Radical Sustainable Construction

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Life Cycle CostingA Critical Tool for Building
Green
National Green Building Conference
Exposition Toronto, Canada 29 November 2006
Charles J. Kibert, Director Professor Powell
Center for Construction Environment University
of Florida Gainesville, Florida 32611-5703
USA ckibert_at_ufl.edu 1 352 273 1189
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Overview

• Definition of Life Cycle Costing
• Views of Life Cycle Costing Broad and Narrow
• Conducting a LCC analysis
• Role of the discount rate
• General and Energy Inflation Factors
• Bringing it all together
• Several examples
• A quiz!
• Conclusions

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Life Cycle Costing Defined

• The total discounted dollar cost of owning,
  operating, maintaining, and disposing of a
  building or a building system (NIST Handbook 135)
• Life Cycle Costing is a process to determine the
  sum of all the costs associated with an asset or
  part thereof, including acquisition,
  installation, operation, maintenance,
  refurbishment and disposal costs. It is therefore
  pivotal to the asset management process. (NSW
  Government)
• Life Cycle Costing (LCC) is a methodology to
  evaluate the economic performance of investments
  in building and building systems.
  www.lifecycle.org
• Latter refers to ASTM E 917-93, Practice for
  Measuring Life-Cycle Costs of Buildings and
  Building Systems, ASTM Standards on Building
  Economics

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Applications of LCC

• Asset Management
• Facility Management
• Complex Systems, e.g. Transportation
• Value Engineering
• Sustainable Design/Integrated Design Process

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Some Applications of Sustainable Design to LCC

• Analyzing active versus passive system tradeoffs
  passive cooling/ventilation
• Daylighting systems versus thermal loads
• Employment of renewable energy systems
• Ultra low flow water systems
• Constructed wetlands for wastewater processing
• IEQ measures versus energy consumption

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Definition of LCC The Broad View A tool for
comparative cost estimations
Life Cycle Costing (LCC) is as an assessment of
all costs associated with the life cycle of a
product that are directly covered by any one or
more of the actors in the product life cycle
(supplier, producer, user/consumer, EOL-actor),
with complimentary inclusion of externalities
that are anticipated to be internalized in the
decision-relevant future.
Source Rebitzer, G. Hunkeler, D. Life Cycle
Costing in LCM. International Journal of LCA 8
(5), 2003, p. 253
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Where do we want to go?Economic dimension of
sustainability along life cycle is captured by
life cycle costing (LCC)
Life Cycle Costing Cost estimation for-
product process development, - purchasing, -
sales marketing,- etc.

Socialaspects
Environmental Impacts (GWP,energy,
Eco-indicator, etc.)
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The Concept of Life Cycle CostingAssessing
present and future money flows within the
economic system
e.g., fuel tax (externality that is (partially)
internalized)
e.g., CO2 certificates (will be (partially)
internalized)
Source Rebitzer, G. Hunkeler, D. Life Cycle
Costing in LCM. International Journal of LCA 8
(5), 2003, p. 253
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Life Cycle CostingA Narrower View

• Benefits and/or costs of competing investment
  options are compared in the common unit of the
  dollar

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Life Cycle CostingAddresses Key Project Questions

• Why? Performance
• What? Greatest net benefit
• When? Optimal timing
• Where? Best alignment
• How? Best implementation strategy

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LCC Issues and Concepts

• Costs and benefits can be valued in dollars
• Project life cycle or system life is basis for
  comparison
• To be compared, dollars in different years must
  be discounted to their present value amounts
• Various inflation factors can be taken into
  account
• For each year, the difference between benefit and
  cost is discounted to the present
• The discounted net (benefit-cost) for all years
  is summed and compared to the initial investment

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Typical Life Cycle Profile
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Benefits and Costs

• Benefits
• Energy/water savings
• Lower maintenance
• Greater durability
• Tax breaks and other incentives
• Costs
• Loan covering system procurement
• Down payment
• Operations and Maintenance
• Insurance
• Component Replacement

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Life Cycle CostingAdjusting for Present Value
where P present value at time zero (base
year) d discount rate t time (number
of year) Fn amount of net benefit or net
cost in year t
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Life Cycle CostingExample of Discounting

• What if we want to determine how much a 1,000
  benefit in 30 years is worth to us today?
• 1000 is in real dollars (i.e., in dollars with
  todays purchasing power)
• Discount rate is 3

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Economic AnalysisExample (continued)

• Plug values into discounting formula
• Do calculations

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Discount Rate

• The interest rate used in calculating the present
  value of expected yearly benefits and costs.
• The interest rate at which eligible depository
  institutions may borrow funds directly from the
  Federal Reserve Banks. This rate is controlled by
  the Federal Reserve and is not subject to
  trading.
• The interest rate of your alternative investment

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Discount Rate Is Important

• Higher the discount rate, the lower the present
  value of a future dollar
• At 3, 1,000 30 years from now is worth only
  412 today
• Worth 231 at 5 and 57 at 10
• Discount rate can influence project selection or
  design

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Inflation Factors

• Model how the costs of a given activity or
  resource will vary over time.
• General inflation rate from government figures.
• Fixed same for entire life cycle
• Variable changes each year, use a lookup table
• Energy inflation rate
• Assumes that it will be different than general
  inflation rate
• Can be fixed or in a lookup table

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Inflation Factors

• General Inflation
• Energy Inflation

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General Inflation

• Based on government estimates for the future
• Can be constant or from a lookup table

Assume the initial cost of maintenance is 1,000
per year. What is the maintenance cost in year 8
if the general inflation rate is 3? S8 1000
(1 0.03)8 1267
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Energy Inflation

• Based on government estimates for the future
• Normally greater than the general inflation rate
• Can be constant or from a lookup table

Assume the initial energy savings are 2,000 per
year. What are the savings in year 10 if the
energy inflation rate is 5? E10 2000 (1
0.05)10 3257
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Basic LCC Formulae
Present Value of Future Money
Future Value of Present Money
Future Value (General Inflation)
Future Value (Energy Inflation)
Annual Loan Payment (LP) for a Loan Amount (LA)
borrowed for n years at interest rate, i
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Sum of Present Value of Discounted Present Worth

• The basic multi-year discounting formula

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LCC Concepts

• For each year Net Benefit Benefits Costs
  Example Net Energy SavingsEnergy
  Savings -Costs
• Then, find the Present Worth of the Net Benefit
  Note The Present Worth is how much the
  savings are worth today. Use the discount rate
  for this purpose.
• Sum the Present Worth for each year over the life
  of the option. This is the Total Present Worth
• Compare the Total Present Worth to the Total
  Investment. This is the Savings-to-Investment
  Ratio (SIR).

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Basic LCC Example 1

• See spreadsheet

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Basic LCC Example 2

• See Spreadsheet

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Photovoltaic Example 1

• See Spreadsheet

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Daylighting Exercise Solution

• See Spreadsheet

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TABLE 2-A Summary of Initial Input Data
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TABLE 2-C Expected SIR at Various Interest and
Inflation Rates
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TABLE 2-D Sensitivity of SIR to changes in
Interest and Inflation Rates.
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Summary

• LCC is an essential tool for decision making
  about green building strategies
• It can have a broad definition and application
  and be applied in parallel with LCA
• LCC must not be used in a static fashion, but as
  an exploratory tool with sensitivity analysis
• Selection of discount rate and inflation factors
  is the key to a good LCC analysis.