Market News

 October 19, 2009
Life Cycle Costing - The First Step in Green Building

 By Stefan Storey and Sylvia Coleman

GLOBE-Net - When developers look at building procurement, they consider ’first costs’ in great detail. From the site costs, utility services, construction, contingency, through to financing and debt management, good financial planning is key to getting a project off the ground. Yet the first cost of a building is only the beginning of the story.  

A study led by Royal Academy of Engineering shows that for conventional commercial buildings, the total maintenance costs spread over 30 years can often dwarf first costs by a factor of 5:1. High performance buildings have significantly lower operational costs than conventional buildings, meaning that the total cost of owning and operating a building can be greatly reduced (see Kats report, pdf)

With market and regulatory forces accelerating the adoption of high performance buildings, the financial benefits will be substantial and permeate the various sectors of the construction industry. 

Mind the Gap

Many other studies have shown that investing up front on efficient buildings means cost savings downstream. So why don’t building developers jump on board so that they can benefit from these savings? 

Unfortunately, building developers rarely get the opportunity to recoup operational savings because they often sell a building after construction is complete.  This creates a lack of incentive to invest in high performance technologies, such as energy efficient building envelopes, and such design strategies are often ’value engineered out’ - a term which has little to do with engineering and everything to do with cutting costs.

Building owners and operators are then left with the legacy of a poorly designed building with a whole range of maintenance problems. 

This decoupling between developer and owner is referred to as the ’split incentive gap’. The gap exists for a number of reasons, many of which reside in the differing goals of developers and owners. Both parties use entirely different accounting methods based on a variety of budgeting methods, risk minimization techniques, and financial priorities. 

The good news is that there are readily available tools that are capable of creating a common financial platform for high performance buildings. Life cycle costing is the front-running tool that can compare and aggregate a spectrum of costs over long time frames.

What is life cycle costing?
In North America, life cycle costing is one of the most useful methods for long term budgeting for buildings. The National Institute of Standards and Technology (NIST) definition of LCC exemplifies the general scope: it is a method of accounting for all directly related expenditures from cradle to grave including construction, capital renewal, maintenance, operations and deconstruction costs. 

How does LCC work? In a nutshell, an LCC analyst will look at all the budgetary impacts incurred over a service life, 25 years or longer for durable buildings, and then deflate the figures to account for escalating cost so that all dollars from successive years are comparable. 

The last step is to account for the future value of expenditures by discounting cash flows to the year of construction and calculating the net present value of each flow. A good review of LCC methodology can be found in a Davis Langdon report [pdf].

The ’total cost of ownership’ is the aggregated cradle-to-grave costs of a building. Note that costs rise over time because older buildings become increasingly expensive to operate and maintain.

The real power of LCC is that it can take costs that are unevenly distributed in time and aggregate them into a single number which is called the ’total cost of ownership’. During building procurement, an LCC analyst can then look at two competing building designs and select the most cost effective option. 

LCC as an accounting methodology is not new; it has been widely used at least since the 1970’s for decision-making in large capital investment projects by provincial, state and federal governments in the Canada, the US and the EU. What is new is the impending arrival - en masse - of high performance buildings.  

Market-driven voluntary initiatives, such as LEED 2009, and mandatory regulations, such as stringent energy efficiency standards, are compelling the building industry inexorably towards energy efficiency, low carbon emissions, minimization of water consumption and waste generation. 

Shift towards performance

These market forces and higher levels of regulation are causing a shift towards performance which has direct implications for the total cost of ownership. Firstly, high performance buildings are less expensive to operate and maintain. Secondly, the cost of building to higher standards is declining. The CaGBC review of construction cost studies document that the cost premium to implement LEED Gold standards or higher is only 2-6%.   

Schematic showing total costs in today’s dollars. Deep operational savings and a small or zero cost construction premium mean that high performance cost less in the long run.

The combined forces of the trend to small first cost premiums and large operational efficiency gains means that the total life cycle savings are becoming significant. 

Preliminary results from an upcoming LCC study on the Centre of Interactive Research in Sustainability (CIRS) at the University of British Columbia is showing substantial savings when compared to LEED Gold building standards. 

CIRS, currently under construction at UBC, is designed to be one of the most highly performing buildings in Canada. According to design goals documents, the building will be carbon neutral, thermal energy zero and easy to internally reconfigure and retrofit. An upcoming LCC study by UBC and Stantec Engineering shows that the combined life cycle savings will save the University of British Columbia $6.1M over the first 25years, which is 13.7% less than an equivalent LEED Gold building. 

Architectural rendering of CIRS by Busby Perkins + Will

Upcoming Challenges

Buildings like CIRS show that the economic arguments against constructing high performance buildings have all but evaporated. The next challenge is to produce financial models that can quantify, map out where these savings exist and how they can be shared.

That said, not all the barriers to high performance are economic. 

Surprisingly, even in institutions where ownership of buildings is continuous, such as UBC, there are management differences between departments responsible for capital expenses and operational budgets. The reasons for these differences are multifaceted and include internal organization barriers, heterogeneity of stakeholder preferences, misaligned incentives and imperfect redistribution mechanisms for allocating the flow of savings. 

However, long-term financial modeling such as LCC offers an opportunity for capital developers and operational managers to observe that they can mutually co-benefit from long term financial planning. It is the first key step in a series of actions that take us closer to attaining a high performance future. 

The next article in this series will investigate policy pathways that support the development and proliferation of sustainable buildings across our urban landscapes.

Stefan Storey and Sylvia Coleman are PhD students at the Institute for Resources Environment and Sustainability, UBC. This article is part of a special GLOBE-Net Series on Building The Future

The Institute for Resources, Environment and Sustainability (IRES) is both an interdisciplinary research institute and a major interdisciplinary graduate education program at the University of British Columbia. It is the mission of IRES to work to foster sustainable futures through integrated research and learning about the linkages among human and natural systems, to support decision making for local to global scales.