Whole life cost calculation

Costs and frequency of future payments

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. See Data sources for examples of sources for data.

Depending upon the requirements, some calculations will be relatively straightforward, as with the option appraisal exercise for air-conditioning in Worked example 1. However, if a total building analysis is needed, this could include all the expenditure required throughout the life of the building.

The major categories of cost expenditure are:

• capital costs;
• financing costs;
• operation costs, including energy;
• annual maintenance costs;
• intermittent maintenance, replacement and alteration costs;
• occupancy costs; and
• residual values and disposal costs.

Estimates for these costs will be based upon assumptions about future events and it is essential that these assumptions are clearly stated. Indeed, an additional advantage of whole life costing is that it requires design assumptions to be stated explicitly rather than implied.

Although current costs are generally used, it is important that the assessment of future costs should reflect any expected divergence of a specific cost from the general level of inflation allowed for in the discount rate. For example, when tender levels for building work are very depressed, it would be unwise to assume that market conditions will remain unchanged for any extended period. Some allowance should therefore be made in order to adjust current building prices to more normal market conditions when putting prices against future building work. Similarly, comparative fuel charges may be predicted to change in the future and due allowance should be made for this.

The level of detail used will be dictated by the availability of information, together with the requirements of the client.

Cost categories

In considering the costs for each category, the following should be borne in mind and, where necessary, established with the client. See Checklist of cost and values.

Capital costs

These include land and building costs, professional fees, the costs of furniture and equipment, and costs of permanent improvements to existing assets, needed for the business to carry out its operation, with the intention that these should have a useful life of more than 1 year. The significance of any tax benefits and grants should be established with the client.

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 must 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.

Operation costs

These include estimates of rent, rates and energy, cleaning, building-related staffing and other staffing costs.

Annual maintenance costs

Average maintenance costs may be used, but once the details of design are completed, a more relevant estimate can be produced based on information obtained from manufacturers or maintenance managers.

Intermittent maintenance, replacement and alteration costs

Replacement costs can be produced using normal cost-estimating techniques.

In seeking to establish a realistic assessment of the life of materials and components, reference should be made to manufacturers, maintenance managers and other sources of such data.

Occupancy costs

Occupancy costs are the costs of performing the function for which a building is intended (for example, for the production of motor vehicles). Occupancy costs are distinguished from operation costs, as they relate to the 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 have a consequential impact on his occupancy costs, whereas his building-related operation costs might be relatively unchanged. Often clients will not require a surveyor to take these costs into account, as they are not directly related to the building.

Residual values and disposal costs

These are estimates of the resale value and cost of disposing of a 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 whole life costing calculations (see Residential value).