
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PART2, SECTION2
Page 30 Part 2, Section 2 (4/99) Effective from 1/6/99 The SurveyorsConstruction Handbook
2.2.5.5 CENTRALISATION OFOFFICESSTUDY
(a) Brief
This example is kindly provided by Gerald Hall.
The client wished to investigate a centralisation (of offices) strategy as a
means to improve business efficiency in an increasingly competitive market.
The offices were originally spread out over three main sites.
Three options were identified:
do nothing, although this would require repair and refurbishment of the
existing offices;
centralise at location A and construct additional new offices;
centralise at location B and construct additional new offices;
(b) Capital Costs
These were calculated using traditional cost estimating and included cyclical
capital costs. The distinction between cyclical capital costs and cyclical
maintenance costs is often vague, those costs in excess of 10,000 are
included in the capital cost element under the assumption they would be part
of the capital cost programme.
Relocation costs (labour and plant required to transport office equipment,
stores, machinery, compound materials and stationery items) are included
under Year 0 on the assumption they would be complete within 12 months and
a contingency for new furniture included.
(c) Revenue Costs
fuel: the energy manager provided existing costs which were used as the
basis for the new proposal;
water costs were excluded (the client was a water company);
maintenance costs under 10,000;
rates were not provided by the client by the deadline and are therefore
excluded;
cleaning costs are based on existing cleaning costs and judgement;
security costs are based on existing security costs and judgement;
operation costs for this client included waste removal, water coolers,sanitary hire, mail collections, fire prevention, telephones, hygiene,
insurances. Again this was based on existing client data plus judgement.
Even with constant staff numbers these costs reduce with centralisation;
staffing costs were excluded as they would remain constant.
(d) Capital Income
Options 2 and 3 will free up existing space for sale and rent which are included
as a deduction against expenditure.
(e) Discount Rates
In accordance with the client guidelines the investment horizon is 40 years and
the discount rate 8%.
7/25/2019 part 2 section 2
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PART2, SECTION2
The SurveyorsConstruction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 31
(f) Tax Implications
Tax allowances have been excluded on the basis that this study is a minor part
of the overall company business and assumptions are not appropriate.
However it is worth noting that:
Value Added Tax on all capital costs would affect the financial benefits
of options 2 and 3 which require considerable capital expenditure;
Capital Allowances would help support options 2 and 3.
(g) Renewal and Refurbishment Costs
General building refurbishment has been allowed in ten-year cycles; electrical
and mechanical plant replaced after 20 years with a refurbishment after ten
years or mid-life; felt roofs replaced after 20 years; profiled metal decking,
windows and doors after 30 years. All costs are calculated using traditionalcost estimating and included as present costs.
(h) Cost Comparison
The detailed calculation is summarised over for option 2 which is the most
cost effective over 40 years.
Year 0 Expenditure Year 40 Net Present Value
Option 1 203,000 1,960,950
Option 2 1,164,900 1,607,896
Option 3 1,262,100 1,843,068
(i) Sensitivity Analysis
An analysis of different discount rates and time frame confirm option 2 as the
most favourable.
Discount Life Cycle Option 1 Option 2 Option 3
Rates
6% 0 287,900 1,164,900 1,262,100
6% 20 1,859,000 1,593,000 1,826,1006% 40 2,444,420 1,762,522 2,047,091
8% 0 287,900 1,164,900 1,262,1008% 20 1,614,000 1,515,000 1,721,100
8% 40 1,960,950 1,607,896 1,843,068
10% 0 287,900 1,164,900 1,262,100
10% 20 1,423,000 1,451,000 1,638,10010% 40 1,632,562 1,506,721 1,709,146
7/25/2019 part 2 section 2
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PART2, SECTION2
Page 32 Part 2, Section 2 (4/99) Effective from 1/6/99 The SurveyorsConstruction Handbook
CLIENT
WATERCOMPANYLIMITED
JOBTITLE
CENTRALISATIONOFAREAOFFICESTUDY
JOBNO
3985
DATE
29thMARCH1996
YEAR(SEPT1996)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
TotalValue
000
000
Capi
talCos
ts Building
Wor
ks
1176
0
0
0
0
0
0
0
0
0
190
0
0
0
0
0
0
0
0
0
300
0
0
0
0
0
0
0
0
0
393
0
0
0
0
0
0
0
0
0
310
2,369
Reloca
tion
Costs
15.5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
16
Furn
iture
8.5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
9
Value
1200
0
0
0
0
0
0
0
0
0
190
0
0
0
0
0
0
0
0
0
300
0
0
0
0
0
0
0
0
0
393
0
0
0
0
0
0
0
0
0
310
2,393
Capi
talIncome A
nnua
lRen
tal
-7.5
-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5
-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5
-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5
-7.5
-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5-7.5
-7.5
-308
Land
Sale
-55
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-55
Value-6
2.5
-7.5
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8
-8-8
-8
-363
Revenue
Costs
Fuel
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.41.4
1.4
57
Water
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Maintenance
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
1212
12
492
Rates
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Cleaning
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.71.7
1.7
70
Security
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.1
7.17.1
7.1
291
Operat
ion
Costs
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.2
5.25.2
5.2
213
Staf
fCos
ts
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Value
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.427.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
27.4
1,123
Net
Cash
Flow
1164
.9
19.9
19.9
19.9
19.9
19.9
19.9
19.919.9
19.9
209.919.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
319.919.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
412.919.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9329.9
0
Presen
tValueof
1@
8%
1
0.930.860.790.740.680.630.5
80.54
0.5
0.460.43
0.40.370.340.320.290.270.250.23
0.21
0.20.180.170.160.150.140.130.12
0.11
0.10.090.090.080.070.070.060.060.050.05
0.05
NETPRES
ENTVALUE
1165
18
17
16
15
14
13
12
11
10
97
9
8
7
7
6
6
5
5
5
69
4
4
3
3
3
3
2
2
2
41
2
2
2
1
1
1
1
1
1
15
1608
EXPENDIT
URE
NVP=1,607,896
7/25/2019 part 2 section 2
33/58
PART2, SECTION2
The SurveyorsConstruction Handbook Part 2, Section 2 (4/99) Effective from 1/6/99 Page 33
2.2.5.6 TOTALBUILDINGOPTION: DEMOLISH ANDREBUILD VERSUSREFURBISHMENT
(a) Brief
The life cycle cost appraisal is to evaluate the life cycle cost effects of the
following options:
demolish existing building and rebuild to the clients specific
requirements incorporatingall-airair conditioning systems;
refurbish the existing building to meet, as far as practicable, the clients
requirements, re-using existing systems wherever possible.
The appraisal is to include all taxation implications for comparative purposes.
VAT is to be included as the client is VAT-exempt.
The following costs are to be excluded:
costs associated with the purchase of land;
financing charges associated with the redevelopment;
costs associated with the removal and temporary re-housing of staff
during the construction period;
occupancy costs;
residual values of land or buildings.
(b) Discount Rate
The building is in owner-occupation and the clients accountants have advised
the use of a long-term government stock interest rate of 7%.
The client has been advised that an inflation rate of 3% is a reasonable
assessment.
The discount rate calculation is as follows
[(1.07)1] 100 = 3.88%
[(1.03)1]
The client has agreed that the discount rate can be rounded to 4%.
(c) Building Life
It has been agreed with the client to use a 20-year life cycle.
(d) Description of Existing Building
Late 1950s office block of multi-storey framed construction with curtain wall
cladding to front and rear. Solid party walls to both sides. Single-storey
concrete basement.
(e) Description of Existing Engineering Services
Gas-fired low pressure hot water boiler situated in basement serving perimeter
convector system with warm air ventilation to central parts of the