Pertains to selecting building elements on the basis of life-cycle costs (weighing options during concepts, design development, and value engineering) as well as basic cost estimating and budget control.
Every owner wants a cost-effective building. But what does this mean? In many respects the interpretation is influenced by an individual’s interests and objectives, and how they define “cost-effective”.
Is it the lowest first-cost structure that meets the program?
Is it the design with the lowest operating and maintenance costs?
Is it the building with the longest life span?
Is it the facility in which users are most productive?
Is it the building that offers the greatest return on investment?
While an economically efficient project is likely to have one or more of these attributes, it is impossible to summarize cost-effectiveness by a single parameter. Determining true cost-effectiveness requires a life-cycle perspective where all costs and benefits of a given project are evaluated and compared over its economic life.
Building design is cost-effective if it results in benefits equal to alternative designs and has a lower whole life cost, or total cost of ownership. For example, the HVAC system alternative that satisfies the heating and cooling requirements of a building at the minimum whole life cost, is the cost-effective HVAC system of choice. Components of the whole life cost include the initial design and construction cost, on-going operations and maintenance, parts replacement, disposal cost or salvage value, and the useful life of the system or building.
The federal government has numerous mandates that define program goals with the expectation that they be achieved cost-effectively.
The challenge is often how to determine the true costs and the true benefits of alternative decisions. For example, what is the economic value in electric lighting savings and productivity increases of providing daylight to workplace environments? Or, what is the value of saving historic structures? Alternately, what is the cost of a building integrated photovoltaic system (BIPV), given that it may replace a conventional roof?
The following three overarching principles associated with ensuring cost-effective construction reflect the need to accurately define costs, benefits, and basic economic assumptions.
Utilize Cost and Value Engineering Throughout the Project Life Cycle
As most projects are authorized/funded without a means of increasing budgets, it is essential that the project requirements are set by considering life-cycle costs. This will ensure that the budget supports any first-cost premium that a life-cycle cost-effective alternative may incur. Once a budget has been established, it is essential to continually test the viability of its assumptions by employing cost management throughout the design and development process. An aspect of cost management is a cost control practice called Value Engineering (VE). VE is a systematic evaluation procedure directed at analyzing the function of materials, systems, processes, and building equipment for the purpose of achieving required functions at the lowest total cost of ownership.
Use Economic Analysis to Evaluate Design Alternatives
In addition to first costs, facility investment decisions typically include projected cost impacts of, energy/utility use, operation and maintenance and future system replacements. At the beginning of each project, establish what economic tools and models will be used to evaluate these building investment parameters. The methodologies of life-cycle cost analysis (LCCA) will typically offer comparisons of total life-cycle costs based upon net present values. Other methods usually used as supplementary measures of cost-effectiveness to the LCCA include Net Savings, Savings-to-Investment Ratios, Internal Rate of Return, and Payback.
Consider Non-Monetary Benefits such as Aesthetics, Historic Preservation, Security, Safety, Resiliency, and Sustainability
Most economic models require analysts to place a dollar value on all aspects of a design to generate final results. Nevertheless it is difficult to accurately value certain non-monetary building attributes, such as formality (for example, of a federal courthouse) or energy security. The objective of a LCCA is to determine costs and benefits of design alternatives to facilitate informed decision-making. Costs can be more readily quantified than benefits because they normally have dollar amounts attached. Benefits are difficult because they often tend to have more intangibles. In some cases, these non-monetary issues are used as tiebreakers to quantitative analyses. In other instances, non-monetary issues can override quantitatively available cost comparisons, for example, renewable energy application. These cost-effectiveness principles serve as driving objectives for cost management practices in the planning, design, construction, and operation of facilities that balance cost, scope, and quality. Analyzing the environmental costs through Life Cycle Assessment (LCA) can be complementary to the dollar cost implications of the design, materials selection, and operation of buildings. The LCA methodology, which can enhance information gleaned from an LCC, includes definition of goal and scope, an inventory assessment, life-cycle impact assessment, and interpretation-an iterative process.
Note: Information in these Cost-Effective pages must be considered together with other design objectives and within a total project context in order to achieve quality, high performance buildings.
Throughout a project’s planning, design, and construction phases, Cost Management is employed as a means of balancing a project’s scope and expectations of quality and budget.
The approach can be summarized as requiring the following three steps:
Define the scope, the level of quality desired, and the budget
Ensure that the scope, quality, and budget are aligned
Monitor and manage the balance of these three components throughout the life of the project
Milestone cost estimates at various stages of the process are critical components of the cost management activity. Cost Management encompasses more than cost estimates however—it also includes Risk Management and in the federal arena, can include Earned Value Analysis. Risk Assessment and Management are important as identified risks on construction projects are typically financial in nature. Therefore early in the project an assessment of risk is crucial to establish the budget parameters within which the project must be completed. The calculation of project contingencies should be based on an assessment of the risk surrounding the project (site issues, availability of bidders, method of procurement, and critically the market conditions in the location of the project. As risks are mitigated (site investigation is done, market survey completed, program finalized, design started, and so forth) then contingencies can be reduced and the range of estimated final cost narrowed.
The firm charged with managing the costs of the project should ideally be hired directly by the owner, early in the process, and should be independent of both the architect/engineer and the construction contractor.
Formally defined, economic analysis is the monetary evaluation of alternatives for meeting a given objective. For example, to meet the need for additional office space a decision maker might consider new construction, renovating an existing facility, or leasing another building. The evaluation is based on a comparison of discounted costs and benefits over a fixed time period of time. Alternatives can be summarized in terms of the ratio of total benefits to total cost (benefit-cost ratio) or equivalently, the total net benefits (net present value).
The Economic Analysis Process
The steps to estimate the economic consequences of a decision, as listed in Ruegg’s and Marshall’s Building Economics—Theory and Practice, are summarized below:
- Define the problem and the objective.
- Identify feasible alternatives for accomplishing the objective, taking into account any constraints.
- Determine whether an economic analysis is necessary, and if so, the level of effort which is warranted.
- Select a method or methods of economic analysis.
- Select a technique that accounts for uncertainty and/or risk if the data to be used with the economic method are uncertain.
- Compile data and make assumptions called for by the economic analysis method(s) and risk analysis technique.
- Compute a measure of economic performance.
- Compare the economic consequences of alternatives and make a decision, taking into account any non-quantified effects and the risk attitude of the decision maker.
Types of Economic Analysis Methods
The process described above is cost-benefit analysis, and is appropriate where both the costs and benefits can differ among alternatives. When the benefits are equivalent, the evaluation of alternatives is simplified to a cost comparison, or cost- effectiveness analysis, as described in OMB Circular A-94.
Life-Cycle Cost Analysis
Life-Cycle Cost Analysis (LCCA) is a type of cost-effectiveness study common in the comparison of building projects or, as described in 10 C.F.R § 436A , for the evaluation of energy and water conservation measures. Life cycle costs can include all costs of building ownership over its service life, including construction, maintenance & operation, recapitalization, and disposal. Alternatives can be evaluated on the basis of discounted total cost, or the net savings relative to a “do nothing” alternative such as the savings-to-investment ratio, internal rate of return, or time to payback.
Value Engineering is a systematic evaluation procedure directed at analyzing the function of materials, systems, processes, and building equipment for the purpose of achieving required functions at the lowest total cost of ownership.
According to VE experts Kirk and Dell’Isola, “Value Engineering is a team approach that analyzes a function by systematically developing the answers to such questions as: what is it?; what does it do?; what must it do?; what does it cost?; what other material or method could be used to do the same job without sacrificing required performance or degradation to safety, reliability, or maintainability?” VE is concerned with elimination or modification of anything that adds costs without contributing to the program functional requirements. Reductions in a project’s scope or quality to get it into budget are not considered VE—those decisions are simply “cost cutting”.
Major public works projects may undergo both VE studies and LCCA, and while the two practices serve separate purposes, their consideration of design alternatives is often interrelated. For example, value engineering can be used to complement a life-cycle cost analysis when selected LCC alternatives cannot be adopted without exceeding the project budget. VE can be utilized to reduce initial costs of design features other than those under study in a LCCA. If the VE effort results in sufficient reduction in initial costs, savings may allow selected LCC alternatives to be adopted within the overall program budget, thus optimizing the long-term cost-effectiveness of the project as a whole.
Limits of Economic Analysis
A challenging aspect of economic analysis is identifying those benefits and costs that resist quantification. These typically include aesthetics, safety, environmental impact, historic preservation. Refer to the WBDG page on “Consider Non-Monetary Benefits such as Aesthetics, Historic Preservation, Security, and Safety.”
Sensitivity analysis should be considered when running the numbers and evaluating alternatives. Effects of discount rates, escalation rates, utility costs, etc., can be overlooked. A rigorous sensitivity analysis can help establish which factors are most important in the life cycle analysis and accurate impacts on the decision-making. For example, project costs need to be linked to the BIM models for accuracy. Something as simple as net quantities of drywall may not be accurate due to reductions based on window areas, even though the drywall is needed in the construction process. So it is essential to coordinate cost information across all platforms and aspects of a project.