Intro
Most sport and recreation facilities in Western Australia are built or refurbished with funding from the department.
An important part of the funding process is to make sure the community can bear the true cost of running and maintaining a facility well into the future.
These Life Cycle Cost Guidelines provides facility owners, architects and engineers with the tools they need to develop life cycle cost reports that will be used by the department as it considers publicly owned or funded facilities.
The guidelines mean analysis and reporting can be standardised to ensure a timely and accurate technical review of your facility or project.
The Department of Sport and Recreation is committed to pursuing the most desirable project outcomes that reduce the cost to the sport and recreation industry and the broader community.
Developing a life cycle cost approach when considering your project’s parameters will provide you with a solid and informed base from which to make the most effective financial, economic and operationally sustainable decisions.
Life cycle costing is a key asset management tool that takes into account the whole of life implications of planning, acquiring, operating, maintaining and disposing of an asset.
The process is an evaluation method that considers all ownership and management costs. These include;
One way to express the total life cycle cost is in the form of a mathematical equation.
Total Life Cycle Cost (LCC) = Initial asset acquisition /capital cost (AC) LESS Tax depreciation entitlements (TD) PLUS Operating and maintenance costs (OC) PLUS Replacement / disposal / upgrade costs (RC) LESS Residual / salvage value (RV) = LCC
So a typical life cycle cost for new sport and recreation facilities could be represented in the following equation: LCC = (AC – TD) + (OC + RC) –RV
You would have to factor in an additional component – deferred maintenance (DM) – for refurbishment or redevelopment projects.
LCC = (AC – TD) + (DM)+ (OC + RC) –RV
A key question is “which costs are included within the life cycle equation?”
Put simply, the costs to be included within the LCC equation are those that are directly attributed to the ownership, management and operation of an asset.
An example would be air conditioning where you have installation, operation and replacement expenses. Costs such as annual staff salaries, service provision, training associated with corporate functions would not be included.
Local governments own or manage the majority of sporting and recreational facilities in Western Australia, so management is often exposed to a highly competitive and localised budgetary process.
With few exceptions, facility management within local government has not been exposed to the rigour of consolidated asset management planning processes and the associated financial systems.
Maintenance competes for funding with other programs and is often deferred when other projects receive a higher priority. The cost is the increased risk of components failing and potentially increased safety hazards, poor service to the public, higher costs in the future and inefficient operations.
In many cases the deferral of routine scheduled maintenance will mean your asset will deteriorate faster, making it harder for you to meet the deferred maintenance costs.
In terms of the life cycle cost process, deferred maintenance is understood to be the cost of maintenance not committed to maintaining the assets original or desired level of service.
In this context, deferred maintenance is not considered capital renewal.
Overall, the need to identify deferred maintenance will help you to establish the funding responsibilities of all parties in the project proposal.
The process of identifying and quantifying the true cost of deferred maintenance is detailed in Section 2.3 of this document.
From DSR’s viewpoint there may be times when it requires a facility project to include a LCCA in the project criterion.
The LCCA may be required when applying for grant funding through either the State Sporting Facilities Plan (SSFP) or the Community Sporting and Recreation Facilities Fund (CSRFF).
As such, these definitions apply:
It is up to the public agency or sporting organisation to comply with these requirements.
The timing of a LCCA is crucial to the long–term success of a facility. In contemporary project management the concept and design stages are the greatest opportunities to influence a successful facility structure and operation. The further a project develops, the further opportunities diminish.
For a LCCA to successfully guide decisions about building design or asset replacement it must be completed before systems are selected and approved and construction tenders are awarded.
The image depicted at figure 1.0 demonstrates the optimum time to positively reduce life cycle and project costs associated with any project is at the feasibility study stage. This opportunity greatly diminishes as we move along the life cycle axis. It can be seen from this schematic that effort focused at the feasibility and planning stages can greatly improve the “over the life” performance of an asset.
The aim of this guide is to reinforce the concept of whole of life costs for the practitioner to deliver better project decisions. LCC is a valuable and powerful tool that can be used to gain support for the preferred project option.
Many people across the sport and recreation industry have considered the lowest construction cost as being the best alternative. The LCC approach encourages proponents to focus decisions on a developed life cycle cost regime to reduce energy consumption, maintenance requirements and ongoing operational costs.
The adoption of a life cycle cost approach will be necessary when applying for public funds to assist in your project, renovation or construction. An analysis should conform to the requirements set down in this guide before a contract is let for an improvement or construction of a public facility. Should an analysis not be possible, a written submission should be lodged with DSR outlining the circumstances.
The minimum measures to be analysed in a life cycle cost analysis will include;
There are four primary principles to consider when assessing life cycle costs.
The life cycle cost analysis procedure considers the option of selecting from a set of alternatives, the building design or plant with the lowest whole of life cycle cost.
The design and development aspect of the project analysis procedure recognises that many of the facilities that will provide future sporting and recreational services already exist.
Consideration of funding applications for sport or recreation facilities will fall into two categories:
A Greenfields project for new facilities provides the facility owner the greatest opportunity to minimise the total cost for construction, operation and maintenance through total asset management strategies.
This can be achieved through the adoption of an integrated facility asset management program early in the development stage of a new facility (see figure 1.0). The issue of deferred maintenance typically does not encumber Greenfields projects and consequently the project manager can adopt maintenance and budgetary projections with a greater level of confidence.
The format for LCCA reports shall be similar to the format of these guidelines that have been adapted from Australian Standard for Life Cycle Costing. Information is to be clearly presented and understandable to all parties in the process (facility, financial and technical).
LCCA reports are to be stand–alone documents containing all support documentation and be capable of independent review.
The analysis process for either a new or refurbished facility must factor all of the costs associated with the concept planning, design, documentation, tendering, construction/modification, operation, maintenance and eventual decommissioning of the facility. The Greenfields application will clearly identify rights and responsibilities of all parties involved in the project and detail all estimated cost exposures over the life of the project.
Brownfields projects are those where submissions are made for existing facilities to be upgraded or refurbished or a new facility developed on a site currently being used for other purposes,
Facilities funding processes (both capital and operating) for existing local government facilities are typically exposed to the pressures of annual budget bids in a very competitive financial environment. Exposing existing facilities to this style of budgetary process may lead to inadequate maintenance funding that ultimately results in their premature deterioration.
The dangers of a competitive budgetary process might include a lowering of priorities being placed on routine and scheduled maintenance for existing facilities, and as a result – a “deferred maintenance” debt.
When calculating the deferred maintenance exposure, a facility manager needs to undertake a facility condition assessment (refer to the Asset Management Guide for a sample template).
This process begins with a multi–disciplined team conducting a thorough inspection of the facility. If all systems of the facility are being included in the facility plan, the team should include an architectural representative and structural, mechanical and electrical engineers. Where this is not practical due to budgetary constraints, qualified staff within your organisation should conduct the process.
If the scope of the plan is being limited, then a representative of only those disciplines to be included is required. In all cases, the inspection team can be the owner’s personnel, external consultants or a combination of the two. The scope of the plan can also be expanded to include room fixtures, fittings and equipment where knowledgeable personnel are available. Other specialists such as gas testing specialists or roofing inspectors may also be added to the team as appropriate. In all cases, the inspectors must be experienced and knowledgeable practitioners in their field.
In most cases, the inspection is entirely visual and therefore the inspectors are called upon to make value judgements by extrapolation from their observations. Where necessary, more invasive and preferably non– destructive methods may be employed to gain better insight into the condition of the facility.
For ease of inspection, each discipline (i.e. architectural, mechanical) is divided into a number of individual components. The mechanical systems for example can be divided into eight basic components that are;
The data gathered with respect to the deferred maintenance deficiencies will include building component and sub–component which includes a sequential reference number and a deficiency rating, location and description.
A deficiency repair cost will be added later. The deficiency rating system is flexible and can be adjusted to meet specific project needs. Typically, a process would use a rating system from one to five based upon the relative level of disrepair and the effects on the overall facility, with one being poor to catastrophic and five being in a good state of repair. A numeric rating of one would be for aspects that contravene code, health, and regulation or Act violations – thus requiring immediate attention.
The costs apportioned for remedial repair (including regional adjustments) are to be provided by a quality surveyor or qualified contractor and have the capacity to be reviewed in accordance with a recognised industry building estimates publication such as Rawlinsons Australian Construction Handbook.
The purpose of undertaking this procedure is to identify the true cost exposure for the various funding bodies and also gather valuable baseline data for the formulation of a fully integrated asset management plan.
In each case the analyst has to consider design alternatives for the domestic/commercial hot water system, lighting system, combinations of building envelope–HVAC (heating, ventilation, and air–conditioning) systems, pool design, pool heating, court surfaces etc.
When applicable, the analyst is to consider design alternatives for on–site electricity generation. Each analysis is to be based on a 20–year study period. In order to be considered as an effective investment, an energy application project should have a simple payback period of five years or less.
The analysis methodology must consider the relationship between energy–using systems. When the amount of energy consumed by one system impacts the energy consumed by another, this interaction must be carefully considered in the analysis. The accepted methodology is for the analysis to first evaluate independent systems, followed by those systems that interact. A particularly useful reference for life cycle costing procedures is the Australian Standard for Life–Cycle Costing
A key concept of the life cycle analysis equation is that of the time value of money.
The challenge in determining the best whole of life financial option is to achieve a position where the various options under consideration can be fairly evaluated. When considering various proposals, you will be faced with comparing capital and operating costs that are expended at different times. In evaluating the financial impacts of the various alternatives all costs for each option under consideration are expressed in “today’s dollar value”.
This provides the basis to accurately judge the costs and benefits associated with various alternatives.
The definition given: “A concept that acknowledges that money changes value over a period of time; that a sum of money today is worth more that the same sum of money at a future date, because of the fact that the money received now can be invested to earn interest” considers the value of money invested in future cash flows.
In order to better understand the issue, examples have been provided at page 25. Each option considers the replacement of an air conditioner and factors the purchase cost and the life cycle annual maintenance and running costs. The present values chart at page 36 shows the future value of a dollar at a nominated discount rate.
The example cites a discount rate of 12% for air conditioners of varying qualities. Option one considers an air conditioner of lesser quality that requires replacement at more frequent intervals and has a higher annual running and maintenance cost. Conversely, option two considers a more expensive unit requiring a lesser level of annual maintenance and running costs. Due to reliability, over the period considered (30 years) option two requires replacement once at year 15.
The result demonstrates that the total present value of installing, operating and maintaining an air conditioner of the size considered is significant over a thirty–year period. Option 1 demonstrates that the lesser value investment system costs at present day values a total life cycle cost of $468 013. Option 2, whilst being a high initial cost demonstrates a life cycle cost of $413 689. These examples shows that option 2 delivers a better whole of life cost benefit of $54 324.
The aim of these examples demonstrates the time value of money and how investments may be fairly compared using an appropriate discount factor at today’s dollar value.
The order of sections and appendices are:
The first form required is the Certificate of Responsibility. The report must be certified by the Project Principal and notarised by either a registered Architect or a licensed Professional Engineer in Australia.
DSR has adopted the codified version of ASHRAE Standard 90.1–2001 as its energy code for recreational buildings, so this is the base case for each alternative studied. The analyst is to answer the question at the bottom of the form to verify that all design options in the report comply with the energy code.
You can find a download link for a sample certificate of responsibility form in the resources sidebar located at the top of this part of the guidelines.
The Executive Summary is to include a brief synopsis of the purpose of the report, a summary of important findings of the report, a description of important assumptions and special design considerations used in the analysis and system selection recommendations based on lowest life cycle cost.
The Executive Summary must also provide an annual energy budget for the facility based on the assumptions outlined in table 3.3. The LCCA Summary Form must be provided in the Executive Summary (refer to the next page).
The LCCA Summary Form tabulates the findings of each system alternative evaluated in the report. The LCCA Summary Form also provides the derivation for the annual energy budget for the base case and for the facility alternatives yielding the lowest life cycle cost. The derivation of the annual energy budget should not double count energy consumption data, such as lighting energy that is often also included in HVAC energy consumption calculations.
Specifically with regard to asset renewal, refurbishment or reconstruction projects the Executive Summary must identify the deferred maintenance backlog calculations to establish the baseline funding position.
You can find a download link for the sample life cycle cost analysis summary table in the resources sidebar located at the top of this part of the guidelines.
This section defines the scope of the project (refer to the following page). The project identification form is divided into four topic areas including a project summary, organisation contact information, design professional contact information and special design considerations. Information that is provided is to be as complete and accurate as possible.
The Project Summary section includes general information about the facility such as the location as well as specific building design information. Many of the items are self– explanatory and some only require a yes or no answer, however, an explanation for a few of the items is provided below.
The final section provides space to describe special design considerations requested by the proponent organisation (local government/Sporting Organisations). Design constraints that affect system alternatives selection must be documented here as well as in the report. This section should also include a statement of the analysis objective, operating and support scenarios, assumptions, constraints and alternative courses of action considered.
You can find a download link for the sample project identification table in the resources sidebar located at the top of this part of the guidelines.
The Assumptions Form Table 4.0 provides a central location for documenting assumptions made in the analysis.
Information that forms the basis for inclusion on the assumptions form considers the expected recurrent (operating) cost for the LCC and briefly identifies how the building design has been managed to reduce these costs or enhance service provision. Assumptions regarding initial energy rates used in the analysis are also to be provided. The energy rates should be entered for both summer and winter as applicable. On–site electricity generation should also include information about utility buy back rates.
The next area provides a location to document other assumptions made in the analysis. Examples of other assumptions include the quantity of domestic hot water used annually, maintenance costs, residual value or salvage costs.
The final area on the Assumptions Form provides a location to document references used. These references include, but are not limited to, those used to perform calculations and those used to estimate construction costs. Additional pages may be added as necessary to list all of the assumptions and references.
You can find a download link for a sample assumptions form in the right sidebar located at the top of this part of the guidelines.
The analysis of each option must consider all of the phases associated with the development and delivery of the project and include costs associated with:
An example of the Life Cycle Cost Analysis model is appended at pages 26 to 35. The LCCA has been formed on the basis of the following conventions and concepts.
The base convention is that the model provided by DSR does not incorporate any direct capital costs. The costs entered into the model that affect the financial result should only be operating costs and be directly related to the costs of the management and maintenance of the facility or asset.
Each of the component cost option sheets has been developed to reflect the project’s life cycle phases, including concept and definition, design and development, manufacturing and installation, maintenance, support services and gross revenues. Each of these areas has been further identified into costs areas identified by either capital costs or operating costs.
The model has been developed on a multi sheet MS Excel spreadsheet format. Data provided and developed for the options under consideration are entered under the individual “Component Cost Option” sheets. The consolidated LCCA model is a protected work sheet that serves to reflect the consolidation of each of the component costs option sheets.
Before we consider the model, we must understand the concept of Net Present Value (NPV).
Consider the following.
“When you wish to know the value of a used car, you would look at prices in the second–hand car market. Similarly, when you wish to know the value of a future cash flow, you would look at prices quoted in the capital markets, where claims to future cash flows are traded. (Just remember that those high profile investment bankers are just second–hand cash flow dealers. If you can buy cash flows for your shareholders at a cheaper price than they would have to pay in the capital market, you have increased the value of their investment”.
The example provided is that of a typical recreation centre under consideration by a local government. The example is based upon the premise that total funding for the centre will be provided by the local government from reserves.
The LCCA demonstrates that the cost of a facility commences at the pre-planning stage with the concept and definition. The period between the concept stage and the commencement of operations of the facility is nominally three years.
Option one; provides the base case with initial capital construction costs of $1 985 000 and a 25% refurbishment of the facility at year 10.
Option two; provides a 10 percent increase in initial capital costs ($2,183,000) with a 25% refurbishment at year 15. The increase in initial capital costs assumes the use of higher quality components (e.g. air conditioning) and therefore a reduced requirement for refurbishment until a later period.
Option three; considers a 10% reduction in initial capital cost ($1,786,500) with an expanded refurbishment program. Option three assumes a commitment to lesser quality components and therefore delivers a requirement to refurbish at year seven and again at year 17.
Net revenues are entered into each component costs option, providing an annual figure of cost centre income less the annual operating costs for that cost centre. For the example, under consideration the “cost centre” is the recreation centre. The costs do not include either the facility management costs or the corporate overheads as they are a direct facility consequential cost and are recorded separately in the model.
Each refurbishment delivers additional net revenue income of $30 000 per annum as this anticipates improved services.
It will be noted that the model features a series of input cells that are colour coded green. This denotes that these costs (typically capital) are not included within the model analysis.
Input data is considered for each of the life cycle phases and entered at each option input sheet. For this example, the annual costs included in the input data are kept consistent across the life of the asset. Careful consideration needs to given to the classification of the cost being entered into the model. It is considered fundamental that the cost must be identified as either capital or operating prior to entry into the model. As this model is based on the NPV result and does not consider the direct capital costs (rather the amortised interest and depreciation costs) it is vital that the operating costs relate directly to the management of the building without providing any betterment to the value of the asset. Should the cost apportioned result in an improvement to the facility asset or structure, this cost would be considered capital.
The model has provided for the inclusion of interest charges that is based upon the position that equivalent opportunity costs for the funds employed for the project must be recorded. As the NPV does not consider the initial capital costs, annual interest equivalents must be included. This is irrespective of the origin of the capital employed for the project, whether from reserves, borrowings or investor subscriptions. Similarly, depreciation charges are apportioned for the replacement costs associated for both the building fabric and the consolidated internal asset component that make up the building fabric. It should be noted that at each refurbishment event for each option, the interest and depreciation costs are increased to reflect the additional investment. An accurate reflection of the depreciation of any building under consideration may be sourced in the Rawlinsons Australian Construction Handbook.
The model demonstrates the cash flows associated with the development, management and refurbishment of the facility.
The cost projections automatically feed into the consolidated LCC model initially to the consolidated option values section of the page. At this stage, these figures remain uninflated. These figures are then exposed to the inflation component of the model, which in essence are the operating cost, less net revenues multiplied by the inflation rate at the value of the period in which the costs are considered. This process occurs for all of the costs and revenues for each option over the asset life period being considered. These figures are then exposed to the effects of the nominated discount rate, which may be changed on the consolidated LCC model. This model also provides for NPV calculations that consider project sensitivities. Considerations of these sensitivities or risks are undertaken by the application of higher and lower discount rates.
The following observations are made of the example provided.
As the NPV provides information about the net increase in worth provided by the project (exclusive of the capital costs), the cash flows under support services for each option includes interest and depreciation costs.
Observations also reveal that major programmed maintenance is calculated under the Maintenance category. This operational requirement similarly reduces net revenues in those periods by $30 000.
The net result of these options recommends that a commitment to option two would provide the best result for the council. The option suggests a higher capital cost, though a reduced requirement for refurbishment until year 15. The result is that option two at a discount rate of 12 percent delivers an NPV of –$859 102. This figure represents the net difference between the inflated and discounted costs and revenues accumulated over the period of the life cycle.
The life cycle cost calculations for each alternative are to be presented in this section of the report. The analyst has the option of using the form provided in the Appendices of these guidelines or providing a printout of computer analysis for each case.
DSR has developed a multi–layered spreadsheet that provides the primary shell to create a three–option comparison of alternatives. The spreadsheet provides for the development of project costs, delivering the net present value of each option in addition to two sensitivity tests.
Within the manufacturing and installation segment of the LCC analysis, the following calculations need to be factored with respect to water treatment, lighting, building envelope and HVAC systems and electricity generation.
The analysis of each structure/system (facility, domestic hot water, lighting, envelope/HVAC, and electricity generation) should begin with a base case that would be expected to provide the lowest constructed/installed cost but, due to lower efficiency, usually result in high operating and life cycle costs. The other options should provide a tradeoff of higher constructed/installed cost for lower operating and (potentially) lower life cycle costs. In each case, the system with the lowest life cycle cost must be recommended.
Select three commercial/domestic hot water systems and document the rationale used to justify their consideration for the facility. Systems selection could compare varying efficiency levels, systems using different fuels, a central system versus a distributed system, a solar–assisted versus a non–assisted system, a variety of control strategies, or large equipment versus a modular installation, for example.
Choose three lighting systems for the primary use of the building (offices, courts or gym rooms for example) and document the rationale used to justify their consideration for the facility. Include a variety of lamp types, ballast features, and control strategies.
Choose three building envelope types and three HVAC systems and document the rationale used to justify their consideration for the facility. A total of nine building / HVAC combinations should be studied unless this can be shown to be impractical. The design alternatives recommended previously for the domestic hot water system and for the lighting system should be used in the analysis of the envelope and HVAC systems.
Building envelope parameters may vary wall and roof insulation type, thickness and window type. HVAC system parameters may vary system type, modular equipment, distribution system type, control strategies, etc.
When applicable, use all of the recommended building systems to evaluate three design alternatives for on–site electricity generation. Potential alternatives include engine generators, micro–turbines, fuel cells, steam turbines, wind turbines, solar arrays (photovoltaic), etc. Alternatively, consideration should be given to purchase electricity from providers that generate green electricity from alternative technologies such as conversion of landfill methane gases to electricity.
Briefly note each of the recommended systems, however, most of this discussion should be provided in the Executive Summary. The set of combined systems should be used to find the detailed energy use prediction on the LCCA form in the Executive Summary.
The report appendix is to include supporting information. The contents of the appendix should include sketches of the planned building layout, energy use calculations, and any other pertinent information necessary to document the recommendations made.
At the end of this section you can find a download for a sample spreadsheet which details the suggested economic lifetimes of various mechanical systems, such as air compressors, centrifugal chillers and furnaces.
At the end of this section you can find a download for an example air conditioner LCC Analysis Spreadsheet.
At the end of this section you can find a download for a table representing the present dollar value rate per year and the future values of $1 over a 30 year period.
American Society of Heating, Refrigerating and Air-Conditioning Engineers. (1989). Energy efficient design of new buildings except low-rise residential buildings. United States: ASHRAE.
Ballesty, S., Orlovic, M. (2004). Lifecycle costing and facility management. Facility Management 12 (2), 28-32. Department of Sport and Recreation. (2004). Asset management guide: a guide for sport and recreation facility owners and managers. Perth, Western Australia: Department of Sport and Recreation.
Rawlinsons Construction Cost Consultants and Quantity Surveyors. (Eds.) (2005). Australian construction handbook 2005. Perth, Western Australia: Rawlhouse Publishing Pty Ltd.
Standards Australia. (1999). Life cycle costing: an application guide. (ANZS 4536:1999). Sydney, New South Wales: Standards Australia.