Module 6 Lesson 1

Financial Considerations: Fundamentals of Building Costs and Life-Cycle

Costs

In the construction industry, one of the main challenges is managing building

projects that have unique features and requirements. However, all projects have
elements things in common: a scope of work, a time schedule, and a budget.
Construction cost estimation is a fundamental skill for engineering firms and
contractors since important project decisions are based on costs.

Buildings as results of construction projects are characterized by long lifespan

and high costs. This fact is the reason why all decisions connected with construction
project have long-term and significant impact. Construction project investors often
focused simply on the acquisition costs, when they were about to make decisions
about such matters as the building design, equipment, energy systems. They
frequently neglected future operation or maintenance costs. As a result of the loss of a
holistic view of true costs of a building, the cost-inefficient solution might be selected.

Life cycle costs (LCC) in general consist of an initial investment (usually

construction costs) and the follow-on costs (ordinary payments, i.e. energy, utilities,
cleaning and maintenance, irregular costs for renewal or replacement), while some life
cycle costing methods also include the costs of demolition. Life cycle costing is often
recommended as the method for finding cost-optimal solutions for product design. Life
cycle costing is becoming the more frequent used tool in the design phase of buildings
generally.

FUNDAMENTALS OF BUILDING COSTS

Planning of the construction project is a multi-stage operation. Practically at every

stage, from the idea of the project up to its full settlement, cost analyses are carried
out.

The accuracy of cost estimates improves throughout the design phase, as the project is
specified in greater detail.

 When there are no construction documents yet, only a broad estimate is

possible based on the project scale and the type of facility.

 Engineering firms and contractors with experience in many projects can use
historic cost data to improve the accuracy of preliminary estimates.

 Once the design process is complete, the construction drawings and technical

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

 specifications allow more accuracy.

The ownership costs of a building can be classified into capital expenditures, operation
costs, and maintenance costs. Capital costs tend to get more attention during design
and construction, but there is also a great opportunity to save on operation and
maintenance. For example, energy-efficient equipment normally comes at a higher
price, but the long-term savings outweigh the additional cost.

Costs of construction work are classified as:

 Materials costs

 Labor costs

 Equipment costs

 Overhead (general and job) costs

 Profit

Data on all of these costs are required to develop or prepare an estimate.

The purpose of estimating is to forecast the cost required to complete a

construction project in accordance with the contract plans and specifications.

There are two distinct tasks in estimating:

 to determine the probable real cost of the project

 to determine the probable real time to build the project.

Because construction estimates are prepared before a project is constructed, an

estimate is, at best, a close approximation of the actual costs.

Most estimates are made up of the following five parts:

1. Materials: The estimator makes a take-off of all the different materials

required on the project from the plans and specifications.

2. Labor: The estimator estimates the hours needed to do the required work and
then multiply by the appropriate wage.

3. Equipment: The cost of equipment includes ownership or rental fees, moving

to the job site, erecting, dismantling, and operating.

4. Overhead: There are two types of overheads:

(a) General overhead: includes all costs that cannot be directly charged to

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

 any particular project, such as the cost of office supplies, rent, travel
expenses, and salaries.

(b) Job overhead: includes all costs which apply directly to the project and
cannot be charged to materials, labor, or equipment.

5. Profit: Most estimators show the profit expected from a job as a percentage of
the total estimated cost of the project. The profit varies from 6-15%.

Approximate profits usually expected are:

 Small projects - 15%
 Medium projects - 12%
 Large projects - 10%
 Very large projects - 6-8%

All Clients interested in obtaining fully functional facilities completed, within

time, cost, quality/scope by builder constructing, within estimated time budget, right
standards quality as per approved plan.

Cost Management is a process where construction cost of the project is

managed, through best methods and techniques involving design, construction
technologies, materials, manpower/resource environment/waste management, so that
available resources are put to optimum use when carrying out activities of project.

One of the aims of cost control is to construct at cheapest possible cost without
compromising with the quality. During execution of project managers expected to be
well equipped to execute project, ensuring quality of work, within estimated cost limits.
knowing procedures for project control, and keeping time.

Cost control achieved by selecting:

 right man for right job

 right equipment

 right tools for right work

 right quality of materials in right quantity from right source, at right price,
delivered at right time.

There are factors that made controlling project costs difficult:

 delays by clients to release money;

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

  delay to make a decision;

 lack of materials and equipment;

 bad weather;

 overlapping of activities;

 unclear and incomplete drawings;

 making good defective works;

 failure to control productivity of resources;

 theft and vandalism;

 interference by clients;

 high labour turnover;

 insufficient knowledge on cost control techniques;

 rather lack of knowledge of techniques;

 poor management of cost control methodology;

 poor site organisation; and

 inadequate supervision.

Options for making buildings cost- effective are:

 adopting sustainable development goals

 looking at life cycle cost, instead of the initial cost

 adopting good building design

 designing green buildings effective and professional project management

 effective material management

 effective plant management

 effective labour management

 adopting state of art building technologies

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

LIFE-CYCLE COSTS

Life Cycle Cost (LCC) is a financial technique increasingly used in sustainable

construction analyses to compare high-efficiency construction materials, systems, and
designs with traditional alternatives that initially may be less expensive but have
higher operational and maintenance costs.

LCC examines varying alternatives that impact the overall costs and savings of a
process, product, or process over a given time frame. In addition to considering an
appropriate time frame, one must include an estimate of the cost of capital and in
some cases an inflation rate. LLC analysis depends on a thorough understanding of the
time value of money.

A common dilemma confronted by homeowners considering newer green

sustainable building systems is whether the use of these technologies can be
financially justified.

For example, a water

heater system that
does not use a tank
(shown schematically
in the figure) is more
energy-efficient than a
traditional water
heater, and therefore,
preferable from a
sustainability
perspective. But, is it a
good idea to install
one? The initial cost of
this new technology is
considerably higher
than the initial cost of
a traditional water
heater, and many
owners would be
hesitant to adopt it.

Most commonly, the production cost is the main cost factor in construction and

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

is often set to the minimum, which does not necessarily improve the lifetime
performance of buildings. However, a higher production cost might decrease the total
life cycle cost (LCC).

It is important, therefore, to show the construction client in the early design

phase the relationship between design choices and the resulting lifetime cost. Today,
LCC calculation is used extensively for industrial products to minimise production costs
and increase profit. Clearly, there are significant differences between an industrial
product and a building from the life cycle perspective. The main differences are the life
of a building and the lack of industrialization in the building process, especially during
construction. These factors make calculating LCC for a building difficult early in the
design process.

Life cycle costing is a method assisting in estimating of the total cost of

ownership. The technique is able to help make decisions within building investment
projects. Life cycle costing is particularly useful for the estimating total costs in the
early stage of a project. The life cycle costing process usually includes the following
steps:

 planning of the life cycle costing analysis (e.g. definition of objectives);

 selection and development of the life cycle costing model (e.g. cost
breakdown structure, identifying data sources and contingencies);

 application of the life cycle costing model;

 documentation and review of life cycle costing results.

An extensive research has been performed and a report published concentrated

on life cycle costing. Nevertheless, life cycle costing is not commonly used in Europe or
in the USA. This method takes into consideration any other non construction costs and
income. Life Cycle Costs (LCC) represent the overall costs being spent during the
building’s whole life cycle. Their structure is presented in below, as a part of the Whole
Life Cost (WLC).

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

Decisions in the life cycle costing process

Investors can sight the life cycle costing process of a building as a series of
investment decisions. The procedure includes parallel and interrelated phases. A
theoretical model (shown) integrates six following steps:

 justification for investment requirements.

 conceptual development stage.

 design stage.

 production stage.

 operational stage.

 end of economic life stage.

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

 The horizontal axis represents a project phase and the time, at which key
decisions and life cycle costing analysis need to be performed or updated. The vertical
axis represents accumulative costs and costs of purchase and option within the life
cycle of a construction project. This also can be seen as the acquisition cost of moving
from one stage to another within the life span of a construction project. The utilization
of a model should take place as early as possible and continue until the end life of the
building.

The real series of decisions depends upon the specific project procurement route
strategy. Some are following decisions, which could be assigned to the development
process, whilst others might be connected with procurement and operational issues.
The concept of depicting the life cycle of a building as a series of investment decisions
is universal and could contain a diversity of miscellaneous development scenarios.
Risk analysis and life cycle costing are conducted at the beginning and updated at the
end of each stage of the construction project. Identifying, quantifying, responding and
managing cost and risk at each investment stage of a construction project could be a
useful framework for comprehension cost and risk strategies. However, it could be a
useful framework for all decisions made thorough the life cycle of the building.

Decisions concerning the choice of the construction technology and construction

materials are not any longer based entirely on technical and economic attitudes, but
are becoming increasingly influenced by life cycle cost and environmental
considerations.

Basically, it is crucial to establish a device at the design stage that brings

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

together the life cycle costing, service life, environmental life cycle assessment, and
risk associated with decisions taken at this stage.

Case Study: Depository Building for Museum

The project aims to build a new depository, which will allow relocation of all
exhibits from the existing non-compliant repositories to new spaces with appropriate
conditions. More than 150,000 exhibits of national and international importance will be
saved, with reserves for the next 50 years, on an area of 4600 m2.

The proposed feasibility study demonstrated the economic sustainability of the

construction project. An important part of the feasibility study was life cycle costing.
The minimum, maximum and average levels of life cycle cost have been calculated
(final recapitulation of the LCC is shown in Table 2). Construction cost is taken from the
author’s database that includes prices of reference depository buildings.

Operational costs are estimated on the base of reference depository buildings.

Rates of replacements and maintenance are given by studies on the reference
buildings.

The result of the study was a recommendation to initiate the preparation of a

construction project and integrate the proposed investment plan in the budget of the
Ministry of Culture of the Czech Republic. At present (i.e. March 2018), the conceptual
development stage is already in progress.

Life cycle costing should be performed as part of feasibility studies to find the
most cost-efficient solution, as part of all design stages. The optimization potential in
the early design phases is significant and also cheap.

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design

Reference:

Construction Cost Estimating 101: Learning the Basics. LetsBuild (2019).

[Link]/blog/construction-cost-estimate-101-basics.

Introduction to Cost Estimating. AliJuma Albahrani (2014).

Construction Management 4th Edition. Halpin D., Senior B. (2011).

Life Cycle Costing in Construction Sector: State of the Art Review. S. Emekci, and A.M.
Tanyer. (2018)

Importance of Life Cycle Costing for Construction Projects. Renata Schneiderova-

Heralova (2018).

Module 6 – Lesson 1 Financial Considerations | CE 104 – Building Systems Design