Whole life costing worked examples

Worked example 3 - total building level

Demolish and rebuild v refurbishment

The life cycle cost appraisal is to evaluate the life cycle cost effects of 2 options:

  1. demolish the existing building and rebuild to the client's specific requirements, incorporating 'all-air' air-conditioning systems;
  2. refurbish the existing building to meet, as far as practicable, the client's 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; and
  • residual values of land or buildings.      

Discount rate

The building is in owner-occupation and the client's 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] x 100 = 3.88%

[(1.03)     ]

The client has agreed that the discount rate can be rounded to 4%.

Building life

It has been agreed with the client to use a 20-year life cycle.

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.

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 building. Fluorescent luminaires to all office areas and tungsten fittings to circulation.

Condition of the existing building

The building is structurally sound with few defects; however, it is in a poor state of decorative repair.

Basis requirements of the redevelopment

Gross internal area

1,500 m2

Ratio of net to gross internal area

70%

Number of occupants

110

Ratio of occupants to net internal floor area

9.7 m2

External wall area (excluding party walls)

700 m2

The adjacent buildings will remain in use as offices during and after the development. The structural engineers have advised that no work is required to party walls, other than temporary shoring.

Summary

 

Net present value

£K

OPTION A

Demolish existing building and rebuild to the client's specific requirements, incorporating 'all air' air-conditioning systems

 

3,889

OPTION B

Refurbishment of the existing building to meet, as far as practicable, the client's requirements, re-using systems wherever possible

 

2,177

Percentage difference (A extra on B)

79%

The net present value is a key factor in the option appraisal. However, other less tangible benefits and disadvantages of each option should be carefully considered in relation to the business objectives. It is also recommended that sensitivity analysis be carried out, for example, looking at different discount rates and timeframes.

The calculation of the above is detailed in Tables 3 (extract in Part 2, Section 2 (pages 35-44) of the old Surveyors' Construction Handbook).