Life-Cycle CostAnalysis (LCCA)
bySieglinde Fuller
National Institute of Standards and Technology (NIST)
Last updated: 05-16-2008
Introduction
Life-cycle cost analysis (LCCA) is amethod for assessing the total cost of facility ownership. It takes intoaccount all costs of acquiring, owning, and disposing of a building or buildingsystem. LCCA is especially useful when project alternatives that fulfill thesame performance requirements, but differ with respect to initial costs andoperating costs, have to be compared in order to select the one that maximizesnet savings. For example, LCCA will help determine whether the incorporation ofa high-performance HVAC or glazing system, which mayincrease initial cost but result in dramatically reduced operating andmaintenance costs, is cost-effective or not. LCCA is not useful for budgetallocation.
Lowest life-cycle cost (LCC) is themost straightforward and easy-to-interpret measure of economic evaluation. Someother commonly used measures are Net Savings (or Net Benefits),Savings-to-Investment Ratio (or Savings Benefit-to-Cost Ratio), Internal Rateof Return, and Payback Period. They are consistent with the Lowest LCC measureof evaluation if they use the same parameters and length of study period.Building economists, certified value specialists, cost engineers, architects,quantity surveyors, operations researchers, and others might use any or severalof these techniques to evaluate a project. The approach to makingcost-effective choices for building-related projects can be quite similarwhether it is called costestimating, valueengineering, or economicanalysis.
Description
A. Life-Cycle Cost Analysis (LCCA) Method
The purpose of an LCCA is to estimatethe overall costs of project alternatives and to select the design that ensuresthe facility will provide the lowest overall cost of ownership consistent withits quality and function.The LCCA should be performed early in the design process while there is still achance to refine the design to ensure a reduction in life-cycle costs (LCC).
The first and most challenging task ofan LCCA, or any economic evaluation method, is to determine the economiceffects of alternative designs of buildings and building systems and toquantify these effects and express them in dollar amounts.
Viewedover a 30 year period, initial building costs account for approximately just 2%of the total, while operations and maintenance costs equal 6%, and personnelcosts equal 92%.
Source: Sustainable BuildingTechnical Manual
B. Costs
There are numerous costs associatedwith acquiring, operating, maintaining, and disposing of a building or buildingsystem. Building-related costs usually fall into the following categories:
·Initial Costs—Purchase, Acquisition, Construction Costs
·Fuel Costs
·Operation, Maintenance, and Repair Costs
·Replacement Costs
·Residual Values—Resale or Salvage Values or DisposalCosts
·Finance Charges—Loan Interest Payments
·Non-Monetary Benefits or Costs
Only those costs within each categorythat are relevant to the decision and significant in amount are needed to makea valid investment decision. Costs are relevant when they are different for onealternative compared with another; costs are significant when they are largeenough to make a credible difference in the LCC of a project alternative. Allcosts are entered as base-year amounts in today's dollars; the LCCA methodescalates all amounts to their future year of occurrence and discounts them backto the base date to convert them to present values.
Initial costs
Initial costs may include capitalinvestment costs for land acquisition, construction, or renovation and for theequipment needed to operate a facility.
Landacquisition costs need tobe included in the initial cost estimate if they differ among designalternatives. This would be the case, for example, when comparing the cost ofrenovating an existing facility with new construction on purchased land.
Constructioncosts: Detailed estimatesof construction costs are not necessary for preliminary economic analyses ofalternative building designs or systems. Such estimates are usually notavailable until the design is quite advanced and the opportunity forcost-reducing design changes has been missed. LCCA can be repeated throughoutthe design process if more detailed cost information becomes available.Initially, construction costs are estimated by reference to historical datafrom similar facilities. Alternately, they can be determined from government orprivate-sector costestimating guides and databases. The Tri-Services ParametricEstimating System (TPES) contained in the National Institute of BuildingSciences (NIBS) Construction Criteria Base (CCB)developed models of different facility types by determining the critical costparameters (i.e., number of floors, area and volume, perimeter length) andrelating these values through algebraic formulas to predict costs of a widerange of building systems, subsystems, and assemblies. The TPES models can beadapted to facilities beyond those included in the base modeling system byusing SuccessEstimator, asoftware package available from U.S. Cost.
Detailed cost estimates are preparedat the submittal stages of design (typically at 30%, 60%, and 90%) based onquantity take-off calculations. These estimates rely on cost databases such asthe Commercial Unit Price Book (C-UPB) or the R. S. Means Building Construction Cost Database.
Testing organizations such as ASTM International andtrade organizations have reference data for materials and products they test orrepresent.
Energy and Water Costs
Alife-cycle cost analysis of the Henrietta House,
(Courtesy of Corus Construction Centre)
Operational expenses for energy,water, and other utilities are based on consumption, current rates, and priceprojections. Because energy, and to some extent water consumption, and buildingconfiguration and building envelope are interdependent, energy and water costsare usually assessed for the building as a whole rather than for individualbuilding systems or components.
Energyusage: Energy costs areoften difficult to predict accurately in the design phase of a project.Assumptions must be made about use profiles, occupancy rates, and schedules,all of which impact energy consumption. At the initial design stage, data onthe amount of energy consumption for a building can come from engineeringanalysis or from computer programs such as Energy-10, or eQuest.ENERGY PLUS (DOE), DOE-2.1Eand BLAST require moredetailed input not usually available until later in the design process. Othersoftware packages, such as the proprietary programs TRACE(Trane), ESPRE (EPRI), and HAP (Carrier) have been developedto assist in mechanical equipment selection and sizing and are oftendistributed by manufacturers.
When selecting a program, it isimportant to consider whether you need annual, monthly, or hourly energyconsumption figures and whether the program adequately tracks savings in energyconsumption when design changes or different efficiency levels are simulated.
Energyprices: Quotesof current energy prices from local suppliers should take into account the ratetype, the rate structure, summer and winter differentials, block rates, anddemand charges to obtain an estimate as close as possible to the actual energycost.
Energyprice projections: Energyprices are assumed to increase or decrease at a rate different from generalprice inflation. This differential energy price escalation needs to be takeninto account when estimating future energy costs. Energy price projections canbe obtained either from the supplier or from energy price escalation ratespublished annually on April 1 by DOE in Discount Factors for Life-Cycle Cost Analysis, AnnualSupplement to NIST Handbook 135.
WaterCosts: Water costs shouldbe handled much like energy costs. There are usually two types of water costs:water usage costs and water disposal costs. DOE does not publish water priceprojections.
Operation, Maintenance, andRepair Costs
(Courtesyof Washington State Department of General Administration)
Non-fuel operating costs, andmaintenance and repair (OM&R) costs are often more difficult to estimatethan other building expenditures. Operating schedules and standards ofmaintenance vary from building to building; there is great variation in thesecosts even for buildings of the same type and age. It is therefore especiallyimportant to use engineering judgment when estimating these costs.
Supplier quotes and publishedestimating guides sometimes provide information on maintenance and repaircosts. Some of the data estimation guides derive cost data from statisticalrelationships of historical data (Means, BOMA) and report, for example, average owning andoperating costs per square foot, by age of building, geographic location,number of stories, and number of square feet in the building. The Whitestone Research BuildingMaintenance and Repair Cost Reference gives annualized costsfor building systems and elements as well as service life estimates forspecific building components. The U.S. Army Corps of Engineers, HuntsvilleDivision, provides access to a customized OM&R database for militaryconstruction (contact: Terry.L.Patton@HND01.usace.army.mil).
Replacement Costs
The number and timing of capitalreplacements of building systems depend on the estimated life of the system andthe length of the study period. Use the same sources that provide costestimates for initial investments to obtain estimates of replacement costs andexpected useful lives. A good starting point for estimating future replacementcosts is to use their cost as of the base date. The LCCA method will escalatebase-year amounts to their future time of occurrence.
Residual Values
The residual value of a system (orcomponent) is its remaining value at the end of the study period, or at thetime it is replaced during the study period. Residual values can be based onvalue in place, resale value, salvage value, or scrap value, net of anyselling, conversion, or disposal costs. As a rule of thumb, the residual valueof a system with remaining useful life in place can be calculated by linearlyprorating its initial costs. For example, for a system with an expected usefullife of 15 years, which was installed 5 years before the end of the studyperiod, the residual value would be approximately 2/3 (=(15-10)/15) of itsinitial cost.
Other Costs
Financecharges and taxes: Forfederal projects, finance charges are usually not relevant. Finance charges andother payments apply, however, if a project is financed through an Energy Savings Performance Contract (ESPC) or UtilityEnergy Services Contract (UESC). The finance charges are usuallyincluded in the contract payments negotiated with the Energy Service Company(ESCO) or the utility.
Non-monetarybenefits or costs:Non-monetary benefits or costs are project-related effects for which there isno objective way of assigning a dollar value. Examples of non-monetary effectsmay be the benefit derived from a particularly quiet HVAC system or from anexpected, but hard-to-quantify productivity gain due toimproved lighting. By their nature, these effects are external to the LCCA, butif they are significant they should be considered in the final investmentdecision and included in the project documentation. See Cost-Effective—Consider Non-MonetaryBenefits.
To formalize the inclusion ofnon-monetary costs or benefits in your decision making, you can use theanalytical hierarchy process (AHP), which is one of a set of multi-attributedecision analysis (MADA) methods that consider non-monetary attributes(qualitative and quantitative) in addition to common economic evaluationmeasures when evaluating project alternatives. ASTM E 1765 Standard Practicefor Applying Analytical Hierarchy Process (AHP) to Multi-attribute DecisionAnalysis of Investments Related to Buildings and Building Systems published by ASTM Internationalpresents a procedure for calculating and interpreting AHP scores of a project'stotal overall desirability when making building-related capital investmentdecisions. A source of information for estimating productivity costs, forexample, is the WBDGProductive Branch.
C. Parameters for Present-Value Analysis
Discount Rate
In order to be able to add and comparecash flows that are incurred at different times during the life cycle of aproject, they have to be made time-equivalent. To make cash flowstime-equivalent, the LCC method converts them to present values by discountingthem to a common point in time, usually the base date. The interest rate usedfor discounting is a rate that reflects an investor's opportunity cost of moneyover time, meaning that an investor wants to achieve a return at least as highas that of her next best investment. Hence, the discount rate represents the investor'sminimum acceptable rate of return.
The discount rate for federal energyand water conservation projects is determined annually by FEMP;for other federal projects, those not primarily concerned with energy or waterconservation, the discount rate is determined by OMB. These discount ratesare real discount rates, not including the general rate of inflation.
Cost Period(s)
Length ofstudy period: Thestudy period begins with the base date, the date to which all cash flows arediscounted. The study period includes any planning/construction/implementationperiod and the service or occupancy period. The study period has to be the samefor all alternatives considered.
Serviceperiod: Theservice period begins when the completed building is occupied or when a systemis taken into service. This is the period over which operational costs andbenefits are evaluated. In FEMP analyses, the service period is limited to 25years.
Contractperiod: Thecontract period in ESPC and UESC projects lies within the study period. Itstarts when the project is formally accepted, energy savings begin to accrue,and contract payments begin to be due. The contract period generally ends whenthe loan is paid off.
Discounting Convention
In OMB and FEMP studies, all annuallyrecurring cash flows (e.g., operational costs) are discounted from the end ofthe year in which they are incurred; in MILCON studies they are discounted fromthe middle of the year. All single amounts (e.g., replacement costs, residualvalues) are discounted from their dates of occurrence.
Treatment of Inflation
An LCCA can be performed in constantdollars or current dollars. Constant-dollar analyses exclude the rate ofgeneral inflation, and current-dollar analyses include the rate of generalinflation in all dollar amounts, discount rates, and price escalation rates.Both types of calculation result in identical present-value life-cycle costs.
Constant-dollar analysis isrecommended for all federal projects, except for projects financed by theprivate sector (ESPC, UESC). The constant-dollar method has the advantage ofnot requiring an estimate of the rate of inflation for the years in the studyperiod. Alternative financing studies are usually performed in current dollarsif the analyst wants to compare contract payments with actual operational orenergy cost savings from year to year.
D. Life-Cycle Cost Calculation
After identifying all costs by yearand amount and discounting them to present value, they are added to arrive attotal life-cycle costs for each alternative:
LCC = I + Repl— Res + E + W + OM&R + O
LCC = Total LCC in present-value (PV) dollars of a given alternative
I = PV investment costs (if incurred at base date, they need not bediscounted)
Repl = PV capital replacement costs
Res = PV residual value (resale value, salvage value) less disposalcosts
E = PV of energy costs
W = PV of water costs
OM&R = PV of non-fuel operating, maintenance and repair costs
O = PV of other costs (e.g., contract costs for ESPCs or UESCs)
E. Supplementary Measures
Supplementary measures of economicevaluation are Net Savings (NS), Savings-to-Investment Ratio (SIR), AdjustedInternal Rate of Return (AIRR), and Simple Payback (SPB) or Discounted Payback(DPB). They are sometimes needed to meet specific regulatory requirements. Forexample, the FEMP LCC rules (10 CFR 436A)require the use of either the SIR or AIRR for ranking independent projectscompeting for limited funding. Some federal programs require a Payback Periodto be computed as a screening measure in project evaluation. NS, SIR, and AIRRare consistent with the lowest LCC of an alternative if computed and appliedcorrectly, with the same time-adjusted input values and assumptions. Paybackmeasures, either SPB or DPB, are only consistent with LCCA if they arecalculated over the entire study period, not only for the years of the paybackperiod.
All supplementary measures arerelative measures, i.e., they are computed for an alternative relative to abase case.
NS = NetSavings: operational savings less difference in capital investment costs
SIR = Savings-to-Investment Ratio: ratio of operational savings todifference in capital investment costs
AIRR = Adjusted Internal Rate of Return: annual yield from analternative over the study period, taking into account reinvestment of interimreturns at the discount rate
SPB = Simple Payback: time required for the cumulative savings froman alternative to recover its initial investment cost and other accrued costs,without taking into account the time value of money
DPB = Discounted Payback: time required for the cumulative savings froman alternative to recover its initial investment cost and other accrued costs,taking into account the time value of money
F. Evaluation Criteria
Lowest LCC (for determiningcost-effectiveness)
NS > 0 (for determining cost-effectiveness)
SIR > 1 (for ranking projects)
AIRR > discount rate (for ranking projects)
SPB, DPB < than study period (for screening projects)
G. Uncertainty Assessment in Life-Cycle CostAnalysis
Decisions about building-relatedinvestments typically involve a great deal of uncertainty about their costs andpotential savings. Performing an LCCA greatly increases the likelihood ofchoosing a project that saves money in the long run. Yet, there may still besome uncertainty associated with the LCC results. LCCAs are usually performed earlyin the design process when only estimates of costs and savings are available,rather than certain dollar amounts. Uncertainty in input values means thatactual outcomes may differ from estimated outcomes.
There are techniques for estimatingthe cost of choosing the "wrong" project alternative. Deterministictechniques, such as sensitivity analysis or breakeven analysis, are easily donewithout requiring additional resources or information. They produce asingle-point estimate of how uncertain input data affect the analysis outcome.Probabilistic techniques, on the other hand, quantify risk exposure by derivingprobabilities of achieving different values of economic worth from probabilitydistributions for input values that are uncertain. However, they have greaterinformational and technical requirements than do deterministic techniques.Whether one or the other technique is chosen depends on factors such as thesize of the project, its importance, and the resources available. Sincesensitivity analysis and break-even analysis are two approaches that are simpleto perform, they should be part of every LCCA.
Sensitivity Analysis
Sensitivity analysis is the techniquerecommended for energy and water conservation projects by FEMP. Sensitivityanalysis is useful for:
·identifying which of a number of uncertain input valueshas the greatest impact on a specific measure of economic evaluation,
·determining how variability in the input value affectsthe range of a measure of economic evaluation, and
·testing different scenarios to answer "what if"questions.
To identify critical parameters,arrive at estimates of upper and lower bounds, or answer "what if"questions, simply change the value of each input up or down, holding all othersconstant, and recalculate the economic measure to be tested.
Break-even Analysis
Decision-makers sometimes want to knowthe maximum cost of an input that will allow the project to still break even,or conversely, what minimum benefit a project can produce and still cover thecost of the investment.
To perform a break-even analysis,benefits and costs are set equal, all variables are specified, and thebreak-even variable is solved algebraically.
Sensitivity analysis and break-evenanalysis, and a number of other approaches to risk and uncertainty assessment,both deterministic and probabilistic, are described in detail in Techniquesfor Treating Uncertainty and Risk in the Economic Evaluation of BuildingInvestments, byHarold Marshall, NIST Special Publication 757, September 1988. (Request a copyof this publication from the Office of Applied Economics at NIST).
H. Design and Analysis Tools
The use of computer programs canconsiderably reduce the time and effort spent on formulating the LCCA,performing the computations, and documenting the study. Listed below areseveral LCCA-related software programs:
· Building Life-Cycle Cost (BLCC) Program, version 5.2-04—Economicanalysis tool developed by the National Institute of Standards and Technologyfor the U.S. Department of Energy Federal Energy Management Program (FEMP).
· ECONPACK for Windows—An economic analysistool developed by the U.S. Army Corps of Engineers in support of DOD fundingrequests.
· Energy-10—Cost estimating program available fromthe Sustainable Buildings Industry Council (SBIC).
· Life-Cycle Cost in DesignWinLCCID Program 2-04—Developed for MILCON analyses by the ConstructionEngineering Research Laboratory of the U.S. Army Corps of Engineers. Forpassword contact lawrie@dilbert.me.uiuc.edu.
· SuccessEstimator Estimating and Cost Management System—Costestimating tool available from U.S. Cost.
Application
LCCAwas among the many design and analysis tools used to transform this turn of thecentury building located in downtown Tacoma, WA into an energy efficientshowcase building.
(Courtesy of Washington State Department of General Administration)
LCCA can be applied to any capital investmentdecision in which relatively higher initial costs are traded for reduced futurecost obligations. It is particularly suitable for the evaluation of buildingdesign alternatives that satisfy a required level of building performance butmay have different initial investment costs, different operating andmaintenance and repair costs, and possibly different lives. LCCA provides asignificantly better assessment of the long-term cost-effectiveness of aproject than alternative economic methods that focus only on first costs or onoperating-related costs in the short run.
LCCA can be performed at variouslevels of complexity. Its scope might vary from a"back-of-the-envelope" study to a detailed analysis with thoroughlyresearched input data, supplementary measures of economic evaluation, complexuncertainty assessment, and extensive documentation. The extensiveness of theeffort should be tailored to the needs of the project.
Relevant Codes andStandards
· Circular No. A-94—Guidelinesand Discount Rates for Benefit-Cost Analysis of Federal Programs
· Energy Policy Act of 2005(PDF 1.9 MB, 550 pgs)
· Executive Order 13423,"Strengthening Federal Environmental, Energy, and TransportationManagement"
· Executive Order13123—Greening the Government through Efficient Energy Management
DOEGuidance on Life-Cycle Cost Analysis Required by Executive Order 13123
· Facilities Standard for thePublic Buildings Service, P100 (GSA)—Chapter 1.8—Life-Cycle Costing
· P-442 Economic Analysis Handbook (NAVFAC)
· Standards on Building Economics, 5th ed. ASTM, 2004. ASTMStock #: BLDGEC99, ISBN# 0-8031-2714-6.
· Sustainable Building Technical Manual (DOE/EPA)
LCCA Guidelines for OMB Projects
Office ofManagement and Budget (OMB) Circular A-94 – Guidelines and Discount Rates for Benefit-Cost Analysis of FederalPrograms, October 1992, applies to building-relatedbenefit-cost or cost-effectiveness analyses of federal programs or policiesthat are not primarily concerned with energy or water conservation or renewableenergy projects. Appendix C of Circular A-94, updated annually in February,provides the OMB discount rates.
LCCA Guidelines for FEMP Projects
FEMP has published life-cycle costingrules and procedures in its Code of Federal Regulations, 10 CFR 436,Subpart A. These FEMP rules are consistent with OMB rules. They areto be followed by all federal agencies, unless specifically exempted, inevaluating the cost-effectiveness of potential energy and water conservationprojects and renewable energy projects for federally owned and leased buildings.NIST Handbook 135 Life-Cycle Costing for the FederalEnergy Management Program explains and amplifies the LCC rules of 10 CFR 436A. TheAnnual Supplement to Handbook 135, Energy Price Indices and Discount Factors forLife-Cycle Cost Analysis, updated annually on April 1, provides the FEMP discountrates. The same publication contains tables of discount factors for timeperiods up to 30 years, using either the OMB or FEMP discount rate. The FEMPdiscount factors also include the most recent energy price escalation ratesprojected by the DOE EnergyInformation Administration (EIA). The discount factors are embeddedin BLCC5 and WinLCCIDand other federal LCC computer programs.
LCCA in the Department of Defense (DOD)
The Tri-Services Memorandum ofAgreement (MOA) on "Criteria/Standards for Economic Analyses/Life-CycleCosting for MILCON Design" (1991) provides the guidelines for LCCA for DoDenergy and non-energy projects. These guidelines are consistent with FEMP andOMB guidelines. However, the MOA recommends (but does not require) that cashflows are discounted from the middle of each year rather than from the end ofeach year as are cash flows of FEMP and OMB projects.
AdditionalResources
WBDG
Design Objectives
Cost-EffectiveBranch, Functional/ Operational, Productive,Sustainable
Products and Sytems
FederalGreen Construction Guide for Specifiers
Publications
· Building Economics: Theory and Practice by Rosalie T. Ruegg and Harold E. Marshall. New York: Van NostrandReinhold, 1990.
· Building Maintenance and Repair Cost Referenceby Whitestone Research. 2004.
· Energy Price Indices andDiscount Factors for Life-Cycle Cost Analysis, Annual Supplement to Handbook135 by Sieglinde K. Fuller,Amy S. Rushing, and Laura I. Schultz. NISTIR 85-3273-19. Gaithersburg, MD:National Institute of Standards and Technology, April 2005. Also available fromthe DOE/FEMP Help Desk at 1-877-EERE-INF (1-877-337-3463).
· Engineering Economy by G. J. Thuesenand W. J. Fabrycky. Prentice Hall, 1993. ISBN 0-13-277491-7.
· GSA LEED® Cost Study GSA, 2004.
· GSA LEED® Applications Guide GSA, 2005.
· Life-Cycle Costing Manual forthe Federal Energy Management Program by Sieglinde Fuller and S.R. Petersen. NIST Handbook 135. NationalInstitute of Standards and Technology, 1995.
· Simplified Energy Design Economicsby Harold E. Marshall and Rosalie T. Ruegg. NBS SP 544. Washington, DC:National Bureau of Standards, January 1980.
Others
· ASTM International—Publishes standards thatsupport LCCA.
· R. S. Means Company—Offers constructioncost databases.
· Sustainable Buildings Industry Council (SBIC)—Offersworkshops on Designing Low-Energy Buildings that include instruction in usingEnergy-10 software.
· U.S. Army Corps ofEngineers Life-Cycle Cost Module
· U.S. Cost—Conducts training workshops forSuccessEstimator and Tri-Services Parametric Estimating System (TPES) modelsseveral times each year.
· U.S. Department ofEnergy (DOE) Office of Federal EnergyManagement Programs (FEMP)—Conducts workshopson a variety of topics related to energy and water conservation. A streamingvideo on life-cycle costing may be accessed from www.energyworkshops.org/femp/which includes an introduction to BLCC5.
· U.S. Life-Cycle Inventory (LCI) Database—Createdby NREL and partners, this publicly available database allows users toobjectively review and compare analysis results that are based on similar datacollection and analysis methods.
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