Building economics 13
David S. Haviland, Hon. AIA
Bowen, Brian. 1994. “Construction Cost Management.” in David Haviland, ed.
The Architect’s Handbook of ProfessionalPractice.
Washington, DC: The American Institute of Architects.Haviland, David. 1977, 1978.
Life Cycle Cost Analysis: A Guide for Architects
Life Cycle Cost Analysis: Using it in Practice
. Washing-ton, DC: The American Institute of Architects.Johnson, Robert E. 1990.
The Economics of Building: A Practical Guide for the Design Professional
. New York: John Wiley & Sons.Kirk, Stephen J., and Alphonse J. Dell’Isola. 1995.
Life Cycle Costing for Design Professionals.
New York: McGraw Hill.
Means Building Construction Cost Data
. 1997. Kingston, RI: R. S. Means Company, updated and published annually. Means publishes costdata for use in all phases of project budgeting and estimating.Ruegg, Rosalie T. and Marshall, Harold E. 1990.
Theory and Practice
. New York: Van Nostrand Reinhold.
budgeting, engineering economics, financialinvestment, life cycle cost analysis and operating cost.
Buildings require resources to design, construct and operate. At $80per square foot, a new 2,000 square foot residence costs $160,000 tobuild; this is four times the median income of American families. Auniversity constructing a 100,000 square foot science facility at $150/ square foot plus another 25% in project development costs finds itself raising or borrowing more than $18 million to bring the facility to theday the ribbon is cut.This is only the beginning. Once a new or renovated project is occu-pied and in use, it requires continuing investment. Data from manysources indicate that ownership and operating costs (those designated“project-in-use-costs” in Table 1)total from $8 to $30 per square foot
each year, with an average annual cost of perhaps $15 per square foot.For our university science building, this may represent another $1.5million per year in building ownership costs.Most building projects are financed. Their owners borrow funds orraise them in the bond market, adding annual interest costs that mayrange from 6% to 12%. A full 20-year, 8% mortgage on the residenceabove will cost its owner $16,230 each year. For the university sci-ence building, the debt service—repayment of principal and inter-est—on $18 million in 6%, 30-year bonds is more than $1.3 millioneach year.
Scope of Building Economics
Given the large numbers involved, it is not surprising that costs andeconomy are fundamentally important to building owners. Ownerstypically want to know:• How much the project will cost—often owners want this infor-mation long before the design is detailed enough to produce acareful estimate.• How the planning, design, and construction decisions being madeat each step influence project cost.• How the benefits to be produced compare to the costs of con-structing and operating the project.Building economics includes making economic decisions—the bestway to allocate scarce resources—at every step in the building pro-cess. Project definition, design, construction, commissioning, andoperation involve thousands of decisions affecting the allocation of the owner’s ownership and operating dollars (Table 1).
Taken together, the three questions asked above require those whoown, finance, and design new and renovated facilities to view build-ings as investments. Most building owners seek financing. Even if they have the resources, owners are not always willing to invest themin a project with low liquidity—that is, if they need the fundsfor something else, they may not be able to sell the building at theprice they seek when they seek it. People and institutions who supplymoney charge
for its use, and this is a substantial additionalproject cost.Even if an owner incurs no interest charges by using its own funds, itforegoes the opportunity to use the money for some other investment.Thus, there is an
for using one’s own funds for abuilding project.Finally, those who have money to lend or invest have other possibili-ties for economic return. Spending the money on a building projectcompetes with these alternatives. Some owners insist any discretion-ary expenditure on the building project earn a
minimum attractiverate of return.
Investment thinking raises these questions:• How productive will an investment be (in the project or in analternative design concept, system, or detail)?• Will the benefits outweigh the costs?• If there is more than one choice, which is the most productive?• Is there a better way of using my money than investing it in thisway?