Whole life cost calculation

The whole life costing 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.

As 'money today' has a different value to 'money tomorrow' or 'money in 10 years' time', a technique has to be adopted that will express future costs or revenues in present values for comparative purposes. The process of converting 'future money' to 'present money' is called 'discounting'.

Discounting involves establishing the discount rate to be used. In making a decision on a discount rate for a particular project, some judgment will need to be exercised 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 their 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 give any firm guidelines for surveyors to adopt when selecting discount rates.

There are, however, 2 main approaches to discounting:

• the use of a rate that 'implies' inflation of future costs and values, which is used where the same level of inflation is assumed to apply to all costs (in this approach, future costs and values will be priced at today's prices); or
• the use of a rate that requires an 'explicit treatment' of inflation in relation to future costs and values, which is used where different inflation levels are expected to apply to different categories of cost (in this approach, future costs and values will be priced at today's prices and adjusted by a factor to reflect future inflation).

It is suggested that it is easier to deal with the former.

Discount factor tables

Discount factor tables can be found in Part 2, Section 2 (pages 45-47) of the old Surveyors' Construction Handbook.