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1.8 Life Cycle Costing

Purpose
Life Cycle Costing (LCC) is an important economic analysis used in the selection of alternatives that impact both pending and future costs. It compares initial investment options and identifies the least cost alternatives for a twenty year period. As applied to building design energy conservation measures, the process is mandated by law and is defined in the Code of Federal Regulations (CFR), Title 10, Part 436, Subpart A: Program Rules of the Federal Energy Management Program.

The A/E shall contact local utility companies to determine available demand-side management programs and nocost assistance provided by these companies to designers and owners.

Applications
Basic applications of LCC are addressed within the individual chapters herein and may be further defined within an A-E’s design programming scope requirements. In general, LCC is expected to support selection of all building systems that impact energy use: thermal envelope, passive solar features, fenestration, HVAC, domestic hot water, building automation and lighting. However, LCC can also be applied to building features or involve costs related to occupant productivity, system maintenance, environmental impact and any other issue that impacts costs over time. It is very important to recognize the significance of integrated building systems design in the overall efficiency of the design.

Methodology
There are many established guidelines and computerbased tools that effectively support Present Value LCC analyses. The National Institute of Standards and Technology (NIST) has prepared the Life Cycle Costing Manual for the Federal Energy Management Program (NIST Handbook 135), and annually issues real growth Energy Price Indices and Discount Factors for Life Cycle Cost Analysis. As a companion product, NIST has also established the Building Life Cycle Cost (BLCC) computer program to perform LCC analyses. The latest versions of the BLCC program not only structure the analysis, but also includes current energy price indices and discount factor references. These NIST materials define all required LCC methodologies used in GSA design applications.

It is recommended that the A/E obtain the BLCC software and update from NIST.

Procedures and Approach
The most effective approach to LCC is to appropriately integrate it into the design process.

The building design evolves from general concepts to detailed analysis. LCC needs to follow the same approach paralleling the focus to the current level of detail study.

It is extremely important for the effective development of the project that commitments are made and retained on the building systems, in a general sense, during the Conceptual Phase.

The building systems should be analyzed for appropriateness during the first stages of the Design Development Phase. A commitment on direction for the systems needs to be made at this time, and any further LCC studies focused on detail within each system.

Charles Evans Whittaker U.S. Courthouse, Kansas City, MO
Charles Evans Whittaker U.S. Courthouse,
Kansas City, MO

All LCC effort should be completed in the Design Development Phase of the project.

The following practices are typically required when conducting LCC analyses for building design. They are listed here to address common concerns and frequently asked questions.

  • When defining alternatives for life cycle costing, an acceptable level of overall building services must be assured throughout the analysis period.

  • Design alternatives must be compared against a baseline reference alternate that is the lowest first cost of the alternatives being considered. The baseline alternate must offer a viable system, employing stateof-the-art design features, and be in compliance with all project requirements. Where existing conditions form part of the baseline alternate, the analysis must not only include intended project work, but also the additional costs necessary to achieve code compliance and reliable operation over the analysis period.
  • The analysis period should be chosen to fully represent all costs. When optimizing the design of a single system, all compared alternatives must be considered over the same analysis period. Where possible, the analysis period should be the smallest whole multiple of the service lives for the major systems involved in the analysis. Service lives of HVAC equipment can be found in the ASHRAE Applications manual. In any case, the analysis period should not be over 25 years unless otherwise directed by GSA.
  • Costs that have already been incurred or must be incurred, regardless of the chosen alternative, can be deemed “sunk” and excluded from the analysis. Costs that must be incurred during the period from design decisions to construction award should be deemed sunk.
  • Baseline and alternative first costs are typically those estimated for the construction award date. The life cycle cost analysis can assume that the award date can be considered the zero point in time for the analysis period, with all other event times referenced to the construction award date. For greater simplicity, the year of design decision can also be considered as the zero point in time, and it can be assumed that the construction award will occur in that year.
  • Salvage values for alternatives are typically zero. However, in those cases where scrap values could impact decisions, the present value is calculated as its future value (scrap value) discounted back to the present from the year of occurrence. The formula for
    this is shown in the LCC Formulas Table 1-1.
Table 1-1 LCC Formulas
Type of Cost
 
Cost Examples Present Value Relationships Comments
Sunk
  • Design Fees
  • Funds irrevocably committed
Not Applicable Costs are not included
in the Analysis
First
  • Investment Costs
  • Construction Costs
  • Purchase Price
Present Value Relationship of First Cost For those investment costs
that begin at the start of the
analysis period
Salvage Value Scrap value of equipment
at the end of its service life
Present Value Relationship of Salvage Value Cost Present value equals the
future value at the end of
the service life, discounted
by n service years
Future Investment
  • One time investments
    occurring after the start of the analysis period
  • Non-Annual maintenance
    or repair
  • Major alterations to
    initial investment work

 

Present Value Relationship of Future Investment Cost
Where FV is the time pro-
rated amount that separates
investment value to the end
of service life salvage value.
Discount the future value
(Today’s Value escalated at
rate e to year n) back to the
present.
Residual Value Equipment with a service life
extending beyond the analysis
period
Present Value Relationship of Residual Value Cost Residual value equals the
future value at the end of
the analysis period, dis-
counted to the present.
Annually Recurring Fixed Fixed payment service
contracts with inflation
adjustments Preventative maintenance
Present Value Relationship of Annually Recurring Fixed Cost Annually Recurring Cost,
relating to today’s value,
which increase in price at
the same rate as general
inflation. The UPWn
factors are within the
NIST BLCC program.
Annually Recurring
Escalating
  • Service or maintenance
    which involve increasing
    amounts of work
  • Frequent replacements
    that escalate at a rate
    different than inflation
Present Value Relationship of Annually Recurring Escalating Cost The present value of such
costs are calculated by
using a modified version
of the UPW formula (UPW*)
which allows for cost
escalation.
Energy Fuel related costs, such as fuel
oil, natural gas or electricity
Present Value Relationship of Energy Cost Energy related UPW* factors
are found in the NIST
BLCC program.
Escalation Rates Relating Budgetary
Escalation to Real Growth
Escalation
Present Value Relationship of Escalation Rates Cost Needed to convert budgetary
escalation to real growth
escalation.
Definitions FV = future value
PV = present value
TV = today's value
d = real discount rate
e = real growth escalation rate (the differential escalation rate that exists after removing the influence of general inflation)
n = number of years to occurrence or the analysis period, as appropriate
E = Budgetary Escalation
I = Inflation Rate
UPW = Uniform Present Worth factor for fixed recurring costs
UPW* = Modified Uniform Present Worth factor for escalating recurring costs
  • Future one-time costs, such as replacement costs, are established by escalating a known today’s value (using real growth rate) to its future value in the year it occurs, then discounting that value back to its present value (using a real discount rate). The formula for this is shown in the LCC Formulas Table 1-1.
  • For instances where an alternative has service life beyond the analysis period, allowance shall be made for the associated residual service worth. This calculation involves identifying the future residual value at the end of the analysis period, then discounting the amount back to the present. The future residual value can be approximated by multiplying the future investment value (less future salvage value at the end of its service life) by the proportion of time remaining in the analysis period, compared to its service life.
  • Annually recurring fixed costs include those costs where increases have no real growth, such as costs that increase at the general inflation rate. They can be represented by the formula shown in the LCC Formulas Table 1-1. Also in this table is the formula for recurring costs where recurring costs escalate. Both formulas involve multiplying a known cost (in today’s value) by a uniform present worth value.
  • Fuel costs represent a special case of recurring escalating costs. Uniform present worth values are available from NIST data, correlating specific fuel types by sector/location for a defined analysis period.For simplicity, demand charges may be assumed to escalate at the same rate as consumption charges.
  • Investment and replacement actions over time may impact recurring costs. For simplicity, unless otherwise directed, fluctuating recurring cost savings may be assumed to be proportionate to the savings realized at the start of the analysis period.
  • Calculate the savings to investment ratio (SIR) for comparisons of dissimilar alternatives, such as comparing an HVAC alternative to a lighting alternative. Calculate net savings for comparisons of similar alternatives, such as optimizing insulation thickness in a wall.
  • A sensitivity analysis is required whenever assumptions may be considered questionable. This simply requires conducting multiple LCC analyses using extremes of cost parameters in question.
  • Due to possible margins of error in estimating costs, alternatives with a life cycle cost differential of less than 10 percent can be judged inconclusive by GSA.
  • To define energy related cost impacts for alternatives that are influenced by weather and/or varying loads/schedules, the energy use modeling program DOE2 or other approved software shall be used.

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