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Whole life costing (WLC) is defined as:

“a technique for examining and determining all the costs – in money terms – direct and indirect, of designing, building and facility management (operating, maintenance, support and replacement) of a construction throughout its entire life including the disposal cost”.

Principally, WLC can be characterised as a systematic approach balancing capital with revenue costs to achieve an optimum solution over a construction’s whole life. It is a relatively new concept for the construction industry. However, it is rapidly becoming the standard method for the long-term cost appraisal of civil infrastructure projects. With clients now demanding developments that demonstrate value for money over the long term, WLC has become an essential tool for those involved in the design, construction, operation of construction projects.

Long-term costs over the life of the asset are more reliable indicators of value for money than the initial construction costs. This is because: money spent on a good design can be saved many times over in the construction and maintenance costs. An integrated approach to design, construction, operation and maintenance with input from constructors and their suppliers can improve health and safety, sustainability, design quality; increase buildability; drive out waste; reduce maintenance requirements and subsequently reduce whole-life costs. It is important to take a whole-life approach to the asset, whether or not the same team is responsible for design, construction, operation and maintenance investment in a well-built project can, in turn, achieve significant savings in running costs.

Essentially, whole life costing is aimed at answering the question “What is the cost of achieving this objective in this way?” rather than the more limited question “What is the cost of buying this item?” However, this question will be relevant at many stages throughout the development process – from consideration of the initial business case to evaluation of developers.

Whole life costing can be combined with environmental or other targets, and can be used to validate a more sustainable approach, by quantifying the cost of complying with current and future environmental legislation. As such, whole life costing forms a critical step for developers wishing to move towards sustainability.

It’s also important to make distinction between product’s life cycle cost and its whole life costing. Life cycle cost refer to all the costs that the producer will incur and whole life costs also include the costs that consumers incur, i.e. installation, operation, maintenance, revitalisation and disposal (Shields & Young 1991) .

Overview

1. All cost categories should be considered and identified. Each cost element should be clearly defined so that all parties involved have a clear understanding of what is included in a given cost category and what is not
2. The proper analysis for the period or the time frame over which costs are projected has to be done.
3. Considering the whole life of a construction, how it will enhance the core business operations that will take place in, on or around it, and how it might change in the future and an estimate of the likely cost.
4. End of life of the development should be taken into account in WLC whether that involves de-commissioning, disposal or re-sale
5. Involving buyers in the WLC policy with a view to engaging them in the process to create partnering style relationships in which buyers can be developed for mutual benefit between both parties, e.g. they can work together to take cost out of a construction and service.
6. The inclusion of taxes in WLC calculations should be done, as it is important in the assessment of projects and tends to favour alternatives with lower initial costs because taxation relief is generally available only against repairs and maintenance.

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Case studies

There are multiple examples of using WLC for different construction across the world and in Australia published elsewhere. There are also case studies of projects that have been constructed using WLC approach.  Some examples are:

1. Study of a design-construct company in Australia (Melbourne), which presents and explores a contemporary form of building cost planning integrated into a design cost management approach (Smith et. al. 2004). 
2. Study was carried out to illustrate the use of such profiles, using a typical UK house design produced for a housing association (Harris & Bowles).
3. Study of decision analysis referred to a whole of life cycle cost analysis by considering appropriate elements of bridge rehabilitation costs (A research project funded by the CRC for Construction Innovation in Australia) (Humphreys et al). 

 

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Key Issues

Benefits

WLC can contribute significantly to the achievement of the financial and non-financial business objectives of many construction, and construction organisations. This is especially relevant in terms of customer service, internal business processes, and financial performance. Furthermore, the process is fundamental in moving towards sustainability in construction, as this industry still requires that monetary values be placed on the non-financial elements of sustainable development. WLC is changing the approach to design, procurement, construction and facilities management and delivering major benefits. Many public and private sector clients now procure on cost of ownership, not capital cost.

Life cycle cost analysis is currently a valuable tool in the construction industry and will become more so as resources become more scarce. Selecting the materials and components of structures and pavements based on a life cycle cost analysis can significantly decrease the lifetime cost of construction, maintenance and repair. It is used in the context of the need to obtain value for money (vfm), which does not simply mean selecting the cheapest option which meets the minimum requirements but is defined as “the optimum combination of whole life cost and quality (or fitness for purpose) to meet the customer’s requirement".

The benefits of using WLC include:

• cost savings in the medium and long term;
• more informed decision-making, considering all options on an equal basis;
• provision of a format for discussion between the end users on relative merits of alternatives;
• transparency of the importance of different evaluation criteria;
• structured consideration of non-monetary aspects, which may be difficult to quantify;
• selection of the option that provides best value to meet the requirement, which may otherwise not have been considered.

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Risks

• WLC, by definition, deals with the future and the future is unknown. This difficulty is worsened by the difficulty in obtaining the appropriate level of information and data and means uncertainty is endemic to WLC.
• WLC requires a new set of skills that may be lacking in any part of the supply chain, and clients themselves. Although construction clients are pushing for whole life costed project plans, they may be unable to interpret these correctly themselves. There is a clear requirement for considerable training in WLC within the design professions.
• WLC is not an exact science. In addition to the difficulties inherent in future cost planning, there are larger issues at stake. It is not just a case of asking ‘how much will this construction cost me for the next 50 years’, rather it is more difficult to know whether it will be required in 50 years time at all.
• WLC requires a different way of thinking about cash, assets and cash-flow. The traditional capital cost focus has to be altered, and costs be thought of in terms of capital and revenue costs coming from the same ‘pot’. The common misconception that a whole life costed project will always be a project with higher capital costs does not assist this state of affairs.

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Savings

 

Use of WLC allows significant savings in development costs and increases investment returns over the life of the development due to:

• efficient resource use
• reducing running costs of construction
• saving energy by designing structure to utilise passive solar energy
• water efficiency by utilising low water consumption and rainwater collection system
• savings in running costs
• increasing business performance and organisational effectiveness
• reducing natural and human resource use (which is beyond the traditional perception and bring a better value for the construction itself, the developers and end users).

 

 

Although WLC can be done at any stage of the project, the potential of its effective use is maximised during the early design stages (see graph)

Relationship between whole life costing (WLC) saving and time of its implementation

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Costs

Setting and management of the relationships between clients, designers, builders, and suppliers.

 WLC forces to delineate construction design process including the mechanism and process for involving the supply chain in the development activity.

It requires a series of strategic decisions and changes, both in the way it operates across functions and organisational units, and in the way it manages the relations with members of the supply network.

 Costing the project has to be done at early stages: producing initial cost estimates.
Data about lives of components of construction should be recorded in appropriate forms and used during design to model future construction and maintenance costs in order to provide a method of comparison and evaluation of the financial performance of the project in optimising WLC.

WLC requires development competencies and techniques, both by constructors and clients, for handling financial considerations and profit-related decisions.

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Barriers

• The major obstacle is the difficulty of obtaining the proper level of information upon which to base a WLC analysis, due to lack of appropriate, relevant and reliable historical information and data.
• Time needed for data collection, for the analysis process and for the essential dialogue with the decision-maker to re-run of alternative options.
• The capital cost of construction is almost always separated from the running cost. It is normal practice to accept the cheapest initial cost and then hand over the construction to others to maintain. Usually, there is no clear definition of the buyer, seller, and their responsibilities towards the operating and maintenance costs.
• Lack of motivation in cost optimisation because the design and cost estimating fees are usually a percentage of the total project cost.
• There are usually multiple aspects of needs desired by clients. Most of these aspects can not be assessed in a strict WLC framework, because either they are in conflict with the main WLC objective or because they are mostly ‘non-financial’. Some of these factors are even intangible such as aesthetics. In many cases, these intangibles are also in conflict with results of WLC.

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Benchmarks

Costs and value are not always well managed by clients (A study of UK government construction projects in 1998 (Achieving Excellence in Construction) showed that three quarters of the projects exceeded their budgets by up to 50%) and some clients are focusing on the wrong goal – lowest price rather than best value. However, concentrating on the initial capital costs of a construction project does not give value for money. It needs to think in terms of achieving value by meeting the needs of end-users with a higher quality project at lower whole-life costs. The WLC can be used as a benchmark against other schemes and client costs. To ensure that value for money is achieved the following should be done:

• compare capital and predicted whole-life costs with the benchmark cost for a similar facility procured in the same way;
• work within an integrated project team with the aim to deliver better value rather than lower margins;
• seek opportunities to further reduce predicted whole-life costs without reducing quality or value by using value engineering during the design process;
• consider the scope for sharing any further savings made during the construction stage;
• manage costs collaboratively, with the integrated project team, engaged at the earliest stages wherever possible – using target costing, value management and risk management;
• avoid fixing a guaranteed maximum price until the design stage is complete, to ensure quality and functionality for the client;
• clearly understand actual construction costs, in terms of labour and materials;
• separate underlying costs from risk allowances; distinguish between profit and overhead margins.

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Development phase actions

Feasibility

Expert studies, carried out at an early stage of a project, reduce the associated risks and increase financial certainty, ensuring the right decision is made at this stage before major expenditure is incurred. The study:

• produces scopes, costing and specifications for all the required site investigations as well as offering procurement and expert supervision services.
• includes desk study (cover the full range of required expertise including; gathering historical drawings, geotechnics, ecology and many other related issues), inspection, site investigations and interpretative reports. Feasibility design can then develop options with the assistance of physical and numerical modelling, when required.
• determining a project’s viability, economic and cost benefit evaluations, operational, maintenance, construction and decommissioning cost estimation
• provides data to a whole life costing of the project.

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Planning

Planning is a critically important task for the entire WLC process preparation. It should be based on measurable milestones so it is able to monitor progress. The activity, known as whole life costing planning (WLCP), can be considered as part of WLC. It constitutes the prediction of total costs of construction, part of a construction, or an individual construction element. It also includes planning the timing of work and expenditure, taking into account the effects of performance and quality.
WLC planning should be aligned with the assets renewal phases and must also reflect the plans made at their inception and need to be transferred through the ‘whole life’. This means:

• engineering processes and maintenance plans should be preventative rather than reactive
• avoiding the waste of economic, social and environmental resources;
• long-term business plans must aim to incorporate better assets information systems, which facilitate such processes.

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Design

The design cost management at the design stage should be an integral process for development projects to ensure that construction budgets are maintained, design risks are managed, project is delivered on time and to a level of quality that meets or exceeds company, client and end-user expectations. It is an essential process in achieving a good balance in the time, cost, and quality triangle.

Within WLC framework the developer, the client, the design team and the construction team are ideally the one body, but in practice they may pursue their own interests. So, conflicts can arise that affect the design and budget development of the project. The WLC method needs to balance design management, cost management and design integrity as well as appreciating issues of quality and construction programming (time).

Whilst the fundamental framework of cost planning remains intact in the different stages of the development, the focus and detail in design stage of the project is guided by the priority for greater financial control over the cost and value implications of design and other decisions. The stress should be made on the basic principles of cost planning at this stage to:

• establish a frame of reference for the process (set a realistic budget and cost targets for various parts of the project);
• develop a method of checking that the budget and cost targets are being maintained (elemental cost planning); and
• provide the means for taking remedial action when the cost targets or the overall budget are not being maintained
• work with the topography; not try to reshape it to an ideal solution
• minimise potential use or movement of materials, particularly in reshaping the landscape
• minimise runs of all roads, pipes and cables used for infrastructure services
• choose road layouts with minimum total road length keeping in mind the impact on the need to undertake civil works on the individual house lots
• take a global view - incorporate recycled water (third pipe) as part of integrated services – part of trade-off between using more materials in a specific development yet required fewer structures up the water supply chain.
• Use storm-water run-off locally to reduce pipe system and capacity resulting in smaller and fewer drainage pipes.
• Combine services in one underground channel where possible both to minimise installation costs and materials as well as providing scope for unforeseen uses
• Consider fitness-for-purpose and do not over provide or allow for work, which is not needed in the foreseeable future unless it is part of planned expansion (e.g. widening roads for future traffic or infrastructure) which must also have capacity to serve adjacent developments or next stages of a development
• Keep public open space in the most natural form.

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Construction

The essence of WLC is to capture all predictable costs that may have an impact on the economy or society that could be affected by the development project under consideration.

The sustainability approach has to be employed during construction stage - “The creation and responsible management of a healthy built environment based on resources efficient and ecological principles” [Kibert 1994], which should include the following principles:

• minimisation of resource consumption;
• maximisation of resource reuse;
• use renewable and recyclable resources;
• protection of the natural environment;
• creating a healthy and non-toxic environment.

According to WLC approach this inception for construction should establish its relationship with economic, technical, biological, and social environment using additional principles:

• economic - use of full-cost accounting methods and real-cost pricing to set prices and tariffs for goods and services to achieve more efficient use of resources
• technical - requires high performance, durability, quality and mixed use of a development
• biological - protect the natural environment rather than pollute, encourages the use renewable resource and reduce the use of water, energy, materials and land in construction stage of a project
• social - improvements in the quality of human life, and human living environment.

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Completion

When considering large, complex assets such as constructions some other WLC methodologies start Day 1 from the completion of construction adding the cost of construction as a single cost.

The results of the cash flows beyond completion stage can be analysed as:-

• actual cash flows – the cash flows in each year
• total WLC - the addition of all the annual cash flows
• annualised WLC equivalent – the total WLC divided by the required life
• discounted cash flow – the discounting of the annual cash flows to produce a net present value (NPV) or discounted cash flow (DCF)
• WLC is more accurate when performance specification rather than product definition is used
• WLC will contribute to a realistic approach to maintenance policy, including decision-making, planning, budgeting and funding of inspection and repair activities during the life-time of port structures.

Although the WLC framework can predict both agency and user costs over the expected life of a project, and provides the user with an informative way of comparing the results, the final decision regarding selection of a preferred alternative must be made using engineering judgment. The framework is simply a tool with which engineers and planners can view the relative differences and similarities between alternate designs. The decision as to which alternative to construct cannot be made by the WLC framework alone. Many other factors exist which currently cannot be evaluated. Perhaps future research will bring WLC analysis closer to capturing all costs (and benefits as well) of a particular design and configuration. But even then, human judgment will be necessary to provide final analysis, considerations, and decisions.

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Boussabaine, A & Kirkham, R 2004, Whole Life-Cycle Costing: Risk and Risk Responses, Blackwell, 2004, ISBN: 1405107863

Ebel, K 1991, Achieving Excellence in Business: A Practical Guide to the Total Quality, CRC Press, ISBN: 0824785223

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